Thursday, July 17, 2014

Code Red - what the markets need


If you want to read one book on the indictment of current policies and the risks with the current monetary experiment called quantitative easing, this is the one to read. The current monetary environment is very complex with a significant number of assumptions which drive policy choices. It is not clear whether those assumptions are correct or the expected outcomes will be reach. Mauldin and Tepper provide a very readable work that makes these complex choices approachable.

The global economy has been able to pull itself from a potential disaster through active and strong monetary stimulus from central banks, but the impact of this continued stimulus is still unclear. Inflation has not been really seen in the post crisis period, but the potential for higher inflation, currency wars, and continued balance sheet problems still exist.

Central banks have done a good job of actually having people accept that printing money to increase inflation, inflate asset prices, and debase the currency is all good for us. Debt is good and savings is bad under current central bank thinking. Since every country cannot follow the same policy of devaluation, the world will face currency wars coupled with higher global inflation. Continued deficit financing will only lead to a world of financial repression by governments in an effort to reduce the cost of the excessive borrowing. Our economists are unlikely to forecast the events that will lead to a financial breakdown. Inflection points have never been a strong of this profession. The use of excessive money will lead to trend behavior and bubbles in assets markets as investors follow the herd based on cheap credit and euphoria that will be unrealized.

The authors do a good job of explaining what our future may look like and it is not a pretty picture. Financial safety will be in short supply.


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