Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Perspective who wrote (53132)	7/7/2006 10:09:56 PM
From: YanivBA	Respond to of 116555

Well actually I believe the minute you ask "what stage are we in?" the analysis should breaks down. Life, the CPI, CRB and interest rates are all continues and trying to abstract stages is nice for the mental drill but tends to confine the senses. The real situation might present some of the characteristics of any of the stages at any time, constantly avoiding concrete classification. That said, it is clear to me that over the last few years we have seen capital goods leadership. This is evident due to the bull market in commodities. I don't see how the fact that the capital goods have been placed in emerging markets to produce over there and import the final goods back here makes much difference in the analysis. Once demand hits the first bump in the road (not to mention a real estate realty check) it will be evident that supply has already out paced demand. However, the outlook for interest rates is much more blurred. On the dollar and the US I feel that we are probably already in restrictive interest rates. If demand were to contract today I think the best fit for the US will be the third scenario. However, I also believe that there might be significant blocks in the transmission of high interest rates into the supply curve. While Bernanke will probably let some bankruptcies take place I don't see officials in china halt production no matter what the interest rate is and how much loss has accumulated. Saving face is said to be pretty important down there. If this is true that means that the supply curve will keep expanding well after the demand curve had contracted. That is maybe grimmest of all scenarios because the likely end here is the retraction of globalization and the return of protectionist walls. A key point in the third scenario is that the central bank does not lower interest rates before the market was allowed to purge some of the debt by way of bankruptcies. A premature lowering of the interest rates (i.e. Greenspan style) will result in a temporary return of capital goods demand but will probably backfire at the first attempt to normalize interest rates. At this point the likely thing is that the central banker would panic and lower interest rates again. However, for several reasons it could be that Barnanke, unlike Greenspan, would prove some backbone at this cross roads. I will leave the reasons I think this could be for tomorrow. But the key point in the fourth scenario is that the central banker is left with no ammo to fight the development of deflationary expectations and any path that leads there will do the same. BTW, BC, you are right about the "crash" part being unnecessary. I got a little carried away. What I should have said is that after an extended period of capital goods led growth, supply will reach such levels that capital goods demand can no longer provide support for the economy, price wars break at multiple markets, profitability declines, loses start to accumulate and investors stop the flow of funds. Wow, I've written too much. Too soon. At this pace I'll burn out in a week. I guess I just had a lot stored in and I am happy to have found this place. YanivBA