Friday, October 17, 2008

At the Asset Class

This, of course, is my specialty, if I can be accused of having one.


Warren Buffet, sage investor, is making headlines, today, with his oddly public discussion in the NYT of why he likes American equities.

On the other hand, Paul Krugman, recently anointed Nobel winner and weighty dismal scientist, says today, "I confidently predict that this slump will be nasty, brutish, and long." (most likely based on his long-held fear that the great American consumer is tapped-out and that economic weakness, especially bank weakness, will surely unravel that weave, now out of reach of ordinary policy wonkers).


If things get a lot worse, bonds are the asset class of choice. I don't care how much panic there is in the market, evnetually non-bond money will rush there, based on fundamentals, if it senses ... dare we say it, deflation. We are already at zero CPI...

If things are mild or we enter into a long period of "headwinds", not downward spiral for profits, then the "panic" in the bond markets will unwind. Again, bonds are the thing to own, both because relaxing credit-risk worries are beneficial (even if not fully determinative) and because many corporates have good balance sheets and the ability to pay, even when refinanced at somewhat higher rates.

So, only in the case that the corporate profit expectations firm in the next six months or so, after having weakened, might we expect the equities market to radically do better than the market for credit bonds.

No comments: