Saturday, February 13, 2010

Doug Noland is Still a Bear, Feeling Bullish

Last week in his market summary and outlook, portfolio manager, Doug Noland, wrote of his concerns over the news we heard last week. It was news of Greece's debt problem with no EU solution known and that China was yet again raising the reserve requirement of its national banks to slow growth of both loan issuance and their internal inflation. (I wrote about China, including the reserve requirement policy of the People's Bank of China, last month in China Economy Clocked at 107mph in an 80 mph Zone.) These had the combined effect of causing investors to pull back on the amount of risk they wanted in their holdings. As a result the S&P finished this week up 0.9% and down 3.6% YTD. I have been looking forward to Noland's article this week expecting he would offer a little expansion of his analysis and outlook, which he did in the Global Reflation Update.

Here is a brief point from Noland's article...
The basic premise of my Global Government Finance Bubble thesis is that policymakers everywhere will err on the side of extreme fiscal and monetary stimulus – that global monetary conditions will remain extraordinarily loose. Policymakers see enormous risks in global Credit systems and economies - and little in the way of inflation risk. The structurally maladjusted U.S. economy ensures ongoing massive federal deficits, loose monetary policy, huge current account deficits – and a structurally unsound dollar. Serious financial and economic issues at the “Core” (U.S.) have unleashed Credit systems at the “Periphery” (i.e. China, Brazil, India, Asia, and the “emerging markets”). There is no global monetary anchor, and it’s inflationism as far as the eye can see.

My ongoing belief is that no matter what economic theory you believe in, or what economic condition you feel we are experiencing, the trump card is still the Fed and partners, US Treasury with the FDIC. Together they are manipulating a reflation of the financial system and real estate markets. Keep one eye on the Fed and their policy changes. Keep your other on the world's largest self-financing economy, China. They are creating what might become a sustainable growth rate in their economy. It is still very much like a bubble economy in that the rate of growth reported in some sectors sound very bubbly. If there is a pop sound in China expect a significant repricing of commodities around the globe.