5 May 2006
From Sea To Shining Sea (Of Liquidity)
Market Observations: "As excess liquidity engenders rolling thunder in its price influence on asset classes over time, this can result in both virtuous cycle and vicious cycle consequences for the real economy. We've lived through the virtuous part of the cycle over the last decade with equities and real estate. Both asset class price accelerations were net positives to the consumption driven US economy. The question of course now being, what alternatives do the Fed and global central bankers have at this point? If they slow down liquidity generation in the hopes of quelling spiraling commodity prices, what fallout occurs primarily on a highly levered US economy, and in turn a global economy still very dependent on excessive levered US consumption? Has especially the Fed simply painted itself into an inflate at all costs corner with literally no other choices? Its policy flexibility vastly diminished relative to historical precedent? Damned if it does and damned if it doesn't, so to speak? The Fed has essentially allowed the financial sector servant to become its master in ever increasing fashion over the prior decades. And its current lack of choices seems testimony to its newly found role as terrified servant. At least for now, and whether the Fed is willing to admit this or not, it has become the servant to the hedge fund managers, the prop desk traders, the structured finance masters of the universe, etc. Under this set of circumstances, our best near term investment returns lie where these aforementioned allocators choose to position the Fed liquidity largesse at any point in time. And that's currently in the hard asset complex. Simple enough? Until these forces or dynamics change, we need to stay long energy, long equities benefiting from higher commodity prices, in short duration fixed income if at all, as well as long precious metals. Corrections w"