In the mean time I am going to throw out models, typically quickly assembled, so as I can see how they compare to current market action and hopefully develop a more comprehensive model that will reflect market reality.
Good idea but I think models are the modern day equivalent of alchemy.
It's the broad trends which matter, and it is easy to lose sight of them because of the noise and the chatter, the signal to noise ratio. The media, politics, the ever present and increasingly detailed discussions, the self interested spin, they all conspire to turn us into a bunch of financially addled children.
As I see the broad trends, first, we have recession, and a fairly severe one at that, which is likely to continue throughout the year and perhaps longer.
Second, it is undisputable that there was a near panic caused by the realization that the credit bubble, the largest in human history, was unsustainable and badly [some would say fraudulently] based. It was not based on increased productivity nor on the creation of real wealth but was instead dependent on the continued increase on the value of the US consumers' real estate. This badly based bubble led directly to the single most spectacular increase, in the shortest time, in the money base in the US in history as policy makers did their best to minimize the damage caused by suddenly ended credit. So far, these injected amounts have not had their effect because the velocity of money has slowed significantly and the financially strapped credit institutions have hoarded cash.
Third, we have seen a historically unprecedented accumulation of currency reserves, mostly of USD, in Asia and the ME in the last few years due to trade and oil exports. As a result, the US has in the space of a relatively few years become the largest debtor after being an enormous creditor.
Those, in my view, are the historical facts from which future financial inferences, and investments, must be made. The few inferences I can draw which seem to have any validity are that the huge amount of money injected into the financial system will someday begin to move. I think this is inevitable. Even a tiny bit of a return to financial stability will be a fuse that sets velocity off. When it does, the sheer size of the injected amounts will cause substantial inflation, thereby devaluing the dollar and the value of foreign exchange reserves held in Asia and in the ME. Even assuming a 20 to 30% devaluation due to inflation [this is a lot, I know, but recall that the dollar's value appears presently much too high], US debt will still be overwhelming unless a robust economic recovery based on increased production and productivity takes place. Will this take place? The $20 trillion question.
In the meantime, I think the only sure thing we can count on is inflation and more conflict between creditor and debtor nations. They are unfortunately held in a Faustian choke hold: while they may wish to reduce their dollar holdings, doing so will only devalue them more. China, in particular, I think has no choice but to spend its reserves, as the recession continues, on infrastructure and modernization. Its peasants need to be brought into the modern age. It needs to become environmentally responsible.
Long story short: after a period of seeming deflation, inflation is the broad theme for 2009 and 2010. Stuff - gold, energy, commodities, etc. - should do well. Most things denominated in the inflating USD will not.
That's my model.
|
