HOW INVESTORS CAN PROFIT FROM THE NEW WORLD MONEY OF TH E GR EAT R EFL AT ION J A N T H O N Y B O E C K H www.ebook3000.com www.ebook3000.com Additional Praise for The Great Reflation “Tony Boeckh is a first-rate investment intellect whose work I have read for years, and his thoughts on the crisis are well-worth reading and contemplating.” —Barton M Biggs, managing partner, Traxis Partners; Author, Hedgehogging and Wealth, War, and Wisdom “The Great Reflation is part history, part theory, part textbook and part prophecy — lucid, persuasive and a good read The title says it all There was the 1930s Great Depression and the 1970-80s Great Inflation, but never before has a great recession been averted by an unprecedented great reflation Nobody knows and history can’t tell us what the upshot will be; there are no road maps Instead, Tony Boeckh tells us what signposts to look for It will have a place on my shelves and I expect many others.” —Brian Reading, founder of Lombard Street Research World Service, former adviser to UK Treasury and to the governor of the Bank of England “Tony pioneered the concept of the debt Supercycle in the 1970s and his The Great Reflation has proven that he is the ultimate macro thinker This book is a must read for all investors who strive for financial success in an extremely risky world.” — Chen Zhao, chief global strategist and managing editor, Bank Credit Analyst Research Group “Tony Boeckh, long time Editor and Publisher of the prestigious Bank Credit Analyst, has called on all of the experience of a brilliant analytical and forecasting career to write The Great Reflation Weaving together today’s unprecedented and complex economic, monetary, and investment conditions, Tony lays out the uncomfortable truths that investors must understand and deal with in order to protect capital and invest profitably in the years ahead The Great Reflation is imperative reading for all serious investors and businesspeople.” —Eldon Mayer, former CEO and CIO of Lynch & Mayer, Inc.; New York-based institutional asset manager “Few people know as much as Tony Boeckh does about the relationships between the economies and the financial markets In his book, he gives us a much-needed road map on how to invest given the tremendous convulsions we are going through It is a must read for every investor.” — Charles Gave, chairman, GaveKal Research www.ebook3000.com www.ebook3000.com THE GREAT REFLATION How Investors Can Profit from the New World of Money J Anthony Boeckh John Wiley & Sons, Inc www.ebook3000.com Copyright © 2010 by J Anthony Boeckh All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the 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REUTERS EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESSED OR IMPLIED, AS TO THE ACCURACY OF THE DATA/ CHARTS, OR AS TO THE FITNESS OF THE INFORMATION FOR ANY PURPOSE For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Boeckh, J Anthony The great reflation : how investors can profit from the new world of money / J Anthony Boeckh p cm Includes bibliographical references and index ISBN 978-0-470-53877-7 (cloth) Investments—United States History Finance United States—History Business cycles—United States—History Financial crises—United States—History I Title HG4910.B5985 2010 332.60973 — dc22 2009054227 Printed in the United States of America 10 www.ebook3000.com To Ray, my loving wife, muse, and best friend www.ebook3000.com www.ebook3000.com Contents Preface Acknowledgments Introduction ix xi xv Part I: Financial Instability Chapter 1: Chapter 2: Chapter Chapter Chapter Chapter 3: 4: 5: 6: The Age of Inflation The Debt Supercycle, Illiquidity, and the Crash of 2008 –2009 The Long Wave in the Economy Government Deficits and the Great Reflation Money and the Great Reflation Financial Manias and Bubbles Part II: The Markets: Preparing for the New Investment Environment Chapter 7: Chapter 8: Chapter 9: Asset Allocation: Investing in a Turbulent World The Stock Market Interest Rates and the Bond Market vii www.ebook3000.com 27 43 59 75 97 113 115 135 167 viii Chapter Chapter Chapter Chapter CONTENTS 10: 11: 12: 13: The U.S Dollar Gold Commodities Real Estate 185 199 221 239 Part III: The Future: Is a Return to Lasting Stability Possible? 