Saturday, May 22, 2010

Timeframe for Bullish Outlook

The Boeckh Investment Letter (BIL) has described in a way not often seen, the development of the current financial crisis. They put it in the context of a long-term wave of private debt-fueled consumption, leading to asset inflation. The long wave was supported by the final elimination of the gold based US dollar, replaced with the fiat US dollar in 1971, under President Nixon. The title of the article published by the BIL is "The Great Reflation: The Mother of All Financial Experiments". Another feature of this article is the timeframe they place on the evolution of the economic events in front of us. It is recommended reading for inquiring minds. For a sense of the message, here is a clip...

There are many assets that could be recipients of the new money created. However, a warning for
investors: We don’t believe another inflation of asset prices will last as long as the previous one for
several reasons. Private debt has been pushed to the limit; government debt will be pushed to the limit
in a few more years; the U.S. dollar, as the world’s main reserve currency, will not be able to withstand
open‐ended monetary and fiscal reflation; and finally, the world economy is too fragile to withstand
another spike in energy and food prices which will certainly occur if monetary inflation continues.

The great reflation, if left unchecked, will run into a brick wall in the next few years, and another
credit implosion and deep recession will occur. The result will be even bigger budget deficits and lower
economic growth. Logic says that if the recent crisis was caused by excessive money and credit inflation,
even more of the same should cause an even bigger crisis. The ultimate end point to this trend is
worrisome, to say the least.

No big surprise in this. What is surprising is the time frame they believe is at work. There are enough crises at work on the economy, as well as on our psyches, to turn a young person old in a New York minute. Scanner