Friday, June 24, 2011

Perfect Storm, 3-D Financial Hurricane Coming

Newport Beach-based asset manager, Robert Arnott, tells Marketwatch that he sees a a “3-D Hurricane” — a perfect storm of deficits, debt and demographics that Arnott said will create “serious headwinds for investors in the years ahead.”

Marketwatch continues:

 For starters, the U.S.budget deficit is much bigger than it appears, Arnott said. When obligations for Social Security, Medicare and Medicaid are counted, the already-bloated deficit balloons. Add in state and local debt, and the national overhang exceeds 500% of U.S. GDP, Arnott said. “Think about what you made last year, multiply by five, and that’s your personal share of the national debt,” he noted.

The question, Arnott said, is who pays this debt? That becomes a demographic problem for the U.S. “Our population is aging and our working age cadre will be shrinking as a percentage of the population,” he explained.

With more retirees and fewer workers, the economy will slow, Arnott said. Declining GDP growth will pressure corporate earnings and dividend growth. Meanwhile, Arnott said, if the U.S. has trouble paying its bills, policymakers may decide to reduce the value of the debt by printing more and more money, debasing the U.S. dollar and spiking inflation.

“If we turn to the printing press as the way to reduce the value of our debt, which I think we probably will, that creates inflation risk,” he said.
Arnott's math is correct. That's why the wise thing to do is to ignore short-term market movements and accumulate inflation hedges such as gold and inflation-related commodity stocks. In fact, use dips as periods to add to positions.

1 comment:

  1. I would embrace your advice but I think there is a different possibility.

    There is probably excess mfg capacity in the world. For example there are probably too many automotive manufacturers. I would not be surprised that growth in Chana outstripped demand because of mercantile policies.

    Second, bad debt destroys money. If I paid 100K for mortgage backed securities and they are worthless that 100K is gone. The major banks capital is gone. this whole interest on reserves is an attempt to recapitalize banks. If it were that simple, why would any country allow any business to go under? I think Japan was playing that game and it lead to wealth destruction, not inflation. Money pumped into businesses that are losing money by honest accounting standards are destroying wealth not wealth creating. If the world has less wealth, why would you expect the price of commidities to increase? If the consumers of the world have less value so that 100 million fewer cars are produced and sold, perhaps the price of steel will go down.