253 Chapter 14: Declining America: Will It Recover? Chapter 15: Politics and Policies in the Long Wave Trough 255 265 Summary and Conclusions Notes About the Author Index 283 293 303 305 www.ebook3000.com Notes 301 Paul Kennedy, The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000 (New York: Random House, 1987) Carlo Cipolla, The Economic Decline of Empires (London: Methuen & Co Ltd., 1970) Robert Nisbet, The Twilight of Authority (New York: Oxford University Press, 1975) John R Talbott, Contagion (Hoboken, NJ: John Wiley & Sons, 2009) Chapter 15: Politics and Policies in the Long Wave Trough Thomas L Friedman, “Rescue the Rescue,” New York Times, September 30, 2008 John D Sterman, speech delivered at a Bank Credit Analyst conference, October 1992 See also John Sterman, “An Integrated Theory of the Economic Long Wave,” Futures 17 (1985): 104 – 131 The National Industrial Recovery Act (NIRA) of 1933 authorized the president to regulate industry, permit cartels and monopolies, and protect collective bargaining rights for unions It was implemented by the National Recovery Administration (NRA) and the Public Works Administration (PWA) Harold L Cole and Lee E Ohanian, “New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis,” Federal Reserve Bank of Minneapolis, Research Department Staff Report, February 2003 Jude Wanniski, The Way the World Works (New York: Basic Books, 1978) Richard C Koo, The Holy Grail of Macro Economics: Lessons from Japan’s Great Recession (Hoboken, NJ: John Wiley & Sons, 2008) Michael P Dooley, David Folkerts-Landau, and Peter Garber, An Essay on the Revived Bretton Woods System (Cambridge, MA: National Bureau of Economic Research, 2003) Jacques Rueff, The Monetary Sin of the West (New York: Macmillan, 1972) About the Author Tony Boeckh’s economic and financial writings have been widely followed by individual and institutional investors in every major country in the world for over 40 years He has been referred to as the “expert the experts rely on” by Louis Rukeyser of Wall Street Week His analyses and forecasts have been most closely associated with the Bank Credit Analyst (BCA), which he developed into its modern form; he was the Chairman, CEO, and Editor-in-Chief of BCA Research Inc from 1968 to 2002 Under his leadership, BCA grew from a small firm to become one of the world’s leading independent investment research companies He has a PhD in finance and economics from the Wharton School, University of Pennsylvania He first gained experience in economic and financial research at Canada’s central bank in the early 1960s He taught economics and finance at McGill University in Montreal for a number of years He coauthored The Stock Market and Inflation, published by Dow JonesIrwin in 1982 He was involved in the investment management business as chairman of Greydanus, Boeckh and Associates, a fixed income investment firm, from 1985 to 1999 303 304 ABOUT THE AUTHOR Tony has been a longtime supporter of free market economic principles He is a founding trustee of the Vancouver-based Fraser Institute, an economic think tank dedicated to free market principles Currently, he and Ian Boeckh manage Boeckh Investments Inc., a family office and private investment firm specializing in small public companies The firm periodically organizes investment conferences for family offices Tony has lectured at economic, financial, and investment seminars and conferences around the world, and has been sought after by the media and others for his insights and analysis He is also very active in charitable work in the area of mental health and has established, with his family, the Graham Boeckh Foundation toward that end Tony has been a longtime student of investment cycles, financial manias, and crises The financial crisis of 2008 – 2009 prompted him to set out his thoughts in The Great Reflation: How Investors Can Profit from the New World of Money He also coauthors The Boeckh Investment Letter with Robert Boeckh, which is available on the Web at www.boeckhinvestmentletter.com The publication follows the principles outlined in The Great Reflation and is focused on helping investors make portfolio decisions Index Asset types, 128 Assignat inflation, 76 Australia, 26 Affordability and inventories of housing prices, 247 Africa, 100 American empire: in decline, 256, 258, 259, 260, 263 financial burden and decline of, 264 military difficulties, 258 population forecasts, 257–258 security costs, 258 and U.S decline recovery question, 256–260 Argentina, 90 Artificial prosperity, 31 Asia, 26, 36 Asset allocation: about, 115 –117 bonds for long run, 125 –127 as competitive method, 120–121 described, 117–119 inflation and, 130–132 other considerations about, 128–130 stocks for long run, 121–125 Asset allocation plan, 132 Asset bubbles, 43, 52, 54, 151, 284, 