On the train out to Long Island this morning, I picked up this week's copy of Barron's. A lot came to light following just the first two pieces I read. Below, is a note I wrote to the authors, Jacqueline Doherty and Andrew Barry, of the second piece in this weekend's edition. The first, which I contrasted it with, was written by Alan Abelson. Below, is the greater part of the note I wrote to them. It speaks for itself.
Jacqueline/Andrew,
I wanted to write in response to the first part of your piece in today's Barron's, where you describe QB Asset Management's view of the pending "Face-Ripping" inflation. I thought it was a great touch (though I'm not sure if it was intentional) the way your piece directly followed Allen Abelson's recap of his conversation with Dave Rosenberg from Gluskin Sheff. Never do I think I have read two sequential articles show such stark contrast in thought. Mr. Abelson's piece concluded with deflationary outlooks, while yours began introducing the possibility of rampant inflation. The funny thing is, both the Rosenberg and QB outlooks are very reasonable arguments. However, I think we would be remiss to overlook this as a funny coincidence. Rather, we should recognize that this contrast in outlook might be an example of the most important debate to determine market direction in 2012.
Mr. Abelson writes in summing Rosenberg's thoughts,"it {"extinguishing debt"} will be accomplished by a combination of default and write-downs, debt repayment and rising savings rates. All of which, he warns, will tend to be very deflationary". In your article, you point out that "the QB duo is convinced that central bankers will start printing money to pay off public debts and keep the banking system solvent". QB makes a good case for just how hyper, hyperinflation could get by pointing out that "the system's base money (bank reserves at the Federal Reserve and currency in circulation) is dwarfed by the claims on it. When I Contrast the deflationary and hyper-inflationary cases that both sides make, I am more struck by the similarity in their tone than the difference. Both Rosenberg and QB are believers that an inevitable "face the music" moment with our over-levered system is soon coming. What they disagree about is the likely policy response the world will take when we get to that fateful moment.
The need to deal with this situation is looming imminently upon us; both QB and Rosenberg agree. But, will it be through the pain of taking our lumps to pay off these vast sums? Or will it be the money printing party that enables us to pay back our debts with money that is worth far less? Either way the deleveraging is taking place. And here we meet the fork in the road. We are forced to make a decision about whether we think it will be inflation or deflation. Last week's gold beat down really began following the uneventful Fed announcement. With few changes from the previous release, QE3 thirsty investors were apparently looking for some hints at stimulus. No easy money, gold gets smashed. And nothing really happened. As ridiculous as it is to expect QE pre-US recession (if there is to be one), last week showed us just how fickle the market is. Without a "hint" in the language of the Fed, that we "might" get some easy money on the horizon, and gold prices (which are highly correlated to inflation expectations) plummet. I think your article, contrasted with Alan Abelson's demonstrates just how central the market perception of inflation vs. deflation is to the world of capital markets.
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