Tuesday, 25 October 2011

Current Macro Thesis

Inflation is one way out of this debt crisis. However, the situation in Europe is complicated by the EMU.
  • There is a sizeable (and growing) political constituency in Germany/Finland/Holland and other CREDITOR countries against the bailouts
  • The German Constitutional courts have placed severe constraints on the government’s ability to negotiate bailouts without the German parliament’s approval
  • Euro treaty rules have strict prohibitions against direct monetization of government debt by the ECB & creating permanent bailout mechanisms
  • All current support provided by the ECB to Italy/Spain/Greece is done on a Euro-neutral basis … they have to repo-out assets to repo-in other assets

My current macro thesis is:
  • The debt-deflation scenario envisioned by Prechter and others is the 800lb Gorilla on the macro-stage. No question in my mind that without intervention we WILL see all assets (incl. Gold) fall, and a flight to cash
  • The powers that be will use whatever they can to prevent a deflationary depression by “dampening” the asset price deflation by (1) providing liquidity, (2) quantitative easing (3) monetization of impaired debt assets
  • If they succeed, this will cause inflation in “the things we need” – food, energy, basic commodities, etc as all the liquidity finds its way into the speculative world, while slow deflation in “the things we want” like houses, stocks
  • The economy will cycle between periods of growth (unsustainable, liquidity fuelled) and deflation (caused by inflationary shocks) causing massive volatility in global markets
  • The “stimulus” process is a tightrope walk between runaway inflation & deflationary depression – either outcome is possible if policy mistakes are made
  • In western economies, a decade of stagflation is the most likely outcome – no wage increases, increasing food and energy inflation, persistent deficits & high taxes

No comments: