Balestra Capital: "If Government Programs Were Cancelled, The Economy Would Collapse Back Into Severe Recession"

Tyler Durden's picture

While hardly an opinion that would be questioned around these parts, it is still good to see that even some of the smart money shares our views about the Schrodinger Economy ('alive' and 'dead' at the same time, depending if the BLS or anyone else is observing it) and we are not totally insane vis-a-vis one-time, non recurring government bailouts, which just incidentally have become perpetual and endless: "The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings.  So the next question has to be:  Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt?  We think that if government programs were canceled, the economy would collapse back into severe recession." And here Balestra's Chris Gorgone explains quite astutely why anyone betting on a decoupling or perpetual USD reserve status may want to reconsider: "the U.S. is no longer in complete control of its own destiny.  We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc.  What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes.  The world is changing  rapidly.  The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II." Alas, this too is spot on.

More:

From its October 2011 low of 1075 to its high point at the end of October, the S&P 500 stock index has risen 28%, buoyed by improving economic data in employment and manufacturing along with historically low interest rates.  The obvious question:  Is the strong stock market a sign of a strengthening and enduring economic recovery?  Economic data has been improving  for several months, including employment, manufacturing, and consumption reports, abetted by historically low interest rates. 

 

The Federal government has manfully stepped up to fill the gap left by consumers who have been forced to retrench and who are trying to repair their finances by paying down debt and increasing their savings.  So the next question has to be:  Is this recovery self-sustaining or is the economy still on life support, held together by periodic massive liquidity injections and ultra low interest rates, and accompanied by a dangerous, if not reckless, expansion of government debt? We think that if government programs were canceled, the economy would collapse back into severe recession.  With the continuation of these programs the U.S. can probably maintain a reasonably steady state, which could allow consumers to repair their finances over a period of several years and allow a gradually reducing level of government support.  However, the U.S. is no longer in complete control of its own destiny. 

 

We exist now in a world of increasing correlation in the arenas of economics, finance, trade, politics, etc.  What happens in Europe, China, the Middle East, etc. will have major impacts on American economic, political, and social outcomes.  The world is changing  rapidly.  The old rules that so many investors rely upon may no longer apply the way they did during the great growth years after World War II.  The LTRO was successful in delaying a serious breakdown in the European banking system.  However, it has not solved the problems.  The ECB has been accepting dubious, if not worthless, collateral against its loans to banks, which is a roundabout way of printing money.  Japan has finally embarked on a serious effort to stimulate inflation, with moderate success over the past few weeks.  A cynic might say that these are just two more steps in the currency debasement race to the bottom.

As for where Balesta is invested:

We made some gains on our long-term options on the yen in February, and additional gains during first week of March.  There were also modest losses in equities derivatives.  The portfolio is modestly short overall, but long gold, as usual, mainly to protect against continuing debasement of fiat currencies.  We are also short via options (mostly puts) the yen, euro, and Australian dollar against the U.S. dollar. Equities holdings are balanced, with long positions focused on income producers such as utilities and mortgage REITs.