291 Asset classes, 118, 119 Asset inflation, 6, 7, 9, 16, 26, 279, 280 Asset price inflation, 63 Asset prices, 18, 250, 272 Background, 240–242 Bagehot, Walter, 35 Bailouts, 270–271, 280, 284 Balance of payment deficits, 23, 53, 192 Balance sheet recession: effects of, 60 government efforts during, 60 monetary policy effectiveness during, 69 monetary policy in, 60 United States vs Japan, 69–70 Balance sheets repair, 63 Bank business loads, 148 Bank Credit Analyst, 174, 228, 298n4 Banking system condition, 110 Bank lending to business, 175 Bank liquidity, 175 Bank of England, 35 Bank of France, 76 –77 Bank runs, 35 Bankruptcy, 61, 64, 261 Banks, 83, 243 See also central banks Bannister, Barry, 230 Bannister-Forward cycle, 232 Barnes, Martin, 228 305 306 Bear markets, 137–139 See also secular bear markets cyclical, 144 Behavior finance, 159 Bernanke, Ben, 30 Bilateral exchange rates, 189 Bolton, A Hamilton, 298n4 Bond market tools, 174 Bonds: default rate, 170 liquidity, 126 for long run, 125 –127 prices and yields, 168 risk classes, 179 Bonds maturity term, 169 Bond valuation index, 174 Bond values, 167 Bottoms, 164 Brazil, 26, 100, 288 Bretton Woods II, 45, 218, 285, 300 Bretton Woods system, 10, 11, 186, 196, 205, 278, 285 Brown, Gordon, 269 Bubbles See also manias: burst, 60 causes of, 98 credit bubble, 43, 54, 284 precrash, 249 real estate, 240 Budget deficits, 8, 21, 64 Buffett, Warren, 31, 135, 297n8 Bullion Committee Report (1810), 77, 296n3 Bull markets, 120, 137–139, 142, 163 See also secular bull markets Burst bubbles, 60 Bush, George W., 269 Bush administration, 91 Business Cycles (Schumpeter), 45 Business cycles and capitalism, 45 Business cycle sweet spot, 140, 141 Business Week magazine, 141 Buy-and-hold investment strategies, 116, 137, 139, 163, 228, 288 Buy and sell rules, 162 Buy-and-sell strategies, 163 California, 66 Canada, 26, 274, 296n7 Capacity utilization, 175 Capital flows, 100, 194 Capital goods industry, 262 Capitalism, 45 Capital outflows, 23 Capital requirements, 83, 85 INDEX Cash holdings, 161, 165 Central Asia, 100 Central bankers, Central banks, 8, 13, 16 See also foreign central banks assets and liabilities, 80 challenges, 77– 80 currency control efforts, 104 gold as constraint on, –10 and inflation, 75 –77 liabilities of, 16 and liquidity, 35 –38 mechanics and operation, 80 – 83 and monetary control, 83 – 86 role in manias, 104 worldwide, 279 Chartists, 161 China, 8, 20, 54 advantages of, 110 cheap exports effect, 93 commodity consumption, 227 commodity demand from, 232, 236 as competition to United States, 72 currency appreciation, 288 currency control efforts, 104 currency price levels, 23 dollar holdings, 36 dollar pegging, 196, 227 export surplus, 278 financial strength, 55 gold reserves, 37 gross fixed investment, 92 growth in, 110 infrastructure spending, 226 liquidity of, 33 long wave forces in, 54 –55 market levels, 288 real estate prices in, 26 resource companies, 226 stock markets in, 100 stock prices in, 26 surge of growth in, 52 unemployment response, 277–278 China Investment Corporation (CIC), 37 Chinese GDP, 55 Chronic deficits, 92 –93 Chrysler, 125 Cipolla, Cardo, 259, 260 Citigroup, 125 Clinton administration, 91 Cohau, Peter, 141 Commercial real estate, 240, 248 –250, 290 Commercial rents, 249 –250 Commodities, 221–238 Index 18 year cycle, 228 –232 about, 221–223 as alternative asset class, 225 as asset class, 226, 232, 237, 290 background of, 223 –225 bullish factors, 232 and buy-and-hold investment strategies, 228 correlations, 226 cycles of, 233 declines, 228 down payments, 224 futures markets, 224 as inflation hedge, 228 investment case of, 225 –227 liquid markets, 224 long term trend of, 227–228 moving averages, 234, 236 performance of, 231 relative returns, 230 short term investment, 232 –237 substitution competition, 237 supply factors, 234 users of, 130 Commodity exchange-traded funds (ETFs), 224 Commodity futures, 223 Commodity indexes, 226 Commodity investment products, 224 Commodity pricing, 228 Commodity-producing countries, 288 Competitive method, 120 –121 Concept stocks, 102 Confidence, 34, 37, 106, 276 Conservatism to parochialism politics and policies, 266 –269 Consumer price index (CPI), –5, 167 Consumer price index (CPI) inflation, 5, 7, 9, 16, 85 Contingent liabilities, 67, 70 Contractionary policies, 10 Corporate bond spreads, 179, 289 Corporate debt, 263, 287 Correlations, 130 Corruption, 259, 274 Countertrend movement, 52 Crash of 2008-2009, 27– 42 Creative destruction, 55, 261 Credit bubble, 43, 54, 