Forget Scapegoating! Look Forward
Posted
Apr 09 2008, 09:40 AM
by
Richard Schwartz
SCAPEGOAT BLAMING. Boy, am I’m getting tired of the carping! Day after day, article after article. All these writers seem to think there’s something to gain in blaming former Federal Reserve Chairman Alan Greenspan for the US housing bubble, the credit crisis, and in fact, all our problems. Listen, everyone is human and makes mistakes. So what can I say? Guess that’s the world we live in today. Blame and complain. Call for firing this one and that one. And somehow writers and media people, like Mike & the Mad Dog on sports radio and Sean Hannity on conservative talk radio all think they have the right to sit on judgment over others. Some type of free speech right, I guess. More logically, fostering dissention brings in more viewers, listeners and ratings. Awful! Anyway, thanks for listening. I listened to Dr. Greenspan yesterday on Bloomberg. If I have time I’ll review that videotape tape again today. A couple very interesting points emerged. First, Greenspan is urging a Resolution Trust Corp (RTC) type of organization to help resolve today’s housing glut, similar to how the RTC worked through the late 1980s/early 1990s savings and loan debacle I missed the first part of this concept yesterday, I’d like to hear more. Second, Greenspan talked about where we now stand and what our economic future’s going to be like. Essentially, his sense is that the two decades of disinflation is winding down and would be over if it wasn’t for the credit crisis/recession. This ending to the long downtrend in inflation and thus in interest rates started in late 2006 when China’s disinflationary low wage influence on global goods prices culminated. But this major macroeconomic trend change hasn’t shown up clearly yet. That’s because of the US and global economic downturn. This “slack” period as Greenspan calls the downturn is likely to prevent any sharp inflation spike for now but when this slack period ends, rising inflation will then become the next problem, returning to its past position as our everyday bogeyman, for all of us. Schwartz View: Makes sense to me. When I place a return to rising inflation in the context of historical trends and chart patterns. Any long entrenched trend doesn’t reverse all at once. Thus our long, slow, glide path toward deflation we’ve been in these last 25 years, fits well into my interpretation of the Kondratieff Long Wave, will wind up in the normal way most trends end up reversing. Reversals of long movements in one direction normally end with a first, little spike in the new direction. Such as we’ve been having over the last few years with the spike in commodity prices; oil, gold, industrial metals, soft agricultural commodities, which is part of the larger inflation equation. Next we should have a recession in the trend. In today’s case that would mean a cessation or fall back in commodities prices. Which makes sense if we have do undergo a sustained economic slowdown for the next year or two, the demand for commodities receding somewhat, thus causing commodities to fall back. This also fits with commodity guru Jim Rogers views of the world. That we could/should have big corrections in this long term -- about 18 years dating from the beginning in 1998/1999 -- commodity bull market, upwards of 50% or more. Not necessarily mandated but we shouldn’t be surprised by a big correction. Then, after a pullback, the new long term, macro trend toward higher inflation begins to become apparent to all. That’s how trends like bear markets in stocks have ended historically as well. Go back and look at a chart of the ending of the Papa Bear market in 1974 or the very long term previous Papa Bear market in bonds in 1982. First you get a rally, then a fall back, then the new trend really takes hold. Actually, think about this concept further. This is the same pattern stock traders look for to identify stock market bottoms in shorter term time frames as well. In fact, just think about the recent stock market low in January, the first rally back up, then the secondary low on March 10th, which Bob Doll of BlackRock points out as an important secondary low and some type of bottom. My larger point? It’s that our portfolios going forward should start to get repositioned toward an investment background of rising inflation, not disinflation. Yes, maybe we have one more burst of disinflation during this economic slowdown/recession as economist Gary Shilling predicts, that would be natural, but afterwards, we morph back to an inflationary world, certainly not the same investment world we’ve seen for the last 25 years. One key point. This new world is not geared toward bond investing. Bonds have had a 25 year bull market but that’s winding up. I would be very wary of bonds going forward.
Filed under: Principles of the Stock Market, Richard Schwartz, Alan Greenspan, Investing Strategies, Soft Commodities, Inflation, US Economy, Economic Data, The Fed, Stock Market Weekly, Macroeconomics, Commodity Bull Market, Economy Weekly, Historical Perspectve, Perspective, Federal Reserve, Interest Rates, The Principle of History, The Big Picture, Global Trend