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As central bankers everywhere breathe a sigh of relief and bankers of a more private pinstripe rejoice at the return of beloved bonuses, another tumultuous year draws to a close without any new financial earthquakes - at least none that pose an immediate threat to the still recuperating global system.

True, another seven tiny U.S. banks bit the dust last week, bringing the total to 140 so far this year, for those keeping score at home.

Like all the others, their obituaries appeared quietly well after markets closed on Friday.

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But the big banks that matter are finishing the year in far better shape than they started. Equity markets continue to defy the pessimists. Emerging markets are happily blowing bubbles again. The sucker-punched U.S. dollar appears to be picking itself up off the canvas.

And the Canadian economy is doing its best to prove life can go on without the U.S. consumer.

It has been, as we promised last December, a year of remarkable opportunities for those with a stomach for risk and enough capital to take advantage of them.

But now it's time to see what 2010 might hold in store, especially if this still tentative recovery, largely fuelled by vast injections of government cash, comes unglued.

As our guide through the quicksand, we turn to Satyajit Das, whose genial nature belies his rather dark outlook.

"We've had a financial market recovery. But the real economy is at best bottoming out," says Mr. Das, a globetrotting adviser to serious money and one of the world's leading risk experts.

"What we're going to see is a period of prolonged stagnation."

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Okay, even optimists expect the rebound to be long, slow and somewhat U-shaped, with a fitful recovery in U.S. consumer spending, below-par industrial output, tight credit conditions, stubborn unemployment and worse troubles in such areas as commercial real estate, European banking and the Baltic states.

But that's where Mr. Das and those of a more bullish bent part company.

Gazing into his admittedly cloudy crystal ball, he sees a "massive risk of destabilizing shocks," of which Dubai and Greece were early warnings.

More credit woes are sure to surface, as borrowers face payment deadlines on vast amounts of maturing debt. These will spill over into currency markets, as well as other economies.

Dubai's miseries, for example, have forced suppliers and construction trades to take a severe haircut. The result shows up in distant Asian markets, where vital remittances from expatriate workers are suddenly sharply lower.

Debt-laden private equity firms, banks with hefty commercial real estate exposure and a boatload of sovereign borrowers are quietly hoping credit and market conditions improve to the point where refinancing won't be a problem.

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"But as Dubai shows, that's not a guaranteed outcome. Everybody says this situation is contained. I've heard this before, around the time subprime was being discussed. This is not contained."

He also frets about new asset bubbles in emerging markets and widening global imbalances. He warns that disorderly currency markets could become a serious problem and predicts Washington and other governments will keep throwing buckets of borrowed money at faltering economies.

"The best way to look at it is that we'll be living in a capitalist economy with Chinese characteristics, certainly for most of next year and maybe 2011," Mr. Das says from his home base in Sydney, Australia. "But you can only defy gravity for so long. That's as long as you've got jet fuel. A jumbo jet out of fuel is not a pretty sight."

Still, for all that, the good news is that 2010 may yet turn out to be relatively calm by recent standards, and full of promise for careful investors.

"There are a few land mines, but we may be able to dodge them. I think we're going to get a melt-up before we get another meltdown," Mr. Das reassures me.

And as we gingerly make our way through the treacherous landscape, Mr. Das has a suggestion for Canadian investors. "Stay very close to home, because Canada is likely to do better than most places, though you have to avoid [catching]the U.S. disease."

Short-dated bonds look good, because he still sees deflation as a bigger short-term risk than inflation. He remains a fan of the essentials of life - oil, food and cash. And he would maintain some exposure to red-hot emerging markets, because they have room to rise further, even though he is convinced they are asset bubbles waiting to blow.

And regardless of our appetite for risk, his general advice is the same: "You need to be very, very cautious and able to turn on a dime here. This is not a sit-and-forget [market]"

Nor is it likely to be a sit-and-forget kind of year.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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