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Random Thoughts: A Top-Down View of the World

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Weighing QE3, warships, and Europe.

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MINYANVILLE ORIGINAL

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

I was commuting home last night, looking forward to the laughter of little kids, when an alert buzzed across my phone: "US Sends Warships to Libyan Waters Following Attacks."

The news, in and of itself, wasn't a shocker, but it did provide another piece of a complex puzzle that we've been piecing together for a long time.

Old-school Minyans will remember the critical crossroads that we first painted in Our Wishbone World in February 2008. And I quote:

"What's clear is that the game itself has experienced a seismic shift. Central banks have been extremely proactive in what they do and how they do it. This has been going on for years but the efforts increased appreciably since last summer. We opined at the time that something was afoot and the pieces have seemingly fallen in place.

"We are approaching a critical crossroads; structural imbalances have cumulatively increased since the back of the tech bubble and risk has built to a crescendo. The credit contagion simply served as a catalyst to bring this conundrum to bear. All that remains to be seen is where the bear will domicile.

"Let's look at both sides of the great debate. To the left is the socialization of markets, nationalization by governments, and the potential for hyper-inflation. To the right, we have asset class deflation, risk aversion and the unwinding of the debt bubble.

"If the Northern Rock nationalization is the first in series of similar steps, we could conceivably see the stateside assumption of mortgage debt by the US government. This would hit the dollar and spike equities, at least until interest rates rose to levels deemed attractive as an alternative investment.

"That is the hyperinflation scenario, one that is presumably preferred by the powers that be as an alternative to watershed deflation. The 'haves' would fare better than 'have nots,' which would include the former middle class that suffers as a result of moral hazard, as the costs of goods and services skyrocket.

"The other scenario is the draining of liquidity from the system, which would ignite the fuse for a higher greenback as currency becomes scarcer. Asset classes across the board, from commodities to equities, would deflate and impact the top tier of our societal structure that is tied to the marketplace.

"That, quite obviously, would be problematic for policymakers and the constituencies that bankroll them. Deflation in a fractional reserve banking system means that they have, for all intents and purposes, lost control of the economy. It is an admission of defeat, albeit one that may be unavoidable."

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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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