Backed Into a Corner of Our Own Making (Grant)

Via Mark J. Grant, author of Out of the Box,

It is neither pessimism nor optimism but a squaring up with the facts and, when done, it is the inescapable conclusion that we have backed ourselves into a corner of our own making and that to escape this dark and dangerous place will be a painful experience. The scheme rests upon various feet; Central Banks acting in collusion to lower yields and provide capital as an off-set to the government in America and the governments on the Continent who cannot bear, for political reasons, to do what should be done and that is to cut expenditures.

The United States and the European Union are spending far too much money on anything/everything which cannot be afforded by their economies and so the Central Banks print more and more and more money to accommodate their Masters. Inflation, the conclusion that would be expected in normal times, is not present because all of these Central Banks are operating in unison and so, with nowhere to invest money off-world, we are restrained by the boundaries of the planet and what is available to absorb the slosh of capital that has been created. With the Central Banks buying up around eighty percent of any new supply; what is left for the poor beggars defined as private investors and so the money is put to use, equities head higher, absolute yields fall, compression continues unabated in Fixed Income, Real Estate increases in price and it soon become obvious that it is not this sector or that sector but the entire planet that has been filled with a gigantic amount of hot air and newly minted little pieces of paper and that a bubble has been created which is not only world-wide and systemic but it is the likes of one we have never seen which is why it has gone rather unnoticed. It is rather like lying in the poppy fields of Oz on some warm afternoon in May and forgetting that the wicked witch still lurks in her castle and watch out for Toto because she means to get you both!

The worry then is how does it all end, what do you do in the meantime and how and what do you do when the bubble is pricked. The Central Banks will try to manage it but they will fail as the demon is now far larger than either spun rhetoric or their ability to contain the monster that they have created. The politicians, on both Continents, have fed the incubus by offering sustenance to the people that elect them far past what their pocketbooks can afford and so Uncle Ben and Super Mario turn on their magic machines which mystically morphs paper into a special affair that can be used to buy goods and services with all of it backed by nothing more than promises to pay and “full faith and credit” and other lofty sounding words that mask the fact that no government could afford to pay except in this “pay in kind” fashion and so the presses print, old debt is paid off with new debt, the size of the debt is hidden in musty drawers, most isn’t counted and six and twenty blackbirds have baked a meringue pie.

A meringue is really nothing but foam. And what is foam after all, but a big collection of bubbles? And what's a bubble? It's basically a very flimsy little latticework of proteins draped with water. We add sugar to this structure, which strengthens it; but things can, and will, go wrong. Perhaps very wrong.

So there is the definition of the problem. There is the crystallization of the dilemma. The entire world’s financial system encased in a bubble and nowhere to go, nowhere to hide and nowhere to be safe. Many argue for the value of gold when the prick comes but gold is just a currency replacement and while it will rally in response or perhaps rally with inflation if it comes it begs the question of valuation as it has no absolute value as defined by me before and so relative value without the payment of income is a major cause of concern.

Consequently unless the world’s financial system implodes, a thought expressed by some, gold may be a choice but not the best of choices.

Since off-world investments are not possible then we are bound by the choices that are available. This brings us around to TIPS or corporate bonds tied to inflation, staying very short in maturities, floating rate notes that rise with interest rates or any other types of investments that float off of CMT (Constant Maturity Treasuries) or any other asset class that will rise in yield and price as valuation decreases and as the effects of the slosh of money wears thin. Bonds such as step-ups may have additional worth now as a partial hedge and fortunes, once again, will be made and lost making the right bet. The big Kahuna will be the question of timing because we play the Great Game to win and not to be right. Preparation is the key now because history teaches us that small bubbles, much less our humongous one, will not last as political and economic forces unite to prick that which is so over-valued in one manner or another.

When the economies of Spain, Greece, Italy, Ireland, Portugal and France are in decline and yet their sovereign yields fall as supported by a conditional promise from the ECB then trouble is in the making. When America spends money like it is without end because the Fed hands out the byproducts of the forest as if it was an unlimited supply then the valuation of paper overtakes the use to which it is put. We are sitting with our little round plastic toys and blowing bubbles into the sky and when the turn comes, when the bubble is pricked, scant few will be able to run fast enough or get through the door quickly enough when the madding crowd is rushing in a collective push to get out of the burning theatre. It may not be today and it may not be tomorrow but soon enough and hence my caution before the storm.