Taking A Punch

By: Michael Ashton | Tue, Mar 22, 2011
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Many things have happened since I last wrote, on the day of CPI.

Okay, now I think we are caught up as we head into Wednesday's New Home Sales (Consensus: 290k from 284k) data. The bottom line is this: the immediate, nuclear crisis of Japan has passed. The Libya/MENA/energy price crisis is upon us. The Portuguese crisis is yet to occur.

The economy is no longer in recession, and is strengthening slowly. But what we don't know is, can the economy take a punch? A robust, healthy, free-market economy can adjust to the vicissitudes of life on this big blue marble. In 1987, the global equity market crash happened when the economy was otherwise strong, and after some wrenching losses life continued more or less normally. In 2000, the market crash hit an economy that was already overextended and weakening, and the terrorist attacks in 2001 kept the economy on the canvass for another year.

I don't think there can be much debate that punches are coming. They're always coming. The biggest problems we have tend to be when the markets price out the possibility of a punch. In this case, we can see some of them coming. The Japanese disaster will have a measurable impact on global GDP and there is a potential for a ripple effect up the supply chain of some products. Oil at $100/bbl is dang inconvenient, but survivable; oil at $125 is a punch we're probably not ready for. And the European situation seems to me to be destined to devolve into a barroom brawl (albeit one where everyone has interesting accents and is speaking very politely while they brandish the furniture).

How will the economy fare, and by extension the markets? I would feel better about the latter if stocks were not priced at a CAPE of 22.9, and if the bond market wasn't being asked to absorb (starting in July) not only the $1+ trillion of new Treasury debt but also to brace for the possibility of absorbing the Fed's balance sheet - at the same time that sovereigns globally are increasingly competing for that capital!



Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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