284 Credit elasticity, 111 Credit expansion, 12 Credit growth, 117 Credit risk, 289 Crisis response, 17 Crisis rhythm, 107 Crosscurrents, 46 307 Crowd behavior, 152, 159 Crowding out, 88 Currencies, 287, 291 Current account balance, 191 Current account deficit, 53, 190, 194, 195 Customer margin debt, 159 Cyclical bear markets, 144 Cyclical patterns, 230 Debt and asset bubble, 256 Debt conversion, 64 Debt deflation, 30, 60, 121, 126 Debt overhang, 63 Debt reduction, 27–28 See also deleveraging Debt Super Cycle, 27– 42, 44 – 48 Debt-to-GDP ratio, 29, 65, 67, 72 –73 Debt-to-GDP ratio history, 87 Debt trap, 71, 72 Decline of dominant power, 263 Decline recovery question, 255 –264 about, 255 –256 and American empire, 256 –260 long wave revisited, 260 –263 Default-free bonds, 124 Defaults, 61 Deficit growth, 71 Deficits, 89 See also fiscal deficits budget, 8, 21, 64 chronic, 92 –93 external, 193 federal deficits, inflation and crowding out, 86 –94 fiscal, 59, 60, 193, 275 –280 government deficits and the Great Reflation, 59 –73 impact of chronic, 92 –93 inflation and crowding out, 86 –94 international, 23 reduction of, 276 U.S balance of payments, 23, 24, 192 U.S budget, 72 Deficits without tears, 24, 95 Deflation, 7, 24, 30, 285 Deflationary pressure, 42, 167 Deleveraging, 27, 42, 56, 275 Demographics, 285 Deposit insurance, 41 Depressions, 270 Deregulation, 100 Discretion vs rules, 84 – 85 Disequilibrium, 29, 56, 193, 196, 257, 286 –287 Disinflation, Displacement, 100, 101, 109 Distortions, 172 308 Diversification, 118, 119 Diversification strategy, 225 Dividend yield, 158, 165 Dollar-holding countries, 197 Dollar pegging, 11, 186, 196, 227 Dreman, David, 159 Drucker, Peter, 56 Duncan, Richard, 24 Earnings manipulation, 156 Eastern Europe, 36, 68 Economic and political model, 255, 263 Economic and price inflation pressures timing, 175 Economic slack, 175 Efficient markets theory, 297n8 Eltis, Walter, 295n7 Endowments, 128 Energy, 56, 289 Energy technology, 262 England, 26, 35 Equilibrium, 29 Equities, 13, 60, 136, 139 See also stock markets Europe, 15, 296n7 European Union, 68, 278 Excess debt, 63 Exchange-traded funds (ETFs), 120, 127, 136, 223 External balance sheet, 194 External deficits, 193 External monetary discipline, 187 Fall, 48 Fallacy of composition, 33 Fannie Mae, 67 Federal budget deficit, 65 Federal deficits, inflation and crowding out, 86 –94 Federal Deposits Insurance Corporation (FDIC), 67 Federal Home Administration (FHA), 244 Federal Reserve (Fed), 12, 30 challenges of, 78 credibility of, 87 crisis response, 17, 35 exit plan of, 82 expansion of, 16 failures and mistakes of, 87 failures of, 31 gold reserves, 208 as lender of last resort, 79 liquidity difficulties, 37 next cycle actions by, 26 role of, during decline, 271 toxic asset purchases, 286 INDEX Federal Reserve (Fed) bank, 155 Federal Reserve (Fed) notes, 16 Fiat (paper) money, 9, 10, 13, 18, 77, 85, 121, 131 Filter rules, 163 Financial burden and decline of American empire, 264 Financial constipation, 81 Financial crises aftermath, 106 Financial instruments, 85 Financial manias and bubbles: about, 97–99 characteristics, 101–107 cycles, 107–111 history, 99 –100 preconditions and displacements, 99 –100 Financial markets volatility, 116 Financial ratios, 38 Financial techniques, 100 First-time buyers, 245, 246 Fiscal deficits, 59, 60, 193, 275 about, 275 –276 international monetary reform, 277–280 politics and policies in long wave trough, 275 –280 social policies, 277 Fisher, Irving, 30, 60 Fixed income assets, 170 Fixed income securities, 168, 169 See also bonds Floating currencies, 285 Forced debt liquidation, 64 Forced resource transfer, 88 Forced sales/sellers, 248, 250, 251, 290 Foreign central banks, 195 dollar holdings, 191, 285 gold purchases, 204 personal ownership, 207–208 U.S liabilities of, 209 Foreign currencies, 38 Foreign debts, 33 Foreign resource companies, 37 Forrester, Jay, 46 Fortune sellers, 47, 49 Forward, Paul, 230 France, 76 Freddie Mac, 67 Friedman, Milton, 159 Fundamental indicators, 235 Future asset values and government debt, 61 Game changers, 262 General Electric, 125 General Motors, 125 Geopolitical commitments, 285 Germany, 20, 278 Index Glass-Steagall Act, 41 Globalization, 8, 46, 53, 100 Goethe, 13 –14 Gold, 9, 10, 100, 128, 199 –220 benefits of, 129 –131 buy-and-hold investment strategies, 213 demand for, 102 enduring values of, 205 –206 exchange-traded funds (ETFs), 200, 203 gold margins, 199 –205 hybrid asset, 131 indicators, 216 as insurance, 204, 206, 220, 290 as