|Wednesday, May 13, 2009|
Will We Be Zimbabwe or Japan?
By RANDALL W. FORSYTH
Merle Hazard's musical question yields serious answers from Bridgewater Associates.
I'M PROBABLY THE LAST PERSON to catch up with Merle Hazard, whose satiric music videos about the credit crisis have gone viral on the Internet.
They're the funniest and cleverest stuff on what these days is the most dismal of sciences since Columbia business school types had a dead-on take-off a few years ago about Ben Bernanke's appointment as Federal Reserve chairman to The Police's "Every Breath You Take."
Anyway, somehow I missed Merle Hazard's earlier videos, "In the Hamptons" (sung to Elvis' "In the Ghetto") or "H-E-D-G-E" (to Tammy Wynette's "D-I-V-O-R-C-E".) But now, Merle's teamed up with his sidekick, Bretton Woods, to sing "Inflation or Deflation?" And the chorus wittily sums up the dilemma of the moment:
Inflation or deflation?
Tell me if you can.
Will we become Zimbabwe?
Or will we be Japan?
You can check out Merle at his Web site, www.merlehazard.com, or on You Tube. It's a howl, mainly because there's so much truth to it when he warbles about the Fed printing trillions of dollars.
While Merle dances around the musical question, however hilariously, Ray Dalio and his able associates at Bridgewater Associates, Greg Jensen and Jason Rotenberg, try to tackle it as they oversee some $80 billion in investments.
What we've got now is strong deflation that's being met by strong reflationary forces in the form of quantitative easing, aka printing money, by the Fed and other central banks, "which are essentially offsetting each other," they write in Bridgewater's daily missive to clients.
Eventually, they say they're confident the central banks' reflation will succeed. "We expect this to be bearish for the dollar, bullish for gold and bullish for commodities, especially next year."
But, Dalio et al continue, the "plumbing" that transmits credit to the economy remains broken and won't be fixed any time soon. That means the government "will remain a big and active participant in the credit and equity markets for the foreseeable future in order to make up the difference.
As a result, the economy and markets will not return to normal for the foreseeable future. Rather, the market pricing and economic linkages will largely be a function of government moves."
That said, the Bridgewater team does see the government actions succeeding, to an extent.
"There is a good chance of significant bounce in economic activity in the second half of this year due to technical reasons (an inventory adjustment, a temporary dip in the savings rate and the government's fiscal stimulation kicking in) which could give a misleading impression that the economy and markets have returned to normalcy. But this should fade by year-end," they add.
"Next year, there will be an enormous number of bankruptcies and debt restructurings among lower-grade credits, which could cause disappointment, weakness and another round of fiscal and monetary stimulation. We believe that this will be bearish for the dollar and it has a good chance of triggering stagflation-like market action."
Despite this less-than-ebullient assessment, Dalio and his associates praise Bernanke & Co.
"We admire the Fed and its policies (though they will not make up for their earlier mistakes of letting debt growth substantially outpace income growth) because, if the credit contraction was not offset by the Fed's money creation and buying of assets far beyond its traditional purview, we believe that terrible economic and market conditions would have produced much greater, and more harmful, social changes and threats to capitalism."
Hey, it's not as amusing as Merle Hazard. But, while ideologues on the Right and the Left are blasting the government for bailing out the credit system, it's sobering to consider the alternative of not acting.