No fun, no sin, no you, no wonder it's dark
Everyone around me is a total stranger
Everyone avoids me like a cyclone ranger
That's why I'm turning Japanese
I think I'm turning Japanese
I really think so
Turning Japanese
I think I'm turning Japanese
I really think so
"Turning Japanese" by The Vapors
View it on YouTube:
The Vapors Turning Japanese totp2Could the U.S. be "turning Japanese"? Not to long ago the Fed's biggest fear was that we would fall into a Japanese style deflation. A deflation, that despite bridges to nowhere and Yen dropped from helicopters, has gone on now for twenty years. Fully aware of this risk, our own very astute Fed has embarked on the exact same Keynesian track of quantitative easing to try and reignite inflation. Now most pundits believe that the Fed will not only be successful in reigniting inflation, but they will be way too successful, resulting in massive dollar devaluation and hyperinflation. But could they be wrong, could our future be a massive debt deflation, and an economy that just doesn't grow?
So which should we fear, inflation or deflation?
The answer is really simple, we should fear both. I will go to my grave arguing that none of us know for certain what the ultimate outcome of this epic war will be. We will most likely have inflation winning several battles and deflation winning several other, but it will most likely be years before we know the ultimate victor. It clearly appears that most of the investing public is on the inflation band wagon and making the same inflationary bets; selling the dollar and buying gold, commodities, emerging markets, and various equities. This has been a great trade for the last twelve months, but it appears to be waning of late. We have recently seen a decisive breakdown in the inflationary trade; with gold, commodities, and emerging markets all trading lower. The dollar has rallied as the strongest alternative in a weak global currency market. I always worry when the majority of investors are leaning hard the same way, because Mr. Market will do whatever possible to fool the most people most of the time.
I've learned that the most successful tact to take is listening to the market, and right now it is saying, "deflation is still a possible outcome". "I think I'm turning Japanese, I really think so".
Muni Default Update:
This weekend, while most of us were busy digging out again, our elected officials in Harrisburg passed a budget for 2010. The surprising part of the budget is that it excludes making debt payments! In essence, the city anticipates defaulting. When asked if this means the city will shortly file for Chapter 9 bankruptcy, city controller Miller says, "its a possibility". You think? The catalyst will most likely be a $2 million missed interest payment on an incinerator due March 1st. Again, if you have muni bonds issued by the city of Harrisburg, please contact your investment advisor.
Investment Considerations:
In sympathy with the markets move away from inflationary fears, several of our indicators have turned negative recently, causing us to move from bullish weights to neutral weights in the following assets: International Equities, Gold miners, Commodities, and International Bonds. In the meantime U.S. fixed income moved from neutral (where it resided for only a month) back to a fully invested bullish mode. We currently have a 17% target weight for cash.
Be careful out there,
Chris Wiles
This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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