investment, 211–214 investment tools for, 215 –218 investment vs industrial demand, 200 long-run price, 208 –211 as monetary standard, 206 –208 moving averages, 216 performance, 212 –214 price levels, 199 –200 speculation on, 219 and U.S dollar, 208 valuation, 215 –216 Gold mania, 289 –290 Gold margins, 199 –205 Gold/oil ratio, 210 –211 Gold pool, 11 Gold prices, 98 theoretical, 210 vs U.S dollar, 11 Gold standard, 10, 186, 187, 205, 207, 296n3 effects of, 22 and price stability, 21 return to, 22, 279 wartime suspension, 207–208 Gold standard rules, 37, 84 Gold supply, 205 Goods and services tax (GST), 296n7 Government Accounting Office (GAO), 67 Government banks, 41 Government bonds, 80, 124 Government debt, 71 explosion of, 75 and future asset values, 61 and gross domestic product (GDP), 193 interest rates on, 272 Government debt-to GDP ratio, 275 –276 Government deficits and the Great Reflation, 59 –73 Government intervention, 172, 244 Government resource extraction, 89 Government scope of activities, 21–22 Great Depression, 64 – 65, 126 –127, 244, 284 Greater fool theory, 220, 243 Great Inflation, 75 –95 Great Moderation, 284 Great Reflation, 9, 12, 40 described, 185 effects of, 284 eventual possible consequence, 186 impacts of, 286, 291 investor concern about, 75 origins of, – purpose of, 255 Great Reflation experiment, 189 Greece, 68 Greenspan, Alan, 30 –31 Gross domestic product (GDP), 28, 193 Growth companies, 124 Hardness, 129 Health insurance, 277 Health insurance legislative costs, 67 Herd behavior, 115, 118, 221, 223, 291 High-powered money, 16 High-yield corporate spreads, 180 Hoarding, 32 Home equity extraction, 243 Home Price Index, 242 Household net worth, 116 Household savings rate, 56 Housing: affordability, 246 affordability and inventories, 247 investment recommendations in, 248 Housing bubble, 101 Housing drivers, 242 –243 Housing prices, 244 –248 Hyperinflation, 11, 15 –16 Ibbotson and Associates, 123 Iceland, 36, 68 Illiquidity, 27– 42, 124, 248 –249 Income and wealth disparity, 53 Income inequality, 268 Index funds, 120 India: commodity consumption, 227 as competition to United States, 72 gold reserves, 37 market levels, 288 stock markets in, 100 stock prices in, 26 surge of growth in, 52 Indicators, 146 investor opinion, 159 leads and lags, 150 309 310 Indicators (Continued ) of liquidity, 151 summary of effects of, 151 Industrial economic cycles, 43 Inflation, 168 about, 4–6 asset allocation and, 130 –132 causes of, 5, 13 –14, 76 and central banks, 75 –77 globalization of, 22 history of, impacts of, 285 and interest rates, 175 origins of modern, –13 and politics, 13 process of, 15 –18 and taxation increases, 64 Inflation-adjusted total return, 152 –153 Inflation protection, 182 Innovative technology change, 45 – 47 Instability, 121, 274 Interest equalization tax, 11 Interest rates, 8, 19, 284, 285 differential between riskier bonds and Treasury, 148 and dollar crisis, 280 effects of increases in, 89 factors determining, 172 –173 fall in, 99 focus on, 291 on government debt, 272 and inflation, 175 low levels of, 99 premature tightening of, 272 vs price inflation, 84 prices of, 287 on private debt, 272 real, 182 rise in, 89 secular trends, 175 short-term and long-term, 146 trend of, 182 Interest rates and bond market: about, 167–171 bond investing for the future, 177–181 inflation adjusted bonds, 181–182 interest rates background, 171–173 interest rates tools for forecasting, 173 –177 International deficits, 23 International Monetary Fund (IMF), 37, 277, 294n5 International monetary reform, 277–280 International monetary system, 23, 285 Investing psychology, 139 –140 INDEX Investment advisers, 165 Investment recommendations, 131, 225 –227 in commodities, 238 gold mania, 289 –290 in housing ownership, 248 summary, 287–289 Investment tools, 145, 215 –218 Investment vs industrial demand, 200 Investor confidence, 169 Investor goals, 118 Investor opinion indicators, 159 Investors, 26 IOU’s, 90 Ireland, 36, 68 Isolationalism, 276 Italy, 68 Japan, 7, 9, 20, 64, 278 balance sheet recession in, 69 government debt-to GDP ratio, 275 P/E ratios in, 123 policy failures during longwave downturn, 270 savings rate, 69 Japanese-style deflation, 60, 167 Junk bonds, 169 Kennedy, Paul, 258, 260 Kennedy administration, 11 Keynes, John Maynard, 33, 90, 142 Keynesian countercyclical policies, 41 Kindleberger, Charles, 98, 99, 103, 105, 112, 203 Kondratieff, Nikolai, 45 – 46, 259, 262 Koo, Richard, 60, 64, 69 Korea, 227 Kuwait, 111 Laffer, Arthur, 295n7 Lagging indicators, 