"Like Lambs To Slaughter," Observations On The Real Lessons Of Keynes

Tyler Durden's picture

From the management of a global currency war to the 1998 Committee to Save The World, QBAMCO provides an all encompassing escape into the reality our current - and future - monetary (and inflationary) world. While Brodsky and Quaintance do not expect a breakdown in global monetary oversight, they do expect fiat currency debasement to continue to mask the driver of real economic malaise and contraction - global bank deleveraging; and they do expect this process to lead to a popular loss of confidence in today’s major currencies as savings instruments – perhaps beginning in the global capital markets in 2013.

 

The big macro questions:

Will global central banks raise rates, withdraw bank reserves or tighten credit policies in any way before the global economy experiences significant price inflation? No.

 

Will they continue threatening to tighten? Probably.

 

Will they continue to de-lever bank balance sheets via bank reserve creation? Absolutely.

 

Will global central banks continue to be significant net purchasers of physical gold in 2013 and beyond? Bank on it.

 

Will big global wealth holders convert increasing amounts of fiat currency into physical precious metals, resources and other beneficiaries of global price inflation? Highly likely.

 

Will Western financial asset allocators figure out what all this implies for stocks and bonds in 2013? We think so, probably after a significantly higher-than-expected CPI print.

 

Higher global goods and service inflation is a tail event currently unforeseen by the great majority of investors and unexpressed, or expressed improperly, in the great majority of investment portfolios. And yet we see it as a lock, perhaps asserting itself in 2013.

 

February marks QBAMCO’s sixth anniversary and we are grateful for the interest our views have generated. This piece addresses the following issues:

Currency War – Theory & Practice: We argue one should not necessarily mistake rotating currency devaluations presently for the threat of a belligerent global currency war. Monetary authorities are likely to continue managing the timing and magnitude of discrete, coordinated relative currency weakness so that the appearance of a stable global monetary system remains intact.

 

Cause for Concern: While we do not expect a breakdown in global monetary oversight, we do expect fiat currency debasement to continue to mask the driver of real economic malaise and contraction – global bank de-levering; and we do expect this process to lead to a popular loss of confidence in today’s major currencies as savings instruments – perhaps beginning in the global capital markets in 2013.

 

Lambs to Slaughter: We do not expect an overt crash in global stock, bond and real estate markets, or one that would last very long. They are already crashing in real terms and there is a well-structured mechanism in place to support nominal pricing. Any future flight of public sponsorship would be met with central bank credit support working through bank intermediaries. For those not part of the support mechanism, however, the monetary market put does not necessarily argue in favor of investing broadly in implicitly levered financial markets.

 

The 1998 Committee to Save the World & Centralize Global Economic Control (and their Legacy Beards): We think the smart play is to bet with these guys and the power of their institutions.

 

Reasonable Contrarianism: The pain of holding an inflationary bias over the last six years has been intense, and the pain has only increased exponentially over the last two years. The good news is that we believe for the first time there are important macroeconomic events signaling a fundamental shift in the global monetary system is finally approaching. We expect discussion of Fed, ECB and BOE inflation and/or nominal GDP targeting to become louder and more frequent in 2013, and we expect markets to begin adjusting asset prices accordingly.

 

The Pain Trade: All the Sturm and Drang in the financial press about a revival of the US housing market is bologna. We provide a short idea.

 

Bad Science: On February 1, a large multinational bank published a report that called the end of the bull market in gold, claiming; “the 2011 high will prove to have been the peak for the USD gold price in this cycle.” While no one knows the future and the dollar price of gold may rise or fall, we are quite certain gold’s future path will have nothing to do with the arguments included in this report. Sadly, it was a case study in false identities leading to wayward causations and, in our view, a diametrically wrong conclusion.

 

The True Lesson of JMK: The most important takeaway from John Maynard Keynes many views is that sometimes change for change’s sake is necessary to jumpstart popular confidence.

The Play: We think that what will eventually (or soon) occur will be the rare occasion when return-on-savings trounces return-on-investment, implying precious metals will outperform the great majority of financial assets (except for shares in precious metals miners and natural resource producers).

 

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