"My main expertise is in the past, but if I have to extrapolate into the future, I would say: no good news any time soon and an obvious exit strategy is not apparent." - Juan Cole
In my view and in the view of many others, the globe's debt problems have spiraled to a level that is near uncontrollable. Worse still is that it appears the globe’s economic recovery is firmly wedded to this stimulus and if it is turned off the so called recovery will fall flat on its face causing untold grief. So unless something is done about the ever growing swell of debt and soon, the world will be hit with a tidal wave that will be more devastating than anything we have ever witnessed before.
The central bankers of the world have decided that printing more money is the solution to all of our problems (personally I think that they are boxed in but I have gone over that in previous blogs so there is no need to go down that road again) and that they will all be able to mop up the excess money supply if and when inflation rears its head. To me this is the biggest Shell Game ever played!
For those of you who do not know, a Shell Game comes from ancient times and is still played today. Essentially the “banker” places a stone under three similar shells. With much dexterity he moves the shells around in an attempt to confuse the gambler. Once he stops moving them around the gambler chooses a shell and lifts it up. If it reveals the stone then he wins and if not the ‘banker” wins. The problem is that the “banker” often uses sleight of hand to remove the stone so that no matter which shell is chosen no stone is present. Worse than that, an adept trickster will suck the unknowing gambler in by “letting” him win a few times and then, as he bets big on a sure thing, removes the stone taking the gambler for a big lose. Not only therefore is the game risky for the gambler but the “banker” also risks his neck if he is caught manipulating the game.
Jump then to the central bankers of the world who are printing money hand over fist in an effort to stimulate the economies of the world. The first problem is that their efforts are not resulting in much upside. In fact as more and more debt comes onto the market there is less and less of a benefit but even as the wall turns into a mountain they keep adding more. History has shown us that in these times it is just a matter of time before inflation kicks in and then it becomes hard to stop. In the past it was almost impossible to control and that was with less than a trillion dollars printed but today globally we are north of $20 trillion and climbing!
Now according to the central bankers they will mop up the excess in no time, staving off uncontrolled inflation, creating an environment that is business and investor friendly – just trust us! One thing I am convinced of is that this will not happen, they are the “banker” in the Shell Game and they have removed the stone. So the real question is why is inflation still so tame?
As the global economy is weak and everyone is trying to debase their currency things have remained relatively well under control. Furthermore there is a perception in the markets that the central governments of the world actually do have things contained and that “this time it will be different”. When consensus changes and the players lift up all the “shells” and discover no stone is when things get ugly. When this change in perception happens is anyone’s guess but it will happen.
Personally I believe that it will be a two step process. My thought is that the first indicator will be a massive sell off in the stock markets and that this sell off will be caused by the realization that the central bankers are eminently going to stop printing money as there is no further perceived benefit. Once this happens, bond yields will remain muted for a relatively long period while stock investors look for safety but once there is a perception that inflation is starting to move out of the control of the authorities yields will start to move and inflation will take control of the globe’s economies.
So what to do in the interim? Well the only thing that is truly working is that the markets of the world are going through the roof. As you know I have advised against playing that game particularly without a solid economic basis for the rally. To me you are playing the Shell Game and you know that there is no stone! Once the market loses faith that the support that is quantitative easing is being removed, then watch out below. This is too big a risk for most to bear so keep out of the way of the train wreck to come. For those that do want an allocation to the market and believe that inflation is just around the corner then gold would be a good place to go, particularly after the recent bloodletting that has occurred in these stocks.
Properties were a good bet a year or two ago but they are looking pretty frothy now particularly when you factor in the affordability numbers. While these were favorable a year ago, with the tax increases taking effect it will take numerous buyers out of the market and this is not a market that can continue to be supported by speculators. While I do not expect property prices to collapse as low interest rates will keep prices buoyant I do not expect property values skyrocket from here.
Your best bet is to stick to short term secure investments that produce a relatively good yield. As an example and not that I am suggesting that these are bullet proof by any means but the Venezuelan Oil Bonds are yielding over 11% and mature in 2014. This appears to be a relatively good investment as a short term option. Looking around there are others that have less risk and provide good rates of return but in all honesty you will be lucky to earn more than 4% on a two year investment. The point is to keep your powder dry so that when things are blitzed that you are able to take advantage of the opportunities and that is where you really will be paid for your patience. Rather give away some upside to protect against a massive capitulation. So whatever you do take my advice and do not get sucked into playing the Shell Game!
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