... every once in a while I wonder how I signed up for this class Professor!
I have a new model.... I was talking about 2-4 days till 1000, but let us also remember my model where we have my inflection points of Monday after tomorrow(monday the 12th), and the 19th.
Sunday, January 4, 2009
My evening with woody T and P.
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Woody Brock made me re-think my thesis about the ease with which deflation can be re-flated. I have been under the impression that monetizing the debt is a no-brainer: just have the fed buy up Treasuries. He pointed out that re-flation can only be corrected with more fiscal stimulus *in addition to* monetary policy.
Which then brought up T.Lo's comment about Treasuries and the consensus (including the Barron's cover) that Treasuries are in a bubble. Perhaps not. Deflation will give a de facto negative interst rate environment and if fiscal stimulus is not big enough and prolonged enough, then Treausuries can certainly go higher.
This could go on for several more quarters. No easy money in TBT.
Brock did backtrack a bit and mentioned that he thought the fed was doing things correctly at the moment and that the fed govt still had many more arrows in the quiver. Then he re-emphasized that this level of deleveraging has never been attempted and who knows if it can be done without a lot more pain.
One of the most educational postings yet. Priceless.
There is a broader "Macro" that he is talking about, and how "Unpredictable" it all is.
Deflation could be finished, or could be unstoppable for another 3 years.
When you look at P/E's in the 74 cycle, that was the "inflation cycle", one can hint that the 71 cycle was the deflation cycle.(maybe, not like I've really done extensive research on that cycle). The P/E contraction being caused by stagflation. But with inflation 'P' will expand, and 'E' will contract... but it will happen over a drawn out period.
woody did say repeatably that interest rates went from 6 to 14 to 8 to 18(or some such)... which talks about that cycle having 2 cycles in it of increased rates.
With demand destruction(my brother buying a motorcycle, People buying more economical cars, China no longer growing.) Materials are not likely to grow, with demand lower, and the MFG, at full capacity.
Macro, to me this suggests that we need economic recovery for demand to increase... or at least Expansion... Then we can play the expansion game.
But... There is a whole other game after that, because If->inflation There is a huge economic instability that it will cause.
One of the great variables is what the FOMC does, and what the rest of the world does.
But if one approaches the market as though a Buddhist monk, with the idea that we are 'Groundless' then you just need to get today right.
The thing is to just have some suspicions.
I keep wondering if "Though $30 oil seems cheap relative to $150" but relative to $50... seems more like "Fair Value" in a contraction... the overshoot could be lower.
I've also tried to talk about all this for the past 6 months... but I keep saying that we are trying to go through all this too Quickly. Seems like though you want to just take an early day off from work when you get the 'Flu' rest up and be finished... It always seems like you just have to wait till you feel the worst.
The fed has tried to avoid monetizing the debt as best as possible, and doing an amazing job to be honest.
Overall, it's best to sort of assume that one doesn't know, but you can know how people will react to it.
When I went to university, I always commented about what dumb asses all the business majors were, so when everyone says such dumb shit, like "the fed is printing money", It always reminds me of that, and it get's to T.Lo's premise about what a bunch of trend followers everybody is, and how they are more likely wrong than not.
But in the market, if I strongly suspect "I'm wrong", but are almost certain that "everybody else is wrong too." that almost makes me less wrong that everybody else, and therefor a more efficient market participant.
I don't know... Its all just fun to think about.
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