The market is reacting to the fact that the industrialized world has hit a debt ceiling. If you can't get debt to grow at the same rate as in the past, you have a structural slowdown in the economy. In a highly leveraged economy, fiscal policy is the only thing that works to spur growth. Monetary policy doesn't create final demand. Unlike 2009, fiscal policy now is governed by a contractive, not an expansive, impulse. This leads to lower growth, which creates further problems.
Providing liquidity isn't the solution, but if we don't do it the system will break down. Providing growth is a difficult task. I don't know how to do that. Long-term, we have begun the Japanification of the Western World. If we are unable to bite the bullet, our problems will grow bigger. Eventually, after many years, some central banks and governments might lose their nerve and go completely in the wrong direction, ending up like Zimbabwe.
I predicted in the Midyear Roundtable that the stock market would go to a low in the fall. The next few weeks will be extremely volatile. I expect the market to go below the latest lows in September. The central bank will come in to provide liquidity, but timidly at first because the Fed was bashed for QE2. After the fall low, equities will recover part of what they lost into the turn of the year and then fall again. Economies around the world most likely will be in recession next year.
Once the S&P 500 falls to 1000 or below in the first half of 2012, the Fed will come in and try to support the system. Eventually the ECB [European Central Bank] will try to do the same thing in Europe. The damage in Europe will be greater, as Europe's financial system is even weaker than the U.S. Providing liquidity isn't the solution, but if we don't do it the system will break down. Providing growth is a difficult task. I don't know how to do that. Long-term, we have begun the Japanification of the Western World. If we are unable to bite the bullet, our problems will grow bigger. Eventually, after many years, some central banks and governments might lose their nerve and go completely in the wrong direction, ending up like Zimbabwe.
Confidence in our currencies, policy makers and central banks is going down the drain. That will be reflected in a rising gold price. I have long said this isn't an environment for investing in stocks. Hold cash in the form of short- to medium-term Treasuries. Own a lot of gold, and don't have debt.-Barrons
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