The objective of this thread is to see beyond current economic conditions and understand how markets and various asset classes look when we come out of this current slump. This does not mean I am expecting it to happen soon, could be a time period anywhere from 1 year to 3 years or more.
To set baseline for discussion let us divide asset classes into two categories:
1. Enemies of Inflation (EOI): assets that belong to this class include {stocks, real estate etc} and are the ones whose value goes up when the inflation is low and vice versa
2. Friends of Inflation (FOI): assets that belong to this class include {bond yields, gold, other commodities like PMs/oil etc} and these asset values are high when inflation is high
So if we create a matrix of asset values we have:
Asset value EOI FOI
scnario1 HIGH HIGH
scenario2 HIGH LOW
senario3 LOW HIGH
scenario4 LOW LOW
Some observations based on these scenarios:
-Under normal economic cycles, conditions would gravitate to scenario 2 coming out of recession where interest rates are low and stock values start climbing and bond yields falling
-over last decade, we were in scenario 1, where all assets have been synchronously going up; classic indication of intervention in markets and markets not being allowed to play their natural cycles, not only in US but this phenomenon has happened worldwide
-since last year, we have been experiencing scnario 4 where all asset classes have been going low synchronously, again indicative of the result of massive intervention
If/when we come of of this economic slump:
-the govt reflation is trying to target scenario 1 from current scenario 4, trying to go back to good old days; however, its not clear that is a sustainable situation because it tends to create asset value bubbles that eventually burst and we oscillate between scenario 1 and 4
-its is not clear how we might come out of recession/deflation (current scenario 4) in scenario 3, that is, the curent internevtion can land us into scenario 3 (high inflation) but the economy would not come out of this slump under this scenario (considering depressed stocks real estate in scenario 3)
-under normal conditions, we would target scenario2 to come out of the economic slump; however, considering what the government is doing to save economy in terms of huge bailouts, huge balance sheet, increasing amount of money supply, the conditions are not very conducive to land into scenario 2 where we need low inflation, low rates, and high equity and real estate prices. If we landed in scenario 2, gold/other commodities will likely go down in value
-I am not clear if the govt can clearly lay out a path to target scenario 2 from current scenario 4 with the efforts they are implementing, that would be great to instil confidence, wouldn't it? so essentially they are hoping an prayng that through some future events we muddle through, flip/flop, hop step and jump into scenario 2. The current path would have us voilently swing between scenario1 and 4 with bigger and bigger problems each time we do this.
I wanted to start a disussion on what transitions people think we would experience in going from current state into a target scenario where we successfully come out of this economic slump, understand if people can see how the current efforts can bring us out from the slump, and in the meanwhile how various asset values will change as we complete the transition. |
