I’ve just caught up with some old emails and came across this latest piece from John Mauldin’s blog.
Written by Dr. Gary Shilling, this is an excellent overview of the threat deflation poses to us now.
I’m adding this so I have easy access to it in future.
I read an excellent piece yesterday by John Burford, the MoneyWeek Trader.
He laid out a convincing argument that T-Bill yields (the interest paid on US Treasuries) has bottomed.
Looking at the charts he presents, he is calling the bottom of a 27 year trend. This is a very bold call, but I think there is something to watch out for here.
I am not sure if I agree with him that the trend for the decline in yields is necessarily over just yet. He is right to talk about the unsustainable level of American debt and that when the market does turn, it will likely reverse its course sharply.
At the heart of this issue is the increasing tension between inflation and deflation clearly present in the global economy.
On the one hand we are probably about to witness another bout of inflationary money printing. On the other hand we could well be about to see European banking losses finally be realised (e.g. through a Greek exit from the Euro, a write down of Spain/Ireland/Portugal, even Italy?), which will obviously be heavily deflationary.
This analysis is simplistic, but the point is still valid.
To profit from Burford’s assessment the timing is as important as the view. I agree that we could be reaching a bottom for yields, but I don’t believe this will be challenged until the point where the general market wakes up the fact that a US default of some kind increasingly looks inevitable.
Whatever the case this is a market I am going to pay much closer attention to as this kind of trend reversal can provide some of the most profitable opportunities by far.
I need to learn more about this market.
It was announced today that between 2005 and 2010 US Household net worth declined by an average $36,000.
While the jobless recovery continues and growth is non-existent in reality, I believe this statistic best exemplifies how broken the old economic ways are.
Central bank inspired printing led to a glut of cheap money. Cheap money fuelled a credit boom and encouraged all manner of excessive behaviour. Apparent growth was a mirage, but prices were pushed up as if solid fundamentals were at play.
I don’t believe the statistics are available but I would be amazed if the headline figure has improved in 2010. Equally I would be shocked if this pattern were not mirrored across all the heavily-indebted, over-leveraged industrialised nations.
There is an argument that this reduction in net worth is nothing more than we deserve.
Whatever the case the process of deleveraging (reduction of debt) must continue, but this will only cause more deflationary pressure. I don’t think there is any doubt that this has to happen.
What then though?
So far central bankers have apparently been terrified of deflation and have used this to explain all the measures of monetary stimulus they have enacted in recent years (while denying it has anything whatsoever to do with bailing out their friends in financial markets). The record stimulus measures have certainly had an inflationary effect on financial assets, but so far it has at best reduced the pace of price decline in the housing sector.
At some point, after a likely more painful process, deleveraging and deflation will come to an abrupt end. Losses will be recognised and we will suddenly find ourselves in a world awash with funny money. Lessons from the Weimar Republic give us clear indication of what can occur in a developed nation when this situation is allowed to persist.
Well what an exciting week this has been.
I am glad I took precautionary steps on Friday and would certainly do so again. I have to be careful how I manage my risk and I thought there was a very real possibility that Europe would not reach agreement about Greece.
They did and markets have rallied, although serious questions still remain.
I am sure this is not the end of European Sovereign Debt Crisis. The deal seems fundamentally unworkable and the financial system is at breaking point. As this Zerohedge article points out we came to the brink because Greece could not meet a “measly” €14.5billion payment in March.
Even so the appearance of a solution will hopefully be enough to give new life to the current rally. Monetary conditions are certainly bullish thanks to the ongoing efforts of the world’s central bankers. I am actively looking for points to increase my positions to the same levels as last week. I will have to be nimble in this pursuit and intend to take the opportunity to rebalance my holdings.
At some point economic reality will have to set in and we can expect more steep drops. I don’t believe this will happen in the next six months. Continue reading
Obviously the Fed didn’t deliver QE3 last month. Thanks to this my Google Alert for “QE3” makes for interesting and divided reading.
To begin with there are lots of news articles written everyday on this topic. Where it gets a bit more fascinating is that opinion is split evenly down the middle as to whether or not the Fed will engage in QE3 at all.
The following two articles encapsulate the debate quite nicely. This one makes the case for QE3 as inflation is apparently benign and companies have little pricing power. However this article attributes the decline in the price gold to the expectation of no QE.
For what it’s worth I am sure the Fed will engage in QE3. I have positioned myself for another burst of manic printing.
Not to print would be to call into question the entire policy response of the last 4 years. Once this happens the next logical step would be to question the active roles of those still in power, who took us down this path in the first place. Given that desperately clinging onto power, at any cost, is the fashion amongst our leaders, the chances of enlightened honesty suddenly sweeping through their ranks seem mightily thin to me.
There is also the “race to the bottom” to consider. Debt levels are so high that there is little chance of genuine repayment. At the moment, default is an extremely dirty word. Currency debasement is simply another form of managed default. The weaker your currency becomes the less valuable your debt is. That the majority of developed nations are now so over-leveraged is exactly why we now have a race on our hands. In other words which nation can successfully weaken their currency the fastest without wrecking their economy? Continue reading