When 2009 finished, most were predicting the end of the economic malaise and the beginning of another period of economic growth and prosperity. Those predicting more difficulties ahead, and there were some, were looked at in the same vein as those who were predicting the end of the dot.com bubble. They were merely doomsayers and should be ignored. The world was moving forward again and had a rosy future.

Well, 12 months later and we are none the wiser about just how precarious the state of the world economy is. Trillions of dollars of almost free capital was pumped into the banking system and most people have yet to feel any more confident about their future than a year ago. Banks are simply hoarding cash since they are also worried about the possible fallout of another commercial or residential property crisis. In fact, many are worried about what would happen should the free liquidity be removed and interest rates are raised; especially when unemployment seems to be stuck in most Western economies. Of course, many point out that the east will carry us out of the current crisis and that is in fact where the future lies. I am not so sure.

Looking back over the year, I think we were right in warning that “an economic recovery with high unemployment is not as sustainable as it once was, given the huge contribution that consumer spending now makes to the national GDP figures of most Western economies.” I also continue to believe that the current market requirements of larger deposits for mortgages will mean that property prices will remain under pressure in many of the former property hotspots, such as U.S., U.K., Spain, etc.

I was certainly wrong in predicting that gold would come crashing down to earth. If anything, the reverse is true. But, I think that has more to do with the serious concerns many have about the health of the Western economies than a genuine demand for gold. Consequently, I stick with my prediction that it will come down in price. I still believe that “In today’s world there are far too many derivative instruments for hedging risk that the use of gold, and other precious metals, should not be necessary.”

I was also right in believing that “2010 will be a more exciting year than 2009, since many of the shocks will come as more of a surprise to international decision-makers. International financial institutions will most probably have a record breaking year in 2010, since they will certainly take on more risk and have less of a competition. Many of the write-downs will have been left in the past so that they can accelerate forward. I think the U.K.’s tax on bonuses will not make as many people leave the City as many suggest, since the alternatives are not as viable as many believe and there are far too many ways to avoid it.” I was also right in predicting that “Germany probably won’t introduce taxes, hoping that Frankfurt can once again clash heads with London by attracting those who wish to run away from the tax hikes, but somehow I think the gap between the two is too large now to be cut short by such taxes.”

As for 2011, I predict that as the economic recovery does get stronger, which I believe it will, unemployment should start falling and that should help the recovery gather speed. But, I think, it will be significantly more subdued than many predict. There are still far too many risks in the system than many are willing to acknowledge. As interest rates increase and banks are forced into recognizing bad loans, they will introduce another series of risks to the financial system. Just how severe those risks are, no one really knows. In other words, we have learned that it is impossible to make economic predictions with any degree of certainty. Perhaps the best prediction for 2011 would be that more economists realize that they have no idea how economics actually works in practice. Or perhaps that’s more of a dream.

From a more personal perspective, we published 3 very successful issues of the Journal of Financial Transformation in 2010. Our annual conference of the Cass-Capco Institute Paper Series on Risk in April was well attended, despite the volcanic ashes from Iceland making it very difficult for many of us to attend, and the debates were at a very high level. We hope that the April 14th event in 2011 will be better attended. We have also established a partnership with New York University’s Polytechnic Institute for a paper series in Applied Finance, and its conference will take place on the 16th of June, 2011, at NYU-Poly. We hope to see many of you at both these events.

My co-authors and I have continued writing articles under the “Economists’ Hubris” umbrella, with three more papers completed in 2010. These articles look at the gap between academic thinking and business application, which remains as large today as it’s ever been. These articles are:

Economists’ Hubris – The Case of Equity Asset Management http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1597685

Economists' Hubris - The Case of Risk Management
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1550622

Economists’ Hubris - The Case of Award Winning Finance Literature
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1717928

We hope that you have enjoyed our commentaries during 2010 and that you will join us again in 2011 for what will surely be a very interesting year. We also hope that more of you will share your ideas with our readers, as the Bulletin is intended to be a medium for ideas from anyone who is interested in sharing theirs.

On behalf of my colleagues who have contributed to the Bulletin over the past year, I would like to wish all our readers a Wonderful New Year.