Monday, February 25, 2008

Aaaaaah where are we heading?

Nothing has changed in my view of the ecnomy and stock market. Therefore I haven’t seen the need to write a new blog entry. Credit policies have been weekened during the past 20 years. Risk management has been surplanted by sales programs espoused by management consultants. Credit has been sacrificed for sales and the sales culture has been justified by unrealistic loss expectations. Ergo, we are in a period of shrinking credit to save capital which leads to a slow economy. The lending multiplier is dead for the near term.

Until the rest of the world stalls like the USA, we are going to face continuing, increasing, inflation in raw materials and pass through to all goods. Growing inflation will lead to higher bond rates and gold prices. Stagflation is unavoidable. The banks have hampered the economy and the weak dollar and thriving foreign economies have caused inflation to march forward.

I’ve continued to lighten equity positions on any rally and will be severely harmed if the market rallies and I’m wrong. But, like Charles Barkley, I don’t think I am. So, I continue to bet against the market, buy short term bonds, and bear market long bond ETFs. I’ve also been buying some munis.The place not to be is in the equity market. It smells like before the tech bubble burst and people knew it didn’t make sense, but it still went upward. This time the credit markets seem in terrible disarray, but everyone still believes the stock market is the place to be. I’m betting they are wrong. When banks don’t lend the economy sinks. When the econmy sinks you don’t want to be in stocks. With stagflation you also don’t want to be in bonds so you need to either stay short in duration or benefit from rising rates through TIPS , bear market ETFs, gold ownership, or short equity bets.

I may be wrong, but I feel a lot like Bernard Beruch and I hope I do as well as he did.

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