<My thinking is the money supply that went into these non productive assets must be destroyed.>
Yes, but I think that's only part of it. We have what I would now call "trading desk" based capital allocation, defined as hot momentum money moving around making trades, not real investments.
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That's the fallout from years of Greenspan engendered moral hazard monetary policy (see James Grant's "The Trouble with Prosperity"). Of course this creates a system that poorly allocates investment, stuffing some channels, making nonproductive assets, and neglecting others still. When you have a corrupted allocation mechanism you get the maladjustments I keep alluding to. One form of maladjustment is exactly what you describe: overspeculation, overcapacity and of course deflationary trends. That CAN NOT be dismissed.
But the other side of the coin are the shortages that evolve from the overheating, and from the neglect (underinvestment) in other sectors that aren't as favored by the trading desk crowd. The neglected sectors can set off powerful inflationary forces, that put even more pressure on the formerly "hot sectors" as a result of unexpected cost squeezes. I've been posting regularly what I feel the inflationary sectors are and I don't feel they can just be dismissed either: energy, shipping/transportation, steel, metals, food, and on and on (see my posts). In fact we should be focusing closely on them, because the problems coming out are evolving rapidly now.
My fundamental investment stance focuses on shorting the sectors prone to liquidation and deflationary trends (consumer, retail, financials, tech), and staying long the previously neglected prone to inlation areas like energy, food, and until recently metals. I'm in effect trying to arbitrage them. |
