Just Remember
This, A Hiss Is But A Hiss
(You Played It For Her,
You Can Play It For Me - Play It Again, Sam.)
William R. Hecht
January 4, 2006
The case for inflation and
gold is very strong and is made repeatedly on this site and others.
And while I have tremendous respect for the facts and the economics
behind this prediction, I think the gold ship will ride on unpredictable
crosscurrents as we enter a deflationary recession/depression
environment, with rising t-bond prices, falling equities
and a falling dollar. With so many variables and so many of them
relatively new in significance, the first order of business for
me is to simplify the equation by reducing or eliminating variables
to find a ruling theme or reason for my forecast.
I did a local radio show for
several months last year and in the course of my tenure as host,
I interviewed Jim Rogers, Richard Russell, Bob Prechter, Joe
Granville, Arch Crawford, Bill Fleckenstein, Mark Leibovit, and
others. They almost universally noted the liquidity and credit
bubbles. They are all great students of markets and history.
On my end, I have listened and watched and wondered and scratched
my head at conundrums and housing prices and complacency. Like
the rest of us, I have seen the terrific expansion in M3, witnessed
the debt issuance and the triple deficits: Federal spending,
US Trade, and Savings. I have seen the global bubbles in assets
of all kinds and the expansion of credit and derivative markets,
and the boom in gold and commodities. I have not felt comfortable
articulate a stance on the environment to come. Nothing made
sense other than that a reckoning of sorts was overdue. For whatever
reason, though, I know what I want to do now for those of my
clients who need something simple yet not too drastic. Some elements
of my conclusion may be controversial, but here it is.
We have had a global asset
bubble in real estate, stocks and some commodities. That bubble
will have begun to pop in earnest by the end of '06 and will
engender global economic contraction and overcapacity resulting
in falling wages and prices, falling interest rates, falling
stock prices, and quite probably a falling dollar. There is no
reason to believe that the global asset bubble collapse will
bring anything different to most world markets than past bubbles
brought to other markets in other times and places.
Though I agree that the tremendous
liquidity infusion should be inflationary, the Japanese were
unable to re-flate their economy for years with super-cheap money.
Also, though M3 continues to expand, the efficiency of the monetary
system has managed to create more new debt than growth. With
an economic contraction and the ensuing credit contraction, the
money supply should contract with similar efficiency. In other
words, much of what we call "money supply" is merely
"debt supply": like any virtuous cycle gone bad,
the action/reaction principle implies that much of this debt
will disappear at least as quickly as it arrived. Efforts to
re-flate the bubble should fail, though efforts to provide liquidity
could weaken major world currencies against gold and commodities.
This might result in continued strength in metals and commodities,
but the crosscurrent of hard-asset sales to repay debt and the
reduced economic activity have to exert some downward pressure
on these markets as well.
Equity prices would naturally
fall, though the impact on various markets can only be gauged
in the context of their relative valuation, savings, and debt
levels. Still, the increased synchronization of world markets
should make all boats fall with the outgoing tide in the beginning.
The US market has underperformed and should take the vanguard
in a global equity selloff as US markets face the realities of
decreasing stimuli, increasing debt burdens, an exhausted consumer,
and diminishing standards of living for most Americans. Exporters
of natural resources and raw materials should fare least badly.
Treasury prices will rise as interest rates fall. Credit spreads
should widen, however.
With this scenario in mind, a very flexible managed global bond
fund that maintains high credit quality could provide dollar-based
investors with the trifecta: yield, currency gains, and capital
gains. You might have to pay for the right manager, though. I
know of one that I like.
We will know if I am right
"As Time Goes By." It was a somber film and it depicted
a tough time But even if history doesn't repeat itself, it can
still make a rerun. I want to see Bogart warning them to get
on the plane - to get into quality bonds. Warning them that if
they don't they'll regret it. . . .
"Maybe not today. Maybe
not tomorrow, but soon and for the rest of your life."
William R. Hecht
email: w.hecht@cox.net
Bill Hecht is an investment
advisor and broker with First Financial Equity Corp. in Scottsdale,
AZ. He also teaches Investing at Scottsdale Community College.
He graduated from the University of Wisconsin and the American
Graduate School of International Management. The opinions expressed
reflect the judgment solely of the author, not FFEC, SCC, their
officers or employees.
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