Coffee House Ponderings

Over the last couple of days I stumbled across a way to articulate what might be going on with the US capital market and economy versus what might be going on in foreign markets and economies. I touched on this yesterday in a different context in my greenfaucet post.

In the last little bit, foreign equity markets and currencies have rolled over in varying magnitudes over concerns that these places (most of Western Europe, several emerging markets and Australia as examples) are slowing into a recession.

There is visibility for a global recession and stock markets and currencies seem to be pricing this in at the moment. Global recession may or may not happen, the point I am making is that capital markets are giving that outcome a greater weighting.

If you do a little reading about some of these countries and their current state of affairs you might conclude that they are facing a cyclical event, a normal cyclical event. Maybe the catalyst ties in with the US or maybe not, but cyclical just the same.

The US on the other hand is also facing some systemic issues that play little to no role, that I can glean, in other countries.

Deficits matter, "no country has devalued its way to prosperity," the nature and scale of the Fannie and Freddie situation (bailouts, foreign investors backing away from their debt, raising capital one way or another, the sheer numbers involved) stands to be really big, the US' unhealthy dependence on foreigners funding our deficits and anything else you want to throw in.

Additionally, the deflation in assets prices (Mish has written a lot about deflation) combined with whatever is really happening with higher prices for things we spend money on is a bad mix. And at some point credit contraction becomes a big negative too if it isn't already (concerns about credit is what all those posts about the inverted yield curve were about).

The consequence as I see it and have been writing about for several years now is below normal domestic equity market returns (this has been the case for a while now), a creep up in interest rates (I would have thought rates would have gone up quite a while ago but they have not) and slower GDP growth during the expansionary parts of future cycles.

The investment implications, as I have been chronicling for a long time, are more foreign, more of what ascending countries need and more alternative assets (the focus is over a five or ten year period not the next 6-12 months).

I think the personal implications, this is not new either, are to live below your means, save like hell, plan on working longer and get/stay out of debt.

Maybe none of this is right but it does seem plausible. Just as plausible is that any version of the above will not be as bad as the gloomiest accounts would have us believe.