There is the strong possibility that policy makers in the US and UK will not time the transition from the current quantitative easing to a more tightened monetary policy. That is not because they are no competent. It is because the task is very tricky and there is no play book outlining the steps. This is not Tom Landry (former Dallas Cowboy coach) pacing the field with a play for every situation already planned and practiced well in advance.
The odds favor they will either be too late or too early. Getting it "just right." The Goldilocks play, would be more than fortunate. In fact, there may be no right play to call. They may be forced to choose between a slower economy and/or inflation/deflation. And as this week's Outside the Box authors note, there is also the possibility of yet another asset bubble, making the choices even more risky.
Those who are absolutely positive about which of a variety of outcomes will emerge have a level of clairvoyance with which I am not familiar. It makes risk asset (like stocks) investing particularly tricky right now. This is a time to be nimble and avoid creating opportunities for large losses if you are wrong.
We will start this week's OTB with a few paragraphs from the Bank Credit Analyst about the Great Depression and then move on to a piece from the London office of Morgan Stanley on the problems facing central bankers.
And on a less ominous but more important note, the Muscular Dystrophy Association (MDA) has issued a warrant for my arrest which goes into effect on August 26th! I will be held at the PM Lounge in the Joule Hotel from 3-6. My bail is set at $2,400, which will benefit local families living with neuromuscular disease. No one person can set me free. It will take a little help from all of my friends, family, colleagues and enemies! Please use the link below to visit my Bail Page and help me post my bond by contributing in any way that you can. Thank you for having a big heart! And come see me in jail!
And now, the thoughts from BCA.
Long time readers know that I am a huge fan of the work of Neil Howe. His book, The Fourth Turning, was one of the seminal pieces of my reading over the last 30 years. And it has turned out to be stunningly prophetic. Uncomfortably so. A roughly 80 year cycle has been repeating itself for centuries in the Anglophile world, broken up into four generations or turnings. We have begun what Howe called many years ago The Fourth Turning.
Neil Howe is the co-author, with the late William Strauss, of a number of seminal works on the impact of generations on cycles of history. Howe is a founding partner of LifeCourse Associates (lifecourse.com) which provides research to institutions looking to capitalize on generational research.
The June 2009 edition of The Casey Report, the flagship publication of Casey Research, featured a comprehensive 23 page interview with Neil Howe as well as suggestions on how to position your portfolio to profit during a Fourth Turning crisis. I persuaded my friend David Galland to at least summarize it for my Outside the Box this week, and he graciously did so. David is the managing editor of The Casey Report and has had a long career in the financial services industry; as a founding partner of the successful Blanchard Group of Mutual Funds and, before joining Casey Research, as a founding partner of EverBank, one of the big success stories in independent online banking.
Casey Research is offering readers of Out of the Box the opportunity to read the full edition of The Casey Report featuring the Howe Interview, and receive the publication for the next three months with a 100% satisfaction guarantee. For details click here... http://www.caseyresearch.com/crpmkt/crpSolo.php?id=144&ppref=JMD144ED0609A
I trust you will find this week's Outside the Box to be helpful. The more things change.....
This week's Outside the box looks at some very interesting research done by two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin They give us comparisons between the Great Depression and today's downturn. They continue to update their data from time to time, the link to their work is at http://www.voxeu.org/index.php?q=node/3421. I have not previously heard of www.voxeu.org, but it is a collection of the work of well regarded international economists that seems quite interesting for those who enjoy readings in the dismal science.
This week's OTB will print long, but it is primarily charts. Please note that I have re-arranged some of the new charts to cut down on space because of some duplications. Word count is not all that much and it reads well. I will be referring to their work in future letters as well. Have a great week!
What happens when inflation once again returns. As this week's Outside the Box writer, James Montier, writes, we may want to start thinking now about inflation insurance and he mentions a few ways to do so. But this letter is a must read for his bringing to light a speech by Fed chairman Ben Bernanke in 2000 given to the Japanese, where he suggest inflation targeting:
"In the speech, he laid out a menu of policy options that are available to the monetary authorities at the zero bound. First, aggressive currency depreciation, as per Romer's analysis of the end of the Great Depression. Second on Bernanke's list is the introduction of an inflation target to help mould the public's expectations about the central bank's desire for inflation. He mentions the range of 3-4%!"
I think you will find this week's OTB to be exceptionally thought provoking. Montier is one of my favorite economic thinkers (and a good friend). He works for Societe Generale in London in their Cross Asset Research group.