Ok- I have a tendency to act like a deer in the headlights when unexpected things happen. I understand creating scenarios of possible outcomes, and appropriate actions to take in advance allows one to respond quicker.
Last fall, I created a matrix. I was concerned about the dual impact of higher interest rates and higher energy costs. It looked something like this:
Fiscal Policy
Tight Fiscal | Loose Fiscal
No tax change | Tax relief
Monetary Policy |
Cash | Retailers, Consumer spendng imprvs
Higher Recession | tax cut offsets higher energy
or No Change Lower Home Prices| Hurts investments
Deflationary |
----------------------|------------------------
Bonds |
Looser Banks/Finance | Foreign Currency, Swiss/Euro?
Lower rates Retailers | Gold
HomeBldrs | Inflationary
This assumed energy would stay near $30, and actually is somewhat in error in retrospect. But it served well during the past few months.
These new scenarios are not well understood. I think we could ignore the first two, as they paint with too broad a brush.
a) An inflationary recession/depression, where the declining value of the dollar increases costs for both corporate and personal consumption, and debtors load is alleviated by cheapening the currency. Savers loose, cash is trash. But real goods don't produce income and are likely to depreciate too. Real estate could produce income, but is also likely to decline in at least some markets, especially CA.
b) A deflationary recession/depression, where the collapse of prior credit excesses wipes out capital, reduces demand, creating a vicious circle. Cash is king- it would seem regardless of clownbux or foreign.
c) A mixed environ, with deflation and collapsing debt where excess capacity exists, inflation where malinvestment prevented appropriate capital investment. The Inflation in Energy provides a negative feedback by drawing consumption away from other areas, aggravating the deflation and debt issues.
So, to play these scenarios, must identify where excess capacity exists. I'd like to propose stock brokers and financial intermediaries.
Sectors exhibiting Inflation:
Energy
Base materials- ie CU,NI,AL
Transcontinental shipping? (lower demand offsets capacity restraints?)
Sectors with excess capacity
Autos
Food? (farm production in excess of needs?)
Steel
PC Mfg
Semiconductor, esp DRAM
CellPhones
Bandwidth |
