A: Basically, we have the private sector contracting around the world and then we have these huge stimulus packages that boost economic activity and we have quantitative easing, in other words money printing around the world in concert by all central banks, whereby the Reserve Bank of India (RBI) has been doing a relatively good job at that.

So I think that whereas the economy collapsed between September 2008 and March 2009, we have stabilized but basically considering the size of the stimulus packages and the monetary printing, the economy hasn't responded well. What have responded well are asset markets. The Federal Reserve in the US is basically keen to lift asset markets again – to push them up. Unfortunately, it backfired on them, to the extent that actually oil prices have risen very sharply and other commodity prices also.

So the benefit of quantitative easing has essentially flowed into Wall Street, into investment banks, into the banking sector but it hasn't flowed into the typical household in the US. Unemployment is still horrible at the present time with a lot of people being either unemployed or employed in jobs that they don't really want – in other words under employed.

So we have a very strange economy. We have booming financial markets. The stock market in India is up more than 100% from the lows in March and in the US we are up 60%. But at the same time the average household – the man on the street is basically suffering.

Q: All our trades nowadays are linked to the dollar – whether the dollar is bouncing back or slipping once again. Do you think there is a big dollar carry trade, which is going on and do you see risk of it unwinding – presenting any threats to emerging markets as such?

A: I am not so sure there's a huge dollar carry trade. What happens is that worldwide because interest rates are at zero percent – institutions as well as individuals borrow money and they go and speculate. The dollar carry trade is frequently misunderstood in the sense that there are big short positions in the dollars. But one shouldn't over estimate the short positions in dollars because the world is basically awash in the dollars.

There are too many dollars floating around from the American current account deficit that reached USD 800 billion annually and total international reserves in the hands of central banks now are USD 7.7 trillion. That is the dollar overhang and to some extent some people want to hedge their dollar exposure and then they sell dollars and buy foreign currencies and of course also precious metals including gold, silver, platinum, palladium.

Q: The point about the dollar is that people map weakness in the dollar to comfortable liquidity in emerging markets. They believe as long as that remains, the chances of all markets heading to new highs in the next few months is a possibility. Do you agree with that? Do you see new highs in 2010?

A: The Dow Jones just reached a new high. The S&P hasn't made a new high and it’s possible that they make a new high but the gravy is basically out. We had a 60% rally in the S&P from 666 to 1,101 and in India we're up a 100%. Can we go up another 10% or 15%? It’s possible but obviously the risk/reward is no longer that favourable.

But we have to consider the following: It's very difficult to value assets when you have zero interest rates and when you have a central bank like in the US that has acknowledged and assured investors that they will print money. What you may end up with is that the weaker the US economy is, the more the share market goes up, the more the dollar goes down because of another stimulus package, and further money printing.

Q: What then is the central risk according to you for equity markets across the world at this point?

So I think that eventually yields will go up and this could disturb the stock market. In addition to that we have very high valuations because corporate profits have held up better than expected, in the sense that corporations have cut expenditures very substantially in notably the workforce. You have to see in an economic system if you keep on laying-off your workers, who's going to back your product at the end?

So maybe in 2010 we see again more weakness in corporate profits and that the expectations are disappointed and that we go down again.

Q: What about gold then that has been the one, which has been hitting new 2009 highs? How do you see that panning out?

Q: The S&P 500 and the Dow Jones, what are your targets for next year?

A: That I don't know. I mean I think it may go up a little it may go down. It will be volatile. I think we may still go up a bit more – maybe the S&P to 1,200-1,250 and then move in a trading range. But that's not the high confidence forecast.

I also think we might revisits around 900 at some point because at some stage in 2010 people will realize the economy is still weak – it is not really recovering and another stimulus will have to be implemented and that will start to disturb investors. Because don't forget each stimulus package adds to government debt. The government debt in the US is growing and as a result of that eventually the interest payments on the government debt will go up very substantially because one day the interest rates will be higher than they are today.

Of course they will be higher and they won't be at zero forever. The problem then will be that if you increase interest rates, the Fed Reserve, the interest payment on the US government debt will go up dramatically to maybe 30-50% tax revenues in the next 5-7 years and that will essentially bankrupt the US.

Then there will be only one way to get out of this problem and that is to completely monetize the government debt and then you get into inflationary spiral.