Monday, September 21, 2009

The Deflationary Tortoise and the Inflationary Hare

The controlling trade in the world today: short or long the greenback?

It seems as if almost every asset class is either positively or negatively correlated with it.

In a way it's very fitting, after all at all times and in all ways its' a confidence game.

To be short the dollar, is to be long equities, is to believe in mania. To believe that fundamentals don't matter this time. It's be the bubble grasshopper and enjoy the ride of reflexivity.

It's the evergreen shoots trade.

To be long the dollar amounts to replacing the Principle of Reflexivity with the Principle of Perplexivity - how can the Federales model of debt induced growth possibly work again?

It is ironically where one marries Pimpco's proclamation that they are implementing the 'anti -green shoots' trade with their underlying premise that you have to hold hands with the Federales. That assertion suggests that perhaps there was an agreement at G2 to try and apply some 'risk-adverse' treatment to their reflation bubbling.

Authorities wish for stability; blowing bubbles and then paring with troubles is about all they have to reach their goal of slow and/or statisitical growth.

The question in this humble blogger's mind is will their machinations cause a controlled burn for a future reflate, presumably desired, or an accidental flush?

At some point this deflationary process of asset classes moving in unison ends and differentiation such as dollar going up when equities go up (and vice-versa) occurs.

That will occur, the models suggest, either when the rate of employment or the 'rate of change' of employment reverses ... historical data is mixed on the significance of one over the other.

Back in 1929 anyone who was over 16 and did not have a job was considered unemployed.

What would that equate to today? 20%+?

Or is it truly different this time?

The last time industrial production, and world trade collapsed at this rate ... the last time wealth inequality was so large... the last time debt levels were so high ... the last time was, oh heck , I don't even have to say it do I? That bear campaign took 1929 equity levels all the way down to 1897 pricing.

Will there be a point of deflationary recognition that with falling rents, wages and house prices,large and growing structural employment, and stifling debt levels ... PRICES HAVE TO COME DOWN?

Remember, inflation expectations were well anchored throughout the Great Depression and deflationary Japan. Perhaps reality is the tail risk.

A tail of the deflationary tortoise and the inflationary hare.

Although in this case if the tortoise wins, the owner of the stadium might end up destroying the place (hyperinflating), in order to protect their paying customers.

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