Sunday, June 21, 2009

Sunday Morning “Stuff”

I continue to believe that the inflationista v. deflationista smackdown continues to be one of the single most important conflicts in the market today.  The resolution of that conflict—and the simple of unfolding of time will reveal the winner—will create two distinctive pools of winners and losers.

Puru Saxena was on Financial Sense Online.  He gave a very cogent explanation as to why he did not believe that we were going to have hyperinflation—pointing to several periods, the Great Depression being one of them, as well as to the Japanese example.  The velocity of money seems to be crawling at a snail’s pace—and supply without movement = constipation and economic discomfort.

Peter Schiff is the penultimate poster child of avoiding one trap but falling into another.  Though he ably (and with much ridicule in the beginning) called the financial crisis when it was unpopular to do so, he believed that the results of all of the government’s reactions to it (e.g. the printing of money) would lead to hyperinflation. Positioning accordingly with investments in commodities (at their peak) he suffered the same investment losses had he just stuck his head in the sand as many other investors do during bear markets.

None of us can lose sight of the very real fact that we can be right about one thing and very wrong about another.  Should you successfully navigate through treacherous terrain littered with quicksand, that success does not mean that you’ll not get bitten by a deadly snake after safe passage. 

While the financial institutions have had ample help by the government in getting their capital bases in order after monumental losses on the asset side of the house, the balance of the population gets no such help.  Our investment losses and debt burdens are distinctively ours to bear.  Debt can only get serviced through the liquidation of assets and/or the application of an income stream (wages).  Until asset prices for homes and investments improve, liquidation runs a risk of leaving a gap between the liquidation proceeds and the debt. 

There’s so much nonsensical talk about green shoots.  If we are to believe the lessons of the past bear markets, then we must wrangle with this:  there was not a time where the market failed to respond to good news.  It is true that the market STOPPED responding poorly to bad news.  However, the complement needed to have a melancholy bottom reflecting true despair to the point that it was immovable to even good news never came to pass.  I believe that my observation is accurate, but if not, I would welcome being corrected if this view is distorted.  It’ is something that I think about.

While life is complicated, it is often unnecessarily so.  Often, simple answers must be coaxed out by asking simple questions.  As I’ve asked in this space against the backdrop of much nonsense about “global liquidity”, “the emerging market consumer”, and all manner of effervescent phrases about how things would go up, and up AND UP, is this: 

What do you have to believe to be true?

. . . . to support whatever your allegation is regarding ‘facts’, or ‘reality’.  A simple listing of what you have to believe to be true to support advanced nonsense (which is always wrapped in a robe if credibility) will be enough to shake you out of a euphoric stupor.  It works for the obverse as well if melancholy has unshakably set in—so I’m not trying to pick sides.  It’s also worth noting that a simple answer of “I don’t know” to such a question posed is perfectly acceptable and always true, for none of us can ‘know’ the future.  Anticipating and betting on the wrong outcome can be dangerous to one’s portfolio as Schiff demonstrates.

While there is a polarity of the inflationista/deflationista conflict that confers a different ugly set of circumstances for either outcome, there is an in between place of hedging one’s risk—setting up a Swiss flag in some small space between the inflatinista/deflationista camps (but out of the direct line of fire).  John Hussman is a master of this strategy, and if you do not read him, you should.  He has a measured approach that most notably measures returns over an entire market cycle.  Short term comparisons of his performance v. the market indices are irrelevant as he is managing risk and return over longer periods—to include the great down drafts.  Hedging is the perfect antidote to uncertainty.




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