London, England

Will the U.S. economy post a significant bounce this year? Or is the world's largest economy heading back into recession?

Morgan Stanley's Stephen Roach and Jim Grant of Grant's Interest Rate Observer both make compelling arguments for and against a sustainable economic recovery in 2010.

The chairman of Morgan Stanley in Asia has been a bear throughout the last decade and accurately predicted the bubble in credit and equity markets prior to the peak in late 2007. Roach remains negative on the outlook for global markets and believes the scope for bungled fiscal and monetary policies runs high on the agenda for capital markets.

"A growth scare is likely to be the major investment event of 2010. Post-crisis recoveries are typically anemic – at odds with the vigorous rebound scenario now embraced in world financial markets."

Roach believes that battered financial institutions won't have the capacity to resume pre-crisis lending for years to come. He also points to a fractured American consumer, saddled by high debt and now paring down leverage and raising savings. Historically, a high savings rate has exhibited a negative correlation to corporate earnings.

Morgan Stanley's chairman is predicting another shock. "Shocks are inevitable in a post-crisis world. A failed exit strategy by monetary authorities or an outbreak of protectionism, are especially worrisome. Should a shock occur, fears of a double-dip would hit frothy global equity markets."

At the other end of the spectrum is James Grant, one of the most astute credit analysts and editor of the eloquent Grant's Interest Rate Observer since 1982.

According to Grant, severe U.S. economic recessions have historically been followed by equally impressive recoveries.

"Despite an anti-capitalist political agenda and a decline in bank lending that persisted into 1935, real GDP leapt by 11% in 1934. It advanced by 9% in 1935 and 13% in 1936, too, after having tumbled by 27% between 1929 and 1933. One-third of the nation's banks failed in that era when banks did much more of the credit intermediation than they do today."

Grant also makes a strong case for post-recession recoveries in 1949 and 1983.

"Even 4% growth would hugely undershoot the average 6.6% inflation-adjusted growth rate in the 12 months following the trough of all postwar slumps, including the modern ones."

Indeed, if Grant is correct then Treasury bonds will post even bigger losses in 2010 compared to 2009 as stronger economic growth hits bond prices. Or, if Morgan Stanley's Roach is right, then perhaps Treasury bonds should be purchased at these levels?

Maybe the final outcome will be somewhere in-between both scenarios – not too strong, not too weak. One thing is for sure: After gaining almost 70% since March it's fair to conclude that stocks and other risk-based assets have probably discounted the best scenario for the economy. If that's true, investors should expect a serious correction shortly and raise some cash.