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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: sea_biscuit who wrote (90851)	1/27/2008 9:51:13 AM
From: glenn_a	Respond to of 110194

Thanks again for the reply sea_biscuit. It's actually helping me think this through a bit more clearly. So here's my take, and I'll comment on your thoughts inline: 1 - Central Bank Monetary Policy Firstly, it probably makes a difference if you're an investor in a relatively "hard currency" country with "relatively" sound central bank policy, or whether you're an investor in with a banana republic monetary policy like Zimbabwe or the U.S. I live in Canada, and as you probably know the CDN$ has appreciated nearly 70% against the US$ since 2002. I know that generally speaking money supply growth by central banks has been high, but Canadian monetary and fiscal management is a paragon of virtue IMO compared to the US. I would add that Continental European monetary policy is also more responsible than the US. But I would agree with your comment that Europe of course has its own problems. So, if recent trends persist, what might be inflationary in the US might not be in other countries with more sound monetary policy. 2 - Likelihood of a global recession I think here is where we may see things most differently. I feel there is a very serious chance of a global recession. I feel the Baltic Dry Index is pointing in that direction. This is part business cycled related, and part K-wave credit cycle related IMO. I have no doubt that China and India will continue to grow "over the longer term". But I don't buy the BRIC decoupling from the US story line. All economies are highly dependent on a global credit system, and this system is in great peril. But, I could be wrong. ;) 3 - Assets that I'm pretty confident will experience price deflation (i.e. cost less in nominal $ terms) over the next 2 years Housing for sure. Wage levels in the US for unskilled labor. Financial assets (stocks and bonds) generally. The reputation of central bankers. ;) 4 - Assets where inflation/deflation is a tougher call Assets in this class really depend on how serious the credit bust is, and how deep the global recession is - if indeed that's how it plays out. Here I would put base metals stocks, agricultural-related stocks, and energy-related stocks. I think you could throw commodity prices in this category. But it will depend on the currency those commodity prices are denominated in, and even then, I feel commodity prices will likely remain more resilient than the commodity-related stocks. 5 - Assets that will inflate over the next 2 years - i.e. cost more in nominal US$ Foreign currencies generally. Gold bullion. Probably energy and agricultural commodities, but not sure here, and I may be underestimating the balance of supply and demand here. Again, depends on the severity of the credit bust and economic downturn. 6 - Recapitalizing of the Global Financial System I think we may differ here also. You stated, "US financial institutions which are being rapidly re-capitalized". I don't think that is actually the case. Rather, I think there is the "illusion" that US financial institutions are being recapitalized. I believe the first Basel Accord required Banks to have 8% of their balance sheet in reserves. With the credit bubble we've witnessed, I don't know what the stats are, but if all that junk paper was "marked to market" rather than "marked to model", it wouldn't surprise me if a number of US banks actually had negative reserves. And that's the banking system. One of the big stories of the past decade has been the emergence of non-bank financial intermediaries that issued credit with effective NO reserves, or minimal reserves. I'm thinking of Fannie and Freddie here for example. If I felt that, "in reality", US financial institutions were being rapidly re-capitalized, then a lot of my arguments in this post would fall away. This is really THE CRUX OF THE MATTER, IMO. Any thoughts or comments out there anyone? g