Let's be honest, at midnight December 31st most of us were singing “Happy End Year” and looking forward to better things this year but is that justified when you look at the economics? Last summer it seemed that financial markets had simply ran too far ahead of economic indicators. Roll forward to 2010 and while it's still too early to call absolutely, as each month goes by and indicators continue to improve, the risk of a second recession diminishes. That explains why last year saw a huge rally in equities, commodities (and gold) from the lows of March as we'd suggested.

This year expect continued economic recovery but much less growth from equities. Don't be surprised if another run up in markets the first half is followed by a claw back to modest gains for the year as a whole. Still the 2009 rallies have been remarkable as markets, being forward looking, re-priced PLCs throughout the world and especially those of fast growing economies like China.

Even nearby property markets are showing signs of rallying, especially prime commercial in top locations like central London. Confidence is returning, but not yet the enormous wall of cash built up on the sidelines that dwarfs that built up in the run up to WWII. Provided interest rates remain at historical lows throughout this year and into 2011 as Governments and Central Banks remain nervous of removing stimulus too early, equities, commodities and gold are likely to move ahead again this year, but what happens then?

Understandably after the fright from this economic crisis, views are sharply divided. Sceptics believe that gravity will catch up with the great bailout (NAMA-like projects worldwide) that socialised toxic bank loans by passing them on to taxpayers and that a great deleveraging takes place over several years accompanied by further leaps in unemployment, deflation and economic contraction. They don't buy that growth in GDP, followed by spending cuts and increased taxes, will finance the extra national borrowing. The opposing view is that a second leg down will be avoided, that deleveraging is already taking place, that the damage inflicted on the US economy is overstated and that growth in developing economies is picking up the slack.

Whichever way you slice and dice it, you keep coming back to the strength or fragility of the USA to understand what will happen to the rest of us. It's pretty important because, bearing in mind that stock markets globally are now remarkably synchronised, there had been 16 ten-year periods where US stock markets underperformed inflation since 1871, so what happened next? Over the subsequent decade the average real return was 11% yearly (a range from 6.2% above inflation to 17%). My own conclusion as we move into 2010 is that, while it's only commonsense for Irish investors to hedge against a declining dollar over the long term, (though it may rally this year) and limit US asset exposure, it is very premature to predict the economic demise of the world's superpower. That doesn't mean that the US faces very serious challenges and risks including runaway inflation but betting against its continuance as the world's predominant economic power in the first quarter of this century ignores some key facts.

Remember armageddonists forecasting an imminent US decline have been around before, first during the rise of The Soviet Union in the Fifties and then during the rise of Japan in the Eighties. These views strike an easy cord with investors still rattled by the aftershocks of the crisis and with the financial media still, overwhelmingly, concentrating on the outcomes of the crisis, like unemployment, collapsed developers and court skirmishes, so it's easy to get distracted by the noise and lose valuable opportunities to make money. But when you distil it all down, the key question is whether or not the US is strong enough to prevent a double dip recession?

The facts below, some of them distilled from Goldman Sachs, might help you decide to continue to put faith in growth assets for the next decade if you're worried about Uncle Sam. 

• There is a great deal of attention on the scale of US public debt. It jumped from 40% in 2008 to 53% last year. That's an increase of 13% created by a 3% fall in the economy and a 10% budgetary deficit. However with modest economic growth, the annual deficit is expected to decline over the next few years to 3%, closer to the US long term experience (and equivalent to Ireland's target for 2014). That would put US public debt at 70% of GDP for the next ten years but what's often forgotten is the room to increase taxes which are at their lowest level since the Korean War. Federal tax increases, likely to begin in 2011, coupled with economic growth and despite increased spending on health care, should help reduce the deficit. So just how strong is the US economy relative to the competition?

• The US economy accounts for a quarter of global GDP. It is nearly three times larger than the next two, Japan and China and nearly five times that of Germany. Per capita GDP at €32.2k is well ahead of all large economies like France €29.4k Germany €27.5k and is 13 times greater than China's at €2.5k

• The US spends more on R&D maintaining its economic edge, than any other country at €265 billion compared to Japan at €103bn, Germany at €59bn, France at €38bn and China at €34bn. A new technology device may have its manufacturing outsourced to a low cost Asian factory but most of the wealth created by it will go elsewhere to patents, designers, retailers etc.

• Since its foundation the US has proven to be a flexible and resilient economy, ranking number one amongst major economies across key characteristics like entrepreneurship, innovation, democratic institutions, education etc.

• In terms of military power the US spends just over 4% of GDP, that's over €431 billion annually, that's equal to the combined spend of the next 14 countries, including China which spends about 1.4% of GDP or €47 billion and is poised to build an aircraft carrier, 88 years after the US built its first.

• The US economic decline during the crisis is not out of synch with previous reversals and the 4% bounce in the last quarter may yet signal that US economic growth this year will positively surprise sceptics who remain focused on muted consumption, expecting a collapse after the stimulus wears off. But US growth could yet be above consensus forecasts of 2% and perhaps closer to 3%.

• Unemployment may soon peak, house prices are stabilising and set to rebound 10% to 15% with sales activity up 60% from the bottom in the four key States that represent most of the national decline, California, Arizona, Nevada and Florida. Most importantly for the top third of consumers whose debts represents just 6% of their assets but who represent 60% of spending, the US stock market rally has repaired much of their wealth heralding a quicker return to spending than most sceptics think as the feel good factor returns.

• As ever everything depends on consumer confidence that the recovery is real but, culturally, if there is one thing Americans do best its confidence in their country and in their favourite leisure activity - visiting the mall!

Conclusion

So what can we expect from the US economy this year? Based on the above perspective, US economic growth will be 3%, consumption will improve, house prices will begin to recover and the Dollar, which looks over- sold, will rally against the Euro. So what would this mean for you and how do you balance the risk of a second leg down against the increasing probability that this is, indeed, a real recovery, one that will help boost Irish exports and surprise cynics by beginning to reverse Ireland's economic contraction much earlier than generally expected?

• Think about fixing mortgages now. Long term rates will rise as fears of inflation grows
• Invest at least 10% of your liquid assets in Gold and Silver if you haven't done so already
• Maintain strong exposure to natural resource stocks
• Continue to build a diversified mix of uncorrelated assets across Europe and Asia in particular
• Start building up holdings in Inflation-Linked European Bonds as you near retirement.
• Be ready to get back into property as the market turns and lending slowly normalises
• Continue to pay down lifestyle debt, credit cards, terms loans ideally to zero.
• Haggle to get best prices and discounts wherever you can.
• Expect more shocks but on a diminishing scale. Most of the toxic debt has been revealed and Governments now operate to a common template in dealing with it.