Gary Shilling-"The Age of Deleveraging"-anyone read?

[rj.phila]

just finished this. good read, if a little dogmatic on a few issues. curious if anyone else has read this yet? (outside of the energy factor, he makes a pretty compelling case for a coming decade of deflation.)

[JBinKC]

I didn't read it but my theme for successful investing this decade will be all about figuring out when the forces of inflation and deflation are at work.

Shilling is 100% correct we would be in a massive deflation in most sectors in the economy right now if you assume the federal reserve hadn't monetized the debt. I feel during this time the fed will go through periods of printing money and attempts to drain the excess liquidity making it much easier to spot conditions to "time" the market successfully.

[rj.phila]

agreed-i'd actually like to have at least SOME hedges on both sides of the coin(really comes down to how much cash i feel comfortable holding), but the more info i can have, the better i can weight things, of course. reading up on the fundamentals of inflation, and its corollary and causal issues, as much as i can.

[JBinKC]

RJ I am not hedged but I will share that I have been using weekly MZM and MULT figures on the St Louis fed website as probably the most important tools to get an idea on what way the pendulum is swinging on that front. I have found this data has been an effective leading indicator(s) to stock prices. It has really helped out on my market timing and asset allocation since the credit crisis. Over the years I have learned that money creation/liquidity draining is probably the most important tool to investment timing especially after I thoroughly analyzed to find that excess liquidity and subsequent draining was the root cause of the internet bubble and Y2K crash.

One thing has me convinced the tide of the inflation side of the coin is changing is how short and tepid the rally was after the Japanese earthquake given the size of the stimulus was equivalent to the entire QE2 program in a span of a few days and how the velocity of money has precipitously dropped since the first of the year without any signs of improving. I would lighten up positions on the inflation side on any rallies until you get an concrete idea if Bernanke will attempt a liquidity drain from the QE2 stimulus like he did after QE1 which BTW eventually resulted into the flash crash in May of 2010.

I now have much more allocation to cash, bonds and health care stocks and down to zero cost core positions in my gold stock holdings. I sold out of oil/base commodities and this is from someone who is a long term commodities bull because given the current course of government I believe the fed over the long term will be forced to monetize the debt.

[rj.phila]

thanks for that info, JB. just to be clear here, you are saying that long term, you think that the fed will continue with debt monetization, and that it is going to result in deflation?

[JBinKC]

At this point longer term I feel the fed will continue to monetize the debt with attempts to drain liquidity to cool off the commodity markets. However, while the fed is monetizing we will see INFLATION.

Right now it appears we are at an inflection point where it appears the fed will likely make an attempt to drain liquidity therefore I believe prices will fall. It is very important to look at this data provided by the St Louis Fed MULT and MZM on a weekly basis because there could be a stealth shift in policy or a change in the data.