BarroMetrics Views: Themes for 2010 II
Yesterday I considered my three top trading themes. Today I want to consider the major economic theme: Has US spending changed the system to contain the next shock?
At the end of 2009, Geithner told National Public Radio:
“We cannot afford to let the country live again with risks…like we had last year…we will prevent that. And that is something within our capacity to prevent.”
We all know that for something to be different we need to change. The question is has the US done enough to change the system?
A: Unfortunately there has been little substantive change. Two excellent books on this topic
- “Pander to Power” by F Sheehan and
- “It Takes a Pillage”by Nomi Prins
are a must read for all of us. It’s clear that what the US has done is to save banks loaded with toxic assets from the folly of their risk taking. The toxic assets are now stored on the balance sheets of the Federal Reserve and other off-balance sheets. The sheets are loaded with unrealised losses.
And, the losses are not the only hidden costs. See the attached report by Sprott Asset Management
Now, if the US Government had the surpluses to pay for those toxic assets, we would probably be OK. But it didn’t and doesn’t. And instead of looking for ways to reduce the deficit, it seems intent on piling them on.Ultimately the piper will have to be paid - either in the form of high inflation or a stagnant economy.
The years 1966 to 1982 show the best that we can expect. For this to happen, the US needs to act promptly when inflation appears.
In the 1966 to 1982 period, the US Government equivocated and we needed a Volker to choke off inflation. But this 21st Century does not have the same leeway for error as 1966 to 1982: the US has greater deficits and the world economy is even more connected. The consequences will be much greater (for all of us) if the FED and US Government misstep.
The risk is a V-type bear market rally that the world experienced in the Depression: a 53% rally off the lows followed by a fall to new lows (see Figures 1 &2 ). At this stage, I still lean to the 1966 to 1982 type period (Figure 3) - though I must admit to being less convinced with each new US Government ‘initiative’.
Figure 1 12-Month DJIA
Figure 2 12-Month DJIA
Figure 3 12-Month DJIA
Sprott Report: 2009-dec-sprott-on-us-treasury-mkt.pdf
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