Is our Economy being run by kids or adults?

“You know something is happening and you don’t know what it is, do you Mr. Jones?” Bob Dylan

We are now running our economy like a bunch of kids with the parents not home. Our audience is made up of experienced businessmen, students of the economy and just plain people with common sense. They can see bad decisions being made, and they can’t figure out how so many apparently good things can possibly be happening. How could we be having unlimited money printing, quantitative easing, deleveraging, rising structural unemployment, soaring gold prices, while happily and complacently collecting money in a continuing stock market rally? These points just don’t go together. The cognitive dissonance is deafening.

Here’s the explanation:

Temporarily, and probably by sheer luck, we are experiencing a rare moment of balance. Global deflationary pressures are offsetting the wildly inflationary activities of the U.S. government, which they are carrying out with the willing consent of the American people, including you and me. It is just a rare coincidence that these opposing forces are lining up so beautifully right now. These opposing forces are pressing in opposite directions so they cannot continue to line up and they won’t.

Global deflation will diminish as countries around the world recover and begin to grow. Pay levels will continue to decline because there is a growing supply of people around the world, willing and able to work cheaply-but-effectively. As economies around the world continue to recover and expand, the prices of most other building blocks of society will rise. This growth will overcome cheap labor, and deflation will slow.

On the other side, our inflationary activities will not slow of their own accord. It would be really painful, like kicking heroine cold turkey, to stop trying to print and borrow our way to prosperity. I don’t see the leadership, the vision or the wisdom out there right now to guide U.S. policy to a rational course. That will have to come by speeding up to the edge of the cliff, and stopping just in time… or not. I am not predicting irreversible calamity, but investing whether in anticipation of calamity or near calamity requires the same actions, which I am taking.
While preparing to benefit from potential adversity later, things are pretty good right now. It would be a mistake to pass up today’s opportunity. In the face of rampant skepticism, the economy has been steadily improving for months, and our leading indicators tell me the improvement will continue for at least several more months. With investors still excessively pessimistic, we will continue to make money placing our bet on stocks associated with global growth. Timing will be key, though, because the rare moment of balance is a beautiful and profitable opportunity but it is only temporary. This is the moment for the grasshopper to dance in the sunshine. Winter will be here soon enough, but to live a life of joy, one must also learn to live in the moment.

After the growth scenario runs its course, we’ll be in a better position to see whether the U.S. economy takes its trading partners down with it or not. They appear to be growing independently. We’ll see.

Raw materials prices will rise assuming continued global growth. The question will be whether companies in the materials businesses will see their stocks tumble even while the prices of the commodities themselves rise. This would be caused by simple fear and reduced willingness to assume risk. If the definition of “flight to quality” changes into holding commodities to avoid inflation and raised income tax, you could see commodity prices rise, while the stocks of companies who deal with them decline. We’ll see!

For now, U.S. stocks rally, as the economy continues to surprise to the upside – at least a couple of more months.