Risk Increases - The Flood Continues

Monday, November 9, 2009, 3:39 PM
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Monday, November 9, 2009

I've long been cautioning that there are no historical parallels to the present that could guide us on whether inflation or deflation is going to dominate the next investment horizon.  I've recently spent some time arguing that deflationists may have overlooked the impact of allowing financial companies to ignore their losses and pretend that they did not exist.

Even further back, I warned that the signs we were seeing were most consistent with a liquidity flood, which I encourage you to re-read, as it can explain much about where we are headed.  I will build on this theme in this report.

Briefly, the signs of a liquidity flood are a rise in those asset classes most subject to the effects of freshly printed money (stocks, bonds, and commodities), a continued expansion of an already bloated Fed balance sheet, and a return of a risk appetite to the investing world. These things all predictably accompany a flood of freshly printed money pouring out of the Federal Reserve.


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