Once again the market has been fast in recovering, and it seems that certain levels cannot be broken to the downside. What are the structural reasons for the US market better performance? One is tempted to say that the bear case has no hope. However.

Allen Gillespie writes: 

The bear case is as strong as ever in real terms. There are only 4 ways out of a debt crisis.

1) Inflation = losses to bond holders in real terms
2) Deflation = losses to other claim holders and parasites (austerity)
3) Default/Restructure = shared burden between all claim holders
4) Productivity Gains = actual improvement in debt servicing capabilities

Historically losses in sovereign defaults are estimated to be around 40% over 8 years. Recall the official policies are thus

1) Fiscal = "I want to spread the wealth around" - notice the use of the word wealth not income. Wealth is all accumulated savings of income. And how do you tax wealth - inflation and regulation.
2) Monetary = Inflation targeting at 2%. Inflation targeting is nothing more than a gold standard with a higher base rate. Under the gold standard there was no long term inflation, so short rates tended to be volatile but long rates very steady. Flat yield curves prone to violent inversions like the one we got prior to 2008 (19 months).

I think the government model is the 1940s where government was ramped up during the War and then handed things back off after the war to the private sector. This was a time of 2.5% interest rates and 5.5% inflation because inflation would go from 0 to 10% twice in the decade.

We are close to inflection - the food companies have announced that food inflation will be 7-8% next year.

The saddest part is that the powers that be think only #1,2,3 are possibilities because they have no appreciation or trust in people for #4. Peter Thiel is the best thinker on that issue.

Take energy as an example - are earnings up because of #4 or #1? Obviously, more #1 than #4 but some of both looking at nat gas. However, the Prez wants to determine the winners and losers so that is disadvantaged to other lobbies. It's sad.

Are you shorting in nominal or real terms - important question.





Speak your mind

4 Comments so far

  1. david on July 13, 2011 3:35 pm

    As a side bar, the Russian market has out performed the US market YTD. I guess move flows east and west out of the Euro zone….reminds me of the Trilight Zone…..spookie!

  2. Tom on July 15, 2011 10:43 am

    Today is particularly apt. We will likely finish with a strong close and a strong follow through on Monday. By Tuesday open, the bears from the prior week will have no stuffing and will look around in confusion. Perhaps a few negative news pieces serve to confuse them further. And on it goes.

  3. Tom on July 19, 2011 9:00 am

    Here we are - Tuesday open and the bears face a painful 10 point gap up followed by a squeeze where they will eventually be forced to dump. Monday was a nice (and unforeseen by me) ploy to trap in any undecided interest short. Probably makes the week even more bullish then before.

  4. Howard Roark on August 10, 2011 10:48 pm

    What is the expectation of a market >20, 50, 100, 200 day ma(Gold)? What is the expectation of a market


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