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Upside down

October 11, 2014

Upside down

Another challenging October seems to have gripped the global equity markets. Some market participants claim there will be hyperinflation, some argue we are in a deflationary death spiral. Interestingly, both arguments, although extremely overstated have some merit to them.

It is true that the global central banks have created tens of trillions of national currency units and have tried to put them into circulation. However, the money has not entered the real economy as recipients of these funds(banks) have been largely unwilling to take risks in lending to the private sector. As a result, we now face 500 year lows in European interest rates which supposedly should act as a stimulant to the economy.

The problem is, zero interest rates only apply to capital depositors, not borrowers. In a truly bizarre announcement, former Fed Chairman Ben Bernanke recently stated that he has been rejected to refinance his home. As strange as that may seem, ask yourself who is credit worthy these days if Mr. Bernanke isn’t? Only eight years ago, in America, practically anyone was able to get a mortgage, interest rate free and above 100% equity with no documentation or job. Today, hardly anyone can obtain credit, be it middle class folks or start-up companies. As a result, we cannot grow as an economy, certainly not as fast as we otherwise would. Risk/Investment is choked off, savings are not creating yields and investors turn increasingly risk averse which slows down progress.

Financial markets have become interesting reflections of these conditions. Blue chip equities appear to be safer than government bonds, thus they rally. Losing nothing or merely the loss of purchasing power beats gains, thus we see higher rated sovereign bonds rally along with the money created. The dollar despite all its flaws is once again in a bull market as the US is still viewed as the safest place to park money.

I am not sure what it will take to change this global stagflationary situation that we are all in. My best recommendation would be to make sure that some of the printed money does indeed find its way into the real economy. At the end of the day, global central banks can print as much money as they want but they won’t be able to print jobs and assets. Good luck, Mr. Bernanke!



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