146 Large-cap companies, 125 Latin America, 87 Leading indicators of liquidity, 146 Lehman Brothers, 41, 63, 105 Lender of first resort, 35 Lender of last resort, 35, 42, 79, 104 –105 Lending standards, 31, 40 Lenin, V I., 15 Letting the fire burn out (strategy), 63, 270 –271 Liquidation and restructuring, 271 Liquidity, 31–34 amount required, 38 – 40 bonds, 126 and central banks, 35 –38 defined, 33 effects of, 60 Index expansion of, 109 focus on, 291 indicators of, 151 leading indicators of, 146 measures of, 148 rate of change of new, 298n4 Liquidity cycle, 39 Liquidity indicators, 165 Living standards, 53, 116 Loan-to-value ratios, 250 Local government debt, 66 Loeb, Gerald, 166 Lombard Street (Bagehot), 35 Long-run price of gold, 208 –211 Long-run realized rate of return after inflation, 152 Long term trend of commodities, 227–228 Long wave, 43 –57 bottoming process, 262 cycles length, 261 cycles of, 48 – 49 and Debt Super Cycle, 44 – 48 downturn, 52 downward phase, 117 economic decline, 259 end of decline in, 50 –55 upswing, 50, 262 U.S decline recovery question, 260 –263 Madoff schemes, 102 Managed bankruptcies, 64 Manager election, 128 –129 Manias: causes of, 98 commodity frenzy, 222 duration of, 105 financial preconditions for, 99 market tops, 163 real estate, 239 –240 tulip, 99, 102 Manias, financial: characteristics, 101–107 cycles of, 107–111 peaks and duration of, 108 preconditions and displacements, 99 –100 preconditions for, 109 Manias, Panics, and Crashes (Kindleberger), 98 Manufacturing sector, 259 Margin, 224 Market blow-offs, 164 Market reversal rules, 164 Market sentiment indicators, 216, 218 Media coverage, 161 Metallic reserves, 10 311 Mid-cap companies, 124, 125 Middle East, 36 Military expenditures, 276 Milton Friedman rule, 84 Mini-dollar, 298 –299n1 Minsky, Hyman, 41, 100 MIT System Dynamics Group, 49, 178, 266 Monetarist approach, 84 Monetarists, 12, 150 Monetary base, 16 Monetary control, 83 – 86, 277 Monetary policy, 18, 60, 271–273 Monetary standard, 206 –208 Monetization, 90 Money and Great Inflation: about, 75 –76 central bank and inflation, 75 –77 central banks, challenges of, 77– 80 central banks, mechanics and operation, 80 – 83 central banks and monetary control, 83 – 86 federal deficits, inflation and crowding out, 86 –94 Money credit and liquidity tools, 146 –151 Moneymultipler, 81– 82 Money supply, 84, 150 Mongolia, 100, 234 Moral hazard, 244, 270 Moving averages, 165, 234 Mundell, Robert, 295n7 Mutual funds, 127, 136 National Industrial Recovery Act (NIRA), 270, 301n3 National Recovery Administration (NRA), 301n3 National sales tax, 296n7 Net capital flows into United States, 190 Net worth, 60 Nikkei index, 123 Nisbet, Robert, 259, 260 Nixon, Richard, 189, 208 Nominal interest rates, 262 Nonbank financial institutions, 85 Obama, Barack, 178, 269, 277 Office of Superintendent of Financial Institutions (OSFI), 274 One-decision stocks, 102 Operation Twist, 11 Optimistic psychology, 109 Organization of Petroleum Exporting Countries (OPEC), 278 Overvaluation, 151, 152, 156, 214 312 Palin, Sarah, 269 Paper money See fiat (paper) money Parochial (bottoming) stage, 270 Patterns, 50 People’s Bank of China, 204 Pessimism, 265 –266 Pick, Franz, 298 –299n1 Plateau period, 48 Policies in long wave trough, 276 Policy future, constructive vs destructive, 270 –275 Political and social values, 266 Political power concentration, 259 Political pressure, 88 Politics, 13, 265 –291 Politics and policies in long wave trough: about, 265 –266 conservatism to parochialism, 266 –269 fiscal deficit, 275 –280 policy future, contsructive vs destructive, 270 –275 Ponzi schemes, 102 Portfolio allocation, 130 See also asset allocation Portfolios, design characteristics, 118 Precrash bubbles, 249 Price inflation, 8, 84, 99, 121, 170 Prices: of currencies, 287 function of, 286 –287 of interest rates, 287 stability, 19, 21 vertical rises, 103 Price to book ratio, 158 Price-to-earnings (P/E) ratio, 156, 158, 165 Price-to-sales ratio, 158 Primary balance, 72 Private credit demand, 87 Private debt, 27–28 growth of, 61– 62 levels of, 63 overhang of, 61– 65 into public debt, 61, 64 Private debt super cycle, 237 Private savings rate, 170 Private sector, 89 Private-sector debt super cycle, 239, 284 Professional opinions, 159 Protectionism, 280 Psychology, 165 Psychology tools, 158 –161 Public debt, 59, 259 Public-sector debt burden, 259, 284 Public-sector debt super cycle, 116, 284 INDEX Public Works Administration (PWA), 301n3 Purchasing power stability, 77 Rational man theory, 