My strongest conviction is that the Fed is always fighting the last war. The incredible steepness of the yield curve tells me that long-term interest rates are being jammed below where they should be, and there are serious future inflationary implications. With the Fed having brought deflationary concerns to the fore, I believe the risks have now returned to inflation, and given the response of the Fed to every prior situation, I expect they will continue to err on the side of excess ease, resulting in a period of substantial inflation ahead. The only thing that can prevent a deflation here is a removal of the existing debt load, and it will be accomplished through a severe inflation. With all the fiat money created over the past decade, it would be pretty easy to see a halving of the dollar's purchasing power. Stocks could have some inflation hedge tendency in that environment. Commodities seem to be the way to go, though. Look at how the CRB performed in the 1970s - that was the place to be.
The thing nagging me is the immense liquidity created through the mortgage refis can only run on so long, and its end will mean a collapse in demand, which would add to deflationary forces. However, I'm certain the Fed's response will be increased reflationary efforts, "unconventional" if necessary, and the result will be to sustain demand with the consequence of an out-of-control acceleration in inflation - a debtor bailout, at the expense of creditors.
Lever up, all; Easy Al will save you from the mean creditors and whisk your debts away...
BC |
