Chilly Macro

I'm not expecting to grow flowers in the desert
But I can live and breathe and see the sun in wintertime
--Big Country

Richard Russell writes Dow Theory Letters, the longest running investment newsletter service in existence (he's been at it since the 1950s). I've subscribed to his service in the past and it has helped shape my thought process.

Snippets from RR's nightly missive occasionally appear in the public domain. This one provides a nice example of a 'macro' market issue. In fact, it may be the primary 'macro' issue facing the US (and the world, for that matter): government spending and debt.

Russell suggests that debt levels have risen past the point of no return, and that there is little political will to reverse course. He sees two possible endgames to this situation. One is for the US to default on its debt. Big debt default is akin to deflation. To many, including Russell, this seems unlikely. However, sovereign debt defaults, even among 'leading countries,' have marked world history. Investors, in my view, should not dismiss this scenario entirely because of the potential market consequences should it come to pass.

The other likely scenario suggested by Russell is for the US to debase the currency (i.e., print money) and to pay back debts in depreciated dollars. This, of course, is inflationary. Indeed, one could argue that this strategy is already underway via various Federal Reserve monetary policies. RR thinks that this scenario is far more likely because it is more palatable to politicians and to the public.

You may not agree with RR's thought process. But in the interest of 'seeing all sides of the trade,' prudent risk managers should be factoring such macro scenarios into their spectrums of possibility.

position in TLT