Laurie and I have been singing the same tune for months to Minyanville readers. We were laying the landscape for what has now become headline news: the proliferation of fiat currencies precipitating global imbalances: an unlimited currency has no checks and balances. Free money is like free candy...people keep eating eat until one day they wake up fat.
And fat we are, in debt. We warned readers about this early, but it has done no good and perhaps harm. The multitudes of market participants cry conspiracy theory and go on with their buying of financial assets, buying financial assets with the gobs of free money shoved in their faces.
But hopefully we have done some good. Perhaps some have gotten themselves out of the dollar and into a little gold or euro bonds. This will have done much better than the modest rally in stocks caused by the lower value of money.
But there is not much left to say. The great experiment will play itself out one way or another.
My opinion is that it is just a matter of which country has a coronary first. My bet is Japan, which at some point will not be able to continue to absorb dollar currency losses and cry uncle. When they do U.S. candy rates will jump and Washington will have to pull out some pretty nasty tricks like monetization (a higher magnitude) to stay afloat.
So I continue to just watch the dollar yen for clues of panic. The volatility in bonds and currencies is somehow not being transferred into equities, at least not yet.
When it does it will be too late to do anything about it. This is not a recommendation to others to short stocks; the masses are just too persistent. When you go against the man you better be ready for some pain.
My methodology is a compromise, a way to stand the pain until the sickness becomes acute. I can last a while.
And that to me is the answer. Patience until this all plays out. I hope for the best, for there is a way out of this: economies can begin to grow so robustly that debt can be repaid.
But despite negative real rates for almost three years we are seeing a slowing consumer weighed down by debt. We are seeing less foreign capital flowing into the U.S. to finance trade deficits. Much of this capital is now going into real estate as wealthy European investors are scooping up east coast property (like estates in the Hamptons). This is not productive capital and has an end.
So I prepare for the worst.
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