158 –159 Reagan, Ronald, 267, 269 Reagan administration, 8, 52, 90 Real estate, 128, 130, 239 –251 background of, 240 –242 bubbles, 240, 249 commercial real estate, 248 –250 hangover, 250 housing prices, 244 –248 illiquidity, 241, 248 –249 inflation hedge, 240, 241 investment recommendations, 290 manias, 239 prices, 240 prices of, 26 residential real estate, 242 –243 speculation in, 243 Real wages, 52 Rebalancing, 120, 136 Recessions, 60, 62 Recoveries, 25 Rees-Mogg, William, 206 Reflexivity thesis, 49 Regression to the mean, 154 –155 Regulation, new, 40 – 42 Regulation policy future, 273 –275 Regulatory conflict, 78 –79 Regulatory failures, 41 Regulatory standards, 40 Reinhart, Kenneth, 65, 107 Rejuvenation, 54 Rental income, 240 Replacement book value, 155 Reregulation, 111 Reserve Bank of India, 204 Reserve currencies, 23, 24, 187, 192, 209 Reserve requirement ratio, 85 Residential real estate, 242 –243 Resolution Trust Corporation, 271 Resource companies, 226 Restucturing policy future, 270 –271 Ricardian equivalence, 89 Rising prices, Risk, 39 – 40, 107, 170 Risk and return, 117 Risk cycles, 40 Risk/reward trade-off, 169, 170 Rogers, Jim, 221–222, 233 Rogoff, Carmen, 65, 107 Rolling returns, 153 Roosevelt, Franklin Delano, 186, 207, 270 Index Roosevelt administration, 244 Rostow, Walter, 46 Rueff, Jacques, 24, 95, 279 Rules vs discretion, 84 – 85 Russia, 26, 36, 100, 278, 288 Savings, 89, 92 Savings and capital investment, 53 Savings habits, 19 Savings rate, 69, 91 Schumpeter, Joseph, 45 – 46, 47, 49, 53, 54 –55 Secular bear markets, 126, 139, 143, 144, 145, 150, 154, 287 Secular bull markets, 121, 144, 289 Seigniorage, 192 Selling climax, 164 Separation of powers, 78 Shocks, 34 Short term investment, 232 –237 Siegel, Jeremy, 123, 124 Silver, 9, 10 Small-cap growth companies, 124 Small-cap value companies, 125 Smith, Adam, 264 Social and political values, 269 Social policies, 277 Soft money lobby, 206 Soros, George, 49 South Africa, 22 South America, 36 Sovereign debt, 284 Spain, 22 Special drawing rights, 37, 294n5 Specie, 76 See also fiat (paper) money; gold standard Speculation, 101, 119, 238 barriers to, 111 on gold, 219 in real estate, 243 Speculators, 99, 107, 214, 220 Spring, 48 Stability, 77 Stable money, 19 –20 Stagflation, 46 Stagnation, 72, 275 Stanford Schemes, 102 State government debt, 66 Statistical (technical) analysis tools, 161–164 Statisticians, 161 Sterman, John, 46, 178 Stewart, Potter, 33 Stimulus, 32, 60, 245, 284 Stock correlation, 118 313 Stock market risk, 123 Stock markets, 100, 135 –166 about, 135 –137 recoveries, 116 stock market cycles, 135 –145 stock market tactical reallocation, 145 –164 tool use, 164 –165 Stock market tactical reallocation, 145 –164 about, 145 money credit and liquidity tools, 146 –151 psychology tools, 158 –161 statistical (technical) analysis tools, 161–164 valuation tools, 151–158 Stock prices, 26, 162 Stocks for long run, 121–125 Stock size categories, 123 Strong dollar policy, 189 Structural unemployment, 54, 261, 267–268, 269, 277, 280 Subprime mortgages, 31, 102, 246, 248 Summer, 48 Summers, Larry, 278 Super cycle of private debt, 242 Supply and demand, 227 Supply-side economics, 295n7 Taxation, 64, 89 Tax increases, 276 Tech bubble, 41, 98 Technicians, 161 Technological change and innovation, 48 Technology and innovation, 262 Thatcher, Margaret, 267, 269 The Battle of Investment Survival (Loeb), 166 Tight money policy, 12 Timing, 161, 162, 175 Timing factor, 180 Tobin, James, 155 Tobin’s Q, 155, 156, 165 Tool integration, 164 –165 Tools and tool use, 164 –165 Totalitarian governments, 268, 269, 270 Trade imbalance, Trade unions, 21 Trade-weighted U.S dollar index (TWI), 189 Traditional authority decline, 259 Treasury inflation-protected securities (TIPS), 127, 131, 178, 181, 183 Trend-following indicators, 163, 216 Trend lines, 245, 248 Trend reversal indicators, 235 Triffin, Robert, 279 Tulip mania, 99, 102 314 Undervaluation, 152 Unemployment, 88, 175 United Kingdom, 21, 71, 185, 207, 269, 296n3 Bretton Woods system, 278 conservative values, 267 decline of, 278 United States, 7, 21, 269 See also American empire asset bubbles, 257 balance of payments deficits, 23, 24, 192 balance sheet recession in, 69 –70 bottoming process, 262 Bretton Woods system, 278 budget deficits, 72 capital goods industry in, 262 cheap imports effect, 94 commodity consumption, 227 competition to, 72 conservative values, 267 current account balance, 191 current account deficit, 53, 190 debt deflation, 257 debt-to-GDP ratio, 68 debt-to-GDP