After rumblings in the preceding two years, 2008 delivered a financial earthquake. Despite the high risk of another to follow, a so-called double dip, it hasn't happened. But what we have been experiencing are significant aftershocks. These will continue into 2011.

Regular readers of our Outlook series will be familiar with our longest and strongest call. This is that we are on the cusp of a prolonged bout with high inflationary forces from 2012 and that could last a decade or longer. This will herald a fundamental rethink on to how we should grow and protect balance sheets. That long view hasn't changed, but has been underlined by events since our report last year.

So what are some of the big financial themes this year and what should you be considering?

Inflation Announces Its Arrival

2011 is likely to bring hard evidence of emerging inflationary problems. It has already started in fast growing developing economies like China, India and Russia where inflation is a by-product of high expansionary policies. But inflation will also begin to emerge this year in the US and European economies including the UK. Throughout the course of the crisis the conventional view ranged from deflation to tepid inflation for several years. Both were wrong. Each relied upon a multi-year depression in the global economy that hasn't transpired.

But you cannot print money by increasing money volumes on the scale pursued by the US, UK and Europe without debasing currencies. Central bank academics, who believe in a perfect landing where this money can be drained back out of markets as the recovery gains speed, seem blind to two other major influences;

US policy is implicitly pro-inflation. Unless the US inflates its way out of the colossal debt pile it owes the rest of the global economy, the US Government will be forced into an austerity programme involving heavy tax increases. Aggressively jacking up taxes is what caused the American Revolution and unlikely to be followed except as a last resort and certainly not by a Republican-dominated Congress

The second influence is the beginning of a shortage of oil on world markets and which we've been flagging for several years. Reports from the IEA and the US Military of a shortage of oil from 2012 to 2015 on world markets were supported last year by a UK report headed by Richard Branson. But you don't need to read these tomes to see what's happening - just look at the pumps.

High oil costs are back with oil now creeping towards $100 per barrel. Expect oil prices throughout 2011 to continue to move upwards leading to general price rises in industries that have high energy inputs like mining and food. Commodity prices are rising sharply across the board as consumer demand follows economic catch up in the Non-OECD world.

Europe is Forced to Get Its Act Together

Unless resolute action is taken in 2011 such as creating a common E-Bond and shifting the excess debt that cannot be carried by peripheral weaker economies like Ireland, Greece, Portugal and Spain, to the centre, ( which is what Alexander Hamilton accomplished in replacing state bonds with US treasuries in 1790), Europe will tear itself apart. Each of the alternatives, Germany going solo with the DM, a split into Euro strong and weak or, a return to national currencies, would be preceded by a banking crisis.

What isn't fully grasped is that the European sovereign debt crisis is a proxy for the mother of all banking collapses due to the integrated nature of the European banking market. Strong banks at the centre would face unbearable loses in loans to banks in economies exiting the Eurozone. The result would be a balloon in national debt somewhere along the scale that has afflicted us in Ireland. Despite the headlines, most European Government paper is still safer than banks. When Governments run out of money they increase taxes and cut spending. When banks run out of money they can go burst

Overall Europe is much lower risk to bond investors than higher-indebted economies and enjoys superior consumer savings than many other regions. The difficulty is Europe's cumbersome politics but as the crisis has rumbled on and is likely to engulf Portugal very shortly in a bail out, the debate in Germany is shifting. The Euro is crucial to the continued strong performance of German exports and for the first time in over a decade German domestic consumer spending is being to show real signs of strong growth.

Expect 2011 to eventually bring a consolidated European Bond into existence but at the price of much deeper fiscal integration – in other words where national budgets are screened in detail by Brussels so that no one is allowed take unacceptable risks with everyone else's national income. It's going to take a major funding crisis, perhaps on the scale of Spain, to force the issue so prepare yourself for some pretty hairy newspaper headlines and political posturing from those at the extremes, before the moderates win out, allowing the German Chancellor to back up her Christmas speech about the critical importance of the Euro to Germany and Europe, with resolute action.

In the meantime the European bond market will continue to be volatile and media focus will remain on the next rollover date for weaker economy debt, keeping Europe's debt problems centre stage.

What Assets to Own and What to Sell?

• It's safe to ignore the gold bubble brigade. Gold, silver and other precious metals prices are unlikely to collapse and more likely to rise again in 2011 as investors respond to worries about a loss of value in major currencies and inflation.
• Commodity-backed currencies are likely to finish the year strongest which is why we rely upon an AAA Rated Australian Dollar Liquidity Fundfrom JP Morgan for investors seeking shelter from the declining Euro. For more information contact us or visit our website. We also recommend Silver and Gold Certificates to deploy away from Euro.
• Low interest rates in the US and Europe is strongly supportive of Equities in general but be wary of sectors heavily dependent on energy input costs like airlines. Developing market equities are likely to outperform once again on foot of much higher economic growth so Asian and Pacific funds should do better than Europe and the US. An asset bubble in China is the principal concern if not dealt with effectively by the Chinese authorities.
• Commodities, especially energy and metals are likely to continue their strong run up but at some stage will run into the headwind of demand dropping away - although not this year.
• Fixed Income bonds which have enjoyed uninterrupted growth for many years will fall this year not just because of sovereign debt worries but because of the likelihood that inflation could outstrip the coupons paid. These are the stable diet of the common or garden variety pension fund and should be replaced by Inflation-Linked Government bonds.
• Faced with inflationary pressures central banks will be anxious to raise interest rates but fear of reversing the fledgling recoveries evident in the US and Europe is likely to delay any aggressive rate rises until 2012. That means that Cash deposits will underperform inflation when you adjust for tax, losing you money.
• Property values will start to tip toe back in premium parts of markets heavily hit by the crisis but until banking is fully repaired there will be no v-shaped recovery anywhere. It will remain a buyer's market for some time to come.
• Debt especially of the interest only kind should be locked into the longest fixed rates you can get. 2011 will mark the beginning of spikes in long term finance costs. This is a trend that has started already but which will gather momentum in 2011, catching many borrowers who linger too long on tracker mortgages, by surprise.