following on to the earlier post from you know who Message 26260933 , a question of asked and answer sought, i quote the exchange,
player 2 nice post.
So the debt has been passed from the Commercial/Investment banks to the Central Banks.
What happens next?
Government defaults?
Inflation?
High interest rates?
A repeat of the 70's when we had 18 - 20% government interest rates?
Those that bought the high yielding paper at that time did well.
Of course, those that bought the high yielding paper at Wiemar, got wiped out.
What, in your opinion, is the play book?
player 1 There is no 'fixed playbook' that we can use, we can only consider the possibilities and arrange them according to their probability of occurring at any given point in time, depending on what new information comes in.
The main reason for this is the principle that cycles always change. Essentially, while certain things seemingly repeat over and over in history, there are always differences in how exactly they play out, and time-tested yardsticks of financial logic can sometimes go awry for extended periods (for instance, the US stock market never had a yield below 3% - for many decades - until it did. The market was a 'safe short' whenever the yield dropped to 3% until the day it wasn't anymore).
At the moment I believe that at first there will be some to and fro due to the fact that while government debt is evidently exploding, private sector debt is shrinking. So it appears likely that there will be more episodes of both deflation and inflation scares. During the former, government bonds should actually do well in spite of the large debt issuance. For instance, this year it seems likely that govt. bonds will do well, on the idea that 1. they're universally hated and 2. recovery expectations are likely to be disappointed.
Longer term there is a limit to this. Either governments rein their debt expansion and inflation in (and this has become increasingly difficult), or market confidence in the monetary system will go through ever greater convulsions, until it is eventually lost (i believe this is inevitable, but i have no idea how long it will take).
Given the great deal of uncertainty, i would say one should hold on to one's gold and add more when it dips (as it inevitably will during the deflation scares). One should not yet abandon highly rated government bonds, but avoid those of the potential flashpoint countries (like UK and Japan), and cut back on them during the deflation scare spikes. And lastly one should continue to regard the equity and commodity markets as a trading situation (a currently severely overbought one as it were).
I would also recommend to closely watch all slightly unusual developments.
As an example, in 2009 there has clearly been an element of hoarding in the commodity markets. We know this because prices have been rising in the face of rising inventories and tepid industrial demand. Now, i currently believe this will be subject to another setback, but there is no certainty on this point. It is something that bears watching however (i.e., will prices continue to rise in the face of rising inventories, resp. will this behavior return more forcefully after an intervening setback in prices). It's not quite clear yet if the hoarding is based on expectations of a resumption in genuine demand or if it is based on growing inflation fears - maybe it's both, but if it's primarily the former, then a disappointment is likely in store. |