ratio history, 87 decline of, 278 deflation fears, 30 deleveraging fallout, 256 disequilibrium, 257 economic and financial distress in, 256 financial problems, 285 –286 geographic committments, 258 gold holdings, 186 Great Depression actions, 64 – 65 gross fixed investment, 92 inflationary policies, 257 liquidity of, 33 long term rates, 30 long wave downturn in, 43 net capital flows into, 190 past long waves, 268 –269 P/E ratios in, 123 post WWI financial condition, 70 –71 price inflation, private debt super cycle, 256, 257 private savings rate in, 170 reserve currencies, 278 reserve currency advantages, 189 savings rate, 69 serious problems of, 284 –285 Unit labor costs, 175 University endowments, 128 Upswing, 262 U.S Bond Model Valuation Index, 174 INDEX U.S dollar, 10, 178 about, 185 –186 background on, 186 –187 bilateral relationships, 189 collapse of, 196, 197 convertibility, 186 crisis, 196 demand of, 193 –197 determinants of, 187–193 devaluation of, 38 dollar crisis, 280 dollar devaluation, 193 external pressures, 196 fear of collapse of, 100 future of, 193 –197 and gold, 208 vs gold prices, 11 international role of, 79 orderly erosion of, 197 pegged, 186 pegs to, 11 precarious position of, 209 selling pressure impacts, 36 weakness of, 289 U.S Treasury, 79 U.S Treasury bills, 80, 123, 130, 131, 169 U.S Treasury bonds, 123, 131, 167 and debt deflation, 126 yields of, 182 U.S Treasury securities, 262 Valuation measures, 152, 155 Valuation(s), 145, 152, 156, 158 Valuation tools, 151–158 Value-added tax (VAT), 296n7 Value companies, 124 Value of a company, 152 Volatility, 213 Volcker, Paul, 12 Wage and price controls, 90 Wages, 21 Wall Street marketing, 171 Wartime inflation, 10, 21 Wealth preservation, 115, 121 Wealth reduction, 94 Wilson, Harold, 185 Winter, 48 Yield curve, 110, 146 –147, 148, 150, 165 Yield curve distribution, 147–148 Yield spreads, 180 Zimbabwe, 15, 87 PRAISE FOR THE GREAT REFLATION “Tony Boeckh analyzes clearly the frightening range of factors contributing to the recent financial crisis If that doesn’t make you think carefully, his investment strategies for a world still facing high levels of risk will certainly have you riveted.” —Hon Michael Wilson, former Ambassador from Canada to the United States; former Canadian Finance Minister “The Great Reflation is essential reading for serious, thinking investors everywhere Tony Boeckh has been studying and writing accurately about economic and investment cycles for as long as anyone As we enter the final stages of the grand cycle, with governments everywhere stretching the limits of debt and stimulus, who better than Tony to show us how this will all end, and even more important, how to position our investments and our lives to make sure we not only survive, but prosper.” —John Mauldin, Editor, Thoughts from the Frontline; three-time New York Times bestselling author; President, Millennium Wave Investments “This book is a must-read Tony, from all his years guiding the excellent analytic work of the Bank Credit Analyst presents a realistic outline of the post-crisis world, the many challenges, and the exciting and unpredictable times ahead.” —Jim O’Neil, Head of Global Economic Research, Goldman Sachs “The Great Reflation is by far the best economic and investment book that I have read in the last ten years Tony is a seasoned historian, economist, and strategist with a unique ability to explain complex issues in simple, readable terms These are illustrated with numerous charts on economic and financial trends that put current conditions in a historical context.” —Marc Faber, Editor, The Gloom, Boom & Doom Report “This book is written by one of the long-standing and highly recognized veterans in the field of investments In highly readable form, it covers important forces influencing investments and a very detailed evaluation of the key sectors of investment opportunities.” —Henry Kaufman, Henry Kaufman & Company Inc ... chairman, GaveKal Research www.ebook3000.com www.ebook3000.com THE GREAT REFLATION How Investors Can Profit from the New World of Money J Anthony Boeckh John Wiley & Sons, Inc www.ebook3000.com... seen before The purpose of this book is to help investors understand the new investment world we live in, what is likely to happen in the future, and how to profit from this new world of money It... 3: 4: 5: 6: The Age of Inflation The Debt Supercycle, Illiquidity, and the Crash of 2008 –2009 The Long Wave in the Economy Government Deficits and the Great Reflation Money and the Great Reflation