Z - I was doing a quasi-stationary analysis - ignoring the transient effects of how it would actually unfold. You are correctly raising the issues of implementation, which are *huge*. If it was just a 2:1 split, it would be simple, and the winners and losers obvious, with little fallout. The problem in implementation is that the transient behavior - the gradual upward adjustment of pricing - can take on a life of its own. The positive feedback can become so strong that the system becomes unstable and latches into hyperinflation.
How do you see things behaving vs. the quasistationary analysis? It sounds like you think the pricing adjustment won't be equal to the devaluation, which I would support. That implies, however, that somebody is getting squeezed. I submit that somebody is corporate America, anybody importing raw materials and selling finished products. The value of their value-added is squeezed.
More importantly, how do you think this impacts different asset classes? I would say that the squeezing of corporations is a huge negative for the valuation of equities. I would also say that, despite the obvious deflationary scenario, the ultimate impact on bonds will be negative, as the Fed will see to it that the holders are indeed paid back in devalued dollars. The only asset class that is supported is commodities, although not as strongly as in the direct 2:1 split. However, the thing that *really* moves prices in the asset classes is supply/demand, and I think with the other negatives applying selling pressure to equities and fixed income, the relative safe harbor of commodities may mean a real flood of investing interest, and outsized price gains - basically a reversal of the last two decades.
Heinz raised a new issue that I hadn't considered - how in the world does the Fed back itself *out* of the extraordinary measures it is taking to jam interest rates negative? If and when it is successful in reflationary efforts, who exactly in their right minds would be willing to step up and buy a long bond from the government at negative interest rates? The Fed wants to erase the debt on the books, pay everybody back in devalued dollars, but hold rates at zero across the curve. I guess it just crashes our currency and purchasing power on the global scene. Somehow that doesn't make sense.
If it at any point begins to defend the currency, the whole thing collapses. If they continue to support negative interest rates, they must continue buying treasuries, cratering the dollar further. If they let up, there is nobody in their right mind that would hold a long bond with a negative interest rate without a Greenspan put (bond put that is) to guarantee their return.
He's painting himself into a corner.
BC |
