Via Mark J. Grant, author of Out of the Box,
It is neither pessimism nor optimism but a squaring up with the facts
and, when done, it is the inescapable conclusion that we have
backed ourselves into a corner of our own making and that to
escape this dark and dangerous place will be a painful experience. The
scheme rests upon various feet; Central Banks acting in collusion to
lower yields and provide capital as an off-set to the government in
America and the governments on the Continent who cannot bear, for
political reasons, to do what should be done and that is to cut
expenditures.
The United States and the European Union are spending far too
much money on anything/everything which cannot be afforded by their
economies and so the Central Banks print more and more and more money to
accommodate their Masters. Inflation, the conclusion that
would be expected in normal times, is not present because all of these
Central Banks are operating in unison and so, with nowhere to invest
money off-world, we are restrained by the boundaries of the planet and
what is available to absorb the slosh of capital that has been created. With
the Central Banks buying up around eighty percent of any new supply;
what is left for the poor beggars defined as private investors and so
the money is put to use, equities head higher, absolute yields
fall, compression continues unabated in Fixed Income, Real Estate
increases in price and it soon become obvious that it is not this sector
or that sector but the entire planet that has been filled with a
gigantic amount of hot air and newly minted little pieces of paper and
that a bubble has been created which is not only world-wide and systemic
but it is the likes of one we have never seen which is why it has gone
rather unnoticed. It is rather like lying in the poppy fields of
Oz on some warm afternoon in May and forgetting that the wicked witch
still lurks in her castle and watch out for Toto because she means to
get you both!
The worry then is how does it all end,
what do you do in the meantime and how and what do you do when the
bubble is pricked. The Central Banks will try to manage it but they will
fail as the demon is now far larger than either spun rhetoric or their
ability to contain the monster that they have created. The
politicians, on both Continents, have fed the incubus by offering
sustenance to the people that elect them far past what their pocketbooks
can afford and so Uncle Ben and Super Mario turn on their
magic machines which mystically morphs paper into a special affair that
can be used to buy goods and services with all of it backed by nothing
more than promises to pay and “full faith and credit” and other lofty
sounding words that mask the fact that no government could afford to pay
except in this “pay in kind” fashion and so the presses print, old debt
is paid off with new debt, the size of the debt is hidden in musty
drawers, most isn’t counted and six and twenty blackbirds have baked a
meringue pie.
A meringue is really nothing but foam. And
what is foam after all, but a big collection of bubbles? And what's a
bubble? It's basically a very flimsy little latticework of proteins
draped with water. We add sugar to this structure, which strengthens it;
but things can, and will, go wrong. Perhaps very wrong.
So
there is the definition of the problem. There is the
crystallization of the dilemma. The entire world’s financial system
encased in a bubble and nowhere to go, nowhere to hide and nowhere to be
safe. Many argue for the value of gold when the prick comes but gold is
just a currency replacement and while it will rally in response or
perhaps rally with inflation if it comes it begs the question of
valuation as it has no absolute value as defined by me before and so
relative value without the payment of income is a major cause of
concern.
Consequently unless the world’s financial system implodes, a
thought expressed by some, gold may be a choice but not the best of
choices.
Since off-world investments are not possible
then we are bound by the choices that are available. This brings
us around to TIPS or corporate bonds tied to inflation, staying very
short in maturities, floating rate notes that rise with
interest rates or any other types of investments that float off of CMT
(Constant Maturity Treasuries) or any other asset class that will rise
in yield and price as valuation decreases and as the effects of the
slosh of money wears thin. Bonds such as step-ups may have additional
worth now as a partial hedge and fortunes, once again, will be made and
lost making the right bet. The big Kahuna will be the question
of timing because we play the Great Game to win and not to be right.
Preparation is the key now because history teaches us that small
bubbles, much less our humongous one, will not last as political and
economic forces unite to prick that which is so over-valued in one
manner or another.
When the economies of Spain, Greece,
Italy, Ireland, Portugal and France are in decline and yet their
sovereign yields fall as supported by a conditional promise from the ECB
then trouble is in the making. When America spends money like
it is without end because the Fed hands out the byproducts of the forest
as if it was an unlimited supply then the valuation of paper overtakes
the use to which it is put. We are sitting with our little round plastic
toys and blowing bubbles into the sky and when the turn comes, when the
bubble is pricked, scant few will be able to run fast enough or get
through the door quickly enough when the madding crowd is rushing in a
collective push to get out of the burning theatre. It may not be
today and it may not be tomorrow but soon enough and hence my caution
before the storm.
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