Skip to comments.ZERVOS: The Fed Is Risking An Inflation Disaster, And There Will Only Be One Place To Hide
Posted on 12/21/2012 1:13:31 PM PST by blam
ZERVOS: The Fed Is Risking An Inflation Disaster, And There Will Only Be One Place To Hide
Jefferies' economist David Zervos is back in a new note, which takes stock of developments at the Fed and the Bank of Japan.
The Fed, of course, recently adopted Evans Rule, which indicates that tightening won't occur until unemployment gets to around 6.5%, or inflation expectations are around 2.5%. The Bank of Japan is expected to see a new round of aggressive policy, thanks to the wishes of incoming Prime Minister Shinzo Abe.
While markets seem to be pretty happy about it all (ESPECIALLY in Japan) Zervos thinks it will end in uncontrollable inflation, like in other past Keynes-inspired experiments.
In his note, he recounts his time at The Fed:
In fact when I first arrived at the Fed in 1991, all the staff PhD economists I met spoke some foreign language - call it MITease. My world of rational expectations and real business cycles had no place at the table. So in order to understand the policy makers, and the people I had lunch with everyday, I had to learn how they see the world, even if it made absolutely no sense. I can remember vividly debates about the Phillips curve. And to this day I still have no idea how the concept has survived. We had high employment, high inflation and low real growth in 70s - followed by low unemployment, low inflation and high real growth in the 90s. No matter how much you "shift" or "augment" this flawed curve concept, it just doesn't work.
Bottom line for Zervos: This won't end pretty, and there's only one place to hide. The good news is: It's stocks.
(Excerpt) Read more at businessinsider.com ...
If this administration succeeds in what it is trying to do - ramp up inflation - then there is no place to hide.
Sounds like Jeffries is trying to goose the market up some more, or stop it falling too fast. The fact is: stocks usually do poorly in an inflation environment.
“there is no place to hide...”
Actually there is. First is hard assets, whose value will rise with inflation. Stocks are not hard assets. Debt with fixed low interest rates is as well, because the debtor is paying the debt off with reduced-value dollars, and even the principal owed keeps losing it’s value. This is one way inflation kills those with cash and the lenders of fixed interest loans. It’s a penalty on what should be a wise investor - the lender.
In deflation, cash is king, debt kills.
Safe place is described by Shakespeare: Neither a borrower nor lender be.
Stocks will be about as valuable as money. Worthless.
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