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Thursday, August 06, 2009

The Next Decade: Best of Times, Worst of Times

The global economy is no longer in freefall. The rubbernecking by all markets in 2008 has morphed, short-term, into an abrupt reduction of consumer and municipal consumption. Furthermore, falling tax revenue, plus the injection of deficit federal spending equals the antithesis of growth. These simultaneous realities are the legacy from 2008. Meanwhile, cheap stocks and frantic money managers, with plenty of cash, are driving stock prices irrationally higher, despite reported weaker quarterly revenue and earning numbers for many companies.

The back-of-the-envelope calculation promoted by a growing chorus of pundits is cheering the equivalent of a sugar high. Everyone likes sweets but the consequences that follow vary. In today’s market, this sugar rush is erasing from memory last year’s brutal stock market and the lingering problems that caused it.

Taking the macroeconomic view of domestic and global economies, monetary policies, demographics, supply and demand, and the new ingredient – 21st century nano-digital information, a new and peculiar economic state of being – InDation - will occur in the upcoming decade. This economic mutation is possible and probable because, heretofore, it was near impossible to calibrate daily, or hourly, reasonably valuations, arrive at informed decisions, and implement actions, for either side of any transaction, on a sustainable basis. Today, the world contains seven billion individual economies, tethered together, communicating, and constantly reformulating, digitally.

There are primarily two schools of economic thought in predicting the future from where we are; either inflation or deflation will accelerate. The basis for these conclusions is 19th and 20th century econometric modeling. I submit that these established models are imprecise in today’s world. Just as the portmanteau stagflation, coined by British Politician Ian Macleod, in a 1965 speech to Parliament, appropriately described the 1970’s phenomenon of no growth and inflation in America, in the coming decade inflation and deflation will occur side by side, separated by micro supply and demand curves, thus, requiring a new expression, too. I am confident about this prediction.

What have we learned from 2008? Just six months ago, central bankers and financial titans around the world, prayed each night like ancient agrarian farmers to their personal earth god for one more chance, if the western financial system did not disappear into oblivion. Today, the Standard and Poor's 500 Index closed above 1,000 and everything is ok. This cognitive dissonance behavior is tantamount to a morbidly obese man having a massive coronary last September, and this afternoon, lunching on a deli’s accordion pastrami sandwich, a slice of cheesecake standing by for desert, and a pack of cowboy killers in his shirt pocket, for that indispensible after meal smoke. We buried our financial problems but they are not yet dead and they will attack us again soon from their grave. Sell stocks into this summer rally.

Individuals, corporations, and nations of the wild debt and derivatives binge earlier this decade, that did not restructure debt reflecting current cash flows, expenses, and market share, will suffer a qualitative lifestyle decline. Conversely, success faces demand-pull inflation for energy, food, water, raw materials, and other natural resources, as three billion people, mostly non-westerners, scramble to elevate theirs, and emulate our standard of living, through export manufacturing, cheap labor, and individual education.

The next decade will be the best of times and the worst of times. It will be a world of inflation and deflation and the Standard and Poor's 500 Index trapped in a trading range between 600 and 1,500.

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