Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 23rd January 2011.

*When we penned our 2010 forecast at around this time last year we stated that similarities between the stock market's current situation and its situation during the early 1930s had been eliminated. If any more evidence were needed to rule out an early-1930s-like scenario, 2010's market action provided it.

*As also stated in our 2010 yearly forecast, the monetary backdrop is the single most important difference between the early 1930s and the current situation. Specifically, there was massive monetary deflation during the early 1930s and there has been massive monetary inflation since September of 2008. Although it has helped to support prices, the surge in money supply will have very negative long-term consequences.

*Our view continues to be that a global economic depression of the inflationary kind has begun. At this stage the symptoms of economic depression are only evident in the US, Europe and Japan, but we expect that the depression will become more widespread after China's real-estate bubble bursts.

*We perceive the eventual bursting of China's real estate bubble to be the biggest risk facing the stock and commodity markets in 2011. The rising price of food is a potential catalyst for the bursting of this bubble, the reason being that China's policy-makers will be forced to bring about much tighter monetary conditions if food prices continue along their upward path.

*China's isn't the only real estate market in bubble territory. For example, property bubbles are alive in Canada and Australia. The existence of these bubbles adds to the overall risk.

*We view the euro-zone government debt problem as the second biggest risk facing the stock and commodity markets in 2011. The euro-zone countries with the worst government balance sheets and the weakest economies will, as a group, have to roll over about $1 trillion of sovereign debt this year, which is unlikely to be achievable (without massive ECB support) unless stock markets remain buoyant. If the global stock-market rally ends then the world's financial markets will become much less liquid as speculators retreat to cash and other safe havens.

*Stock market risk is high, but if the stock market avoids a large decline then uranium- and agriculture-related stocks will probably do very well in both absolute and relative terms. If the stock market goes into a lengthy retreat then gold will probably be the best-performing sector.

*For equity and commodity speculators, money-making was relatively easy during 2009 and 2010. At least, that's the way it seemed to us. Our 'gut feeling' is that it will be far more difficult in 2011 and that our primary focus over the coming 12 months should be on retaining the large gains of 2009-2010. In this regard, we think that a well-above-average cash position is warranted as the year commences.

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