Eugene:
You're right, that collapsing stock prices and rapidly declining interest rates (The Fed has all but promised a series of cuts, everyone is refinancing mortgages twice a year because the rates keep going down) is an odd combination.
The following would make me go 100% to cash, or perhaps 50% long/50% short:
1. Protectionism (in the U.S. and elsewhere) wins the political battle for "hearts and minds". The only result of this can be a spiral of reciprocal tariff raising, collapse of world trade, collapse of living standards, and a prolonged global depression. I hope we aren't stupid enough to repeat the mistakes of the 1930s.
2. Signs of inflation appear, while profits have not yet recovered. This would require the Fed to raise rates, even if this knowingly causes a recession. I find it hard to believe we're going to have a recession as long as the Fed is lowering rates. There is no historical precedent for that.
Aki is right, there is going to be a huge amount of debt written off over the next year. Almost all of the money lent by overconfident bankers in rich countries, to corrupt companies/governments in poor countries, will never be repaid.
Our government should say, "OK, we'll continue free trade, and we'll exchange your short-term debt for long, and forgive a lot of it, but you have to do two things: 1) adopt SEC accounting/reporting rules, and 2) dismantle your Ministry of Industrial Guidance And Patronage, and let the market decide where goods/labor/capital go." Only countries who don't agree to this should have trade barriers raised against them. If South Korean and Japanese semi companies and banks had lived under those rules, the whole DRAM oversupply problem would never have happened, because most of those fabs would never have been built. |
