The Great Reflation Experiment

(Tony Boeckh is President of Boeckh Capital Co. Ltd., a family office and private investment firm. From 1968 until recently, he was Chairman, Chief Executive Officer and Editor-in-Chief of BCA Publications, known for the Bank Credit Analyst and related international investment publications.)

Summary:

• The real culprit of the Crash of 2008/9 is the U.S. debt super cycle, which has operated for decades, mostly in a remarkably benign manner. The inflationary implications of the twin deficits (current account and fiscal), as well as the steady increase in private debt, have been moderated by the integration of emerging markets into the global economy.
• The speed and magnitude of the bailouts and stimulus – the end of which we won’t see for a long time – aborted the meltdown. However, the story is far from over.
• Anemic growth, falling tax revenue, increased government spending, and bailouts of indigent states, households, businesses, and an aging population will all undermine public finances to a degree never before seen in peacetime.
• The Fed is in a very difficult position. Its room to maneuver is either small or non-existent and the markets understand this. That is why there is a sharp divergence between those worried about price inflation and those fearing a lengthy depression.
• Investors who need income are probably safe holding reasonably high quality bonds in the five-year maturity range.
• Investors who can afford a little risk should own some assets that will ultimately be beneficiaries of the wall of new money being created and thrown at the economy.
• There is a major risk to our relative near-term optimism, and that is the U.S. dollar. The most likely outcome is a nervous dollar stalemate.

However, this is a fragile, unstable situation and the dollar must fall over time. Investors need to diversify away from this risk.

Volume 1 8 the Great Reflation Experiment Jul 23 2009

Related posts:

1. CHINA: ARE THE BEARS OUT TO LUNCH?
2. SOMETHING HAS TO GIVE
3. Tony Boeckh: The Great Reflation
4. Strategists split on rate rise fallout
5. THE GREAT REFLATION

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