China is openly rejecting the policies of bubble economics. For the past six months the Chinese government has tightened restrictions on speculative housing, allowed funding rates to rise, let fiscal stimulus initiatives run off without renewal, and most recently expressed a desire to reform its currency regime in an attempt to find a true equilibrium that discourages speculative inflows. The Chinese are long-term thinkers who realize that bubble economics is ultimately destabilizing and their recent moves are a blatant rejection of the failed policies of the west over the past decade.
Europe has climbed on the reality bandwagon as well. Unlike the proactive Chinese, Europe's sudden piety is reactive; bond market vigilantes have awakened from a 20-year slumber and forced the hands of Germany, France, the UK, etc. Suddenly, fiscal austerity is De-rigueur across the European continent. EU policy makers are finally getting the joke that long-term wealth creation is the product of hard work and saving rather than debt growth.
In the US, state and local governments hands are being forced by constitutional edict - quite simply their budgets must be balanced unless the federal government plugs their deficits with printed money. Much of today's plump local government infrastructure is structurally unsound. It was designed during the heyday of bubble economics, a paradigm that sent artificial signals about long term growth and revenue prospects. When stocks and houses were perceived as a one-way street to riches, it was rational for elected officials to project perpetually rising tax revenues around which bloated municipal bodies could exist. Today, the painful reality is coming home to roost and local governmental establishments are being forced to right-size accordingly.
Notice anyone missing from the list of the nouveau austere? You guessed it; the very creator of bubble economics and the politics of alchemy. The US government still has its head buried deeply in the sand. The big-money dominated entrenched status quo simply does not want the good times to end. Like the Duke brothers from the movie "Trading Places" the US government is hell-bent on "turning those machines back on!" Apparently, zero rates, double-digit deficits, unaccounted for off-balance sheet obligations, and flailing attempts to induce private sector consumption in the US aren't enough. The top dogs from the US economic policy team are openly lobbying the rest of the world against austerity ahead of the G-20 meeting this weekend.
An important inflection point is dead ahead. If the politics of reality are finally crowding out the alchemists, a long overdue austerity-induced recession lies directly in our path. Recessions are an important part of capitalism. During these intervals, redundant capacity gets shuttered and excessive leverage is purged which clears the way for a restoration of equilibrium; short term pain, long term gain. In contrast, if those that preach the status quo get their way, be on the lookout for extended stimulus, new and bigger bailouts, and MORE PRINTED MONEY.
The investment implications of this inflection point are critically important. If the realists win the day, investors will want to be in cash, awaiting lower prices and valuations. Some of the greatest buying opportunities in history have been provided in the aftermath of similar scenarios. If the bubble bullies get their way, investors should own gold, equities of US companies with protectable pricing power, and assets denominated in the currencies of places that have no need for austerity, like Canada.
No comments:
Post a Comment