Jul

15

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.


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