ThePanelist.com - The Fed Interest Rate Cut is One Ingredient in the Recipe for Stagflation

The Fed Interest Rate Cut is One Ingredient in the Recipe for Stagflation

Written by David Neubert

Wednesday, 19 September 2007

How am I positioning for the Fed Interest Rate Cut?

I continue to buy overweight financials, especially the big ones like Citigroup (C), Bank of America (BAC), JP Morgan Chase (JPM), Morgan Stanley, Goldman Sachs (GS) and Lehman Brothers (LEH). I'm even short some puts on the Financials ETF (XLF). In the short term, financials have to go higher as hedge funds cover shorts and, more importantly, mutual fund managers buy to correct the underexposure to the financial sector. Most Fed easing cycles imply very good returns if you buy just as they begin. The exceptions? The last one. I'm hold financials for the short run but I'm going to lighten up on these as this rally progresses. Why? The recipe is in place for some stagflation.

Stagflation is a period of inflation and low or no growth in the economy. The last time this existed was back in the 1970's in Britain and the US.

Recipe For Stagflation:
1. Weak Dollar: A weak dollar leads to inflation but doesn't help the economy because the U.S. is a not much of an exporter relative to the huge domestic economy
2. Rising Commodity Prices
3. Rising Government Deficit Crowding Out the Private Sector
4. Reduction in Global Confidence in U.S. Financial Investments
5. Xenophobic Government Policy
6. Trade Deficit and U.S. Consumer Addicted to Cheap Imports
7. Technological or Political Changes Leading to Changes in Employment Dynamics.

So what to do during Stagflation? I'm keeping my money well diversified in U.S. multinationals, global commodity producers, inflation indexed bonds, non-U.S. properties, global financial institutions and insurance companies.

I'm mostly staying away from U.S. property REITs for now, though REITs will provide a huge opportunity for profit at the nadir of the stagflation cycle - that's when I'll load up on them. I'm short U.S. treasuries (especially the 20-30 year bonds). I'm staying away from very long maturity fixed income instruments. But most importantly, I'm keeping some powder dry (in the form of cash) to take advantage of any panics and volatility. In the longer run, I'm not predicting disaster for the American economy and its people, just some pain and poorly thought policy over reaction to the recent stupid fiscal and foreign policy of late.

Disclosure: I own GS, LEH, MS, BAC, JPM. I am short puts on XLF. I am short bond futures. See History of Neubert's Top Holdings for other important positions in my tradeable portfolio not mentioned above. I was a Managing Director at both Morgan Stanley and Lehman Brothers. I am still vested in their pension and/or executive compensation plans. I was an associate at Chemical Bank, a precursor to JP Morgan. I am not vested in any pension or compensation plan there.

Tags

See All Tags

BAC

ETFs

Exchange Traded Funds

Inflation

Insurance

Interest Rates

Investing Ideas/Stocks

JPM

LEH

Neubert Trades

Real Estate/REITS

Shorting

Comments (3)

Subscribe to this comment's feed

...
written by Eben Esterhuizen , September 20, 2007

An interview with Jim Rogers on the day of the Fed rate cut: Today's Fed rate cut will lead to a recession
- "Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse."
- "If Bernanke starts running those printing presses even faster than he's doing already, yes we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S."
- "The cause of the problems we have today, they are due to artificially low interest rates, expansionary monetary policies and extremely rapid credit growth that was fueled by a totally irresponsible Fed. It's suicidal to cut interest rates."
- "They should do something to stop inflation as soon as they can. If you don't do something now, if you don't nip it in the bud, it gets much worse down the road."
- Rogers said he's selling short shares of investment banks and expects them to fall further.

I think central bank intervention will likely play a key role in the coming months. Look for the Fed to receive assistance from European and Japanese central banks by way of purchasing Treasury Bonds to help prop up the USD as the rate-cut cycle kicks in. A rapidly devaluing USD will not benefit any of the major players. The high EUR value is hurting the export-led expansion in Europe, and Japanese exporters have based their financial year plans on a USD/JPY rate of 115.

For some historical perspective: http://www.forexfactory.com/ne...s&id=47829

...
written by Stag , September 23, 2007

David - what investing strategies do you recommend for stagflation?

...
written by eventually recession? , September 26, 2007

I am no expert in macroeconomics but the issue that preocupies me is that there seems to be no catalyst for the economy in the short term.

When i think about economy, i always imagine that it's in free fall and that periocally some disruptive movements arise which make it go up. In the 80s the catalyst was computers, in the 90s it was Internet, in the last years it was construction...

But now is there any catalyst out there to sustain economy? Most of the big promises, like biotech or renewable energies haven't lived up to the expectations.

Write comment