Montreal, Canada

As 2009 shortly draws to a close, U.S. stocks will log their worst decade of performance since the 1930s. Government bonds, on the other hand, have trounced stocks this decade. But the future performance of bonds is highly suspect ahead of rising deficits, additional financial crises down the road and the prospect of sovereign defaults over the next few years. Interest rates at this point can only rise.

During the ten-year period that spanned the Great Depression, U.S. stocks fared better than the 2000 to 2009 period. From their low in the summer of 1932 stocks thereafter mustered a spectacular 400% rally until crashing again in 1937. But the low for that crisis was indeed June 1932. The 2007-2009 credit crash saw asset prices bottom in March 2009; the Dow has subsequently climbed a cumulative 60%.

Stocks this decade wrestled two severe bear markets starting with the technology crash in March 2000 until October 2002, followed by the worst financial crisis in decades from late 2007 until earlier this year sparked by a collapse of the subprime mortgage-backed securities market. The damage done to equity portfolios has been truly remarkable with the Dow, currently at 10,500, trading at the same level it did in 1999. Basically, stocks have gone nowhere since 1998.

Since 2000, the S&P 500 Index has declined 11%, including dividends, the NASDAQ Composite has shed 18.6% and the FTSE Eurofirst 300 Index of European stocks has lost 30%. Japanese stocks, stuck in a vicious bear market since 1990, lost 42% this decade.

But government bond and other segments of credit fared much better in the lost decade for stocks.

The Barclays Capital U.S. Bond Index gained a cumulative 85% in the 2000s followed by 72% for British gilts and 71% for European government bonds, excluding the United Kingdom.

Yet if stocks started out the decade mostly overvalued – especially growth stocks – then is the opposite true today? Are bonds overvalued?

Considering the scope of debt-financing and refinancing that lies ahead for governments and corporations alike over the next few years, I would argue that, for the most part, bonds are a bad investment. Long-term bonds are especially vulnerable since they're the most sensitive to interest rate expectations.

Interest rates at near zero percent in the United States and historically low elsewhere imply an upward trajectory at some point as the yield curve steepens. Bond investors would need outright deflation and a severe contraction of economic growth to justify aggressive bond purchases now.

As for stocks, a depressed consumer, rising frugality and unstable employment trends portend to a sub-par earnings recovery. Companies will have to dramatically boost spending in 2010 to augment the drag on impaired consumer consumption. Domestic consumption, though improving since last summer on the heels of soaring financial markets and massive government stimulus spending is a short-term sugar-rush; consumers won't return en masse like they did prior to 2008. Housing remains the key to personal balance sheets and that trend is far from starting a new bull market any time soon amid impaired mortgage securitization and tight bank credit.

If the 1990s belonged to stocks and the 2000s belonged to bonds and commodities then, perhaps, the next decade will belong to chaos.

Portfolio insurance is now cheap. Considering the euphoria growing since March and the renewed state of complacency among market participants, perhaps the best speculations over the next decade are tied to crises-based investments that can appreciate amid global economic and political uncertainty.

Prospective trades for the next decade might include gold, the dollar, crude oil, the Chinese Yuan (if made convertible) the grains, managed futures funds, reverse-indexing and the VIX. Stocks and bonds will probably disappoint adjusted for inflation, which will make a fierce comeback over the next 36-60 months once banks start lending again.