Morning! So we have had countless stimulus packages in various flavours in various countries and the end result is anemic growth almost everywhere apart from the UK which is apparantly still contracting. This is just a re-run of the events that took place in Japan in the 90's. Admittedly, goodness knows what things would be like if there was no stimulus at all. In any case what we do know is that Japan had periods of positive gdp AND a relatively strong labour market and they still suffered massive asset price deflation. By the way anyone who wants a good big picture view of the potential for deflation should read Roger Bootle's series of three books; The death of inflation, Money for nothing and his most recent one, The trouble with markets.
The way to solve the problem of excessive debt is not to issue more. The obvious thing to do is to pay it back? This is exactly what happened in Japan. Private debt was, and is, being paid back. This is why banks are not lending and businesses on the whole are not borrowing. I believe Mervyn King was right when he said some months ago at an inflation report press conference that in the short run we have to do the complete opposite of what is right for the economy in the long run. So in the short run excess government spending has been the appropriate economic medicine to avoid armageddon. There is a possibility that governments can stimulate their respective economies back to their pre crisis highs and perhaps beyond but without an increase in lending it seems unlikley this will occur. As I have mentioned in a post from months ago I think the Nikkei is a great roadmap for what may happen in the Anglo Saxon world. Every time there is a rise in optimism and equities rise, the smart people get out, learn from their mistakes and return to a more balanced approach to investing. This process repeats many times and eventually the system is cleansed. It is essentially what Mervyn King was talking about but it will probably need to happen many times because it is simply too dangerous to let all economic agents fail, that need to fail, all in one go. Thus it is done in stages as per the Nikkei chart over the last 20 years.
It is my belief that we are going to experience at least one more credit contractionary phase. As a proportion of outstanding debt, USD denominated debt is the largest. If folk start scrambling to get the money back that they have lent out, the end result is a monumental USD rally that comes from out of the blue. USD sentiment is near an all time low. Note, that when the USD rallied following the collapse of lehman it reached a point at which 98% of USD speculators were bullish USD. Guess what? That was the point to sell USD (around March 09). Now we are at a point where about 3% of speculators are bullish USD. In my mind it is a reasonable place to build small long USD positions.
Take a look at the NZDUSD chart above. It is one of the few USD pairs that has broken below trend-line support and I believe is one that should be sold aggressively on pullbacks towards .7450. Unfortunately I do not have access to my normal charting package so I am trying out an alternative. Let's just say that the false break higher that occured on 21 October followed by the breach of the support of a rising daily wedge and then the major trend-line support off the lows from March/April is an early warning sign of probable further losses. As always, good luck if you have a go.
