The New Normal or Reset

Several prominent businessmen and politicians have used these two expressions in the past week. We agree. The current and projected level of debt (everywhere) is going to change the pace and flexibility of the economy for sometime to come in this "new world." Debt always influences key investment decisions and will now compete for any growth capital expenditure.

Moody's Investors Services assigned a negative outlook to the creditworthiness of all local governments in the United States, the agency said Tuesday, the first time it had ever issued such a blanket report on municipalities. The report signaled how severely the economic downturn was affecting towns, counties and school districts across the nation. This is a big deal, as many people think municipal bonds are a safe haven. They are not.....almost all issuer's have very poor financial reporting and most all have severely underfunded pensions and other liabilities. If the new socialistic movement prevails, watch out as contracts continue to be challenged everywhere....New York City hinted as much last week.

Crude oil adjusted for inflation is selling below pricing last seen in 1980. This is dramatically under priced. Last years peak in global GDP was directly related to global petrol dollars peaking as well. As crude moves higher (probably much higher) look for those petrol dollars to reenter the world economy, a major positive.

Experts trying to call a bottom in the equity markets are probably right.....BUT, time and price will have to run it's course.....patience will be rewarded....cash is being squeezed and bonds will become a source of funds....the equity markets will respond to just a small amount of cash being put back to work...like Thursday's market action. If the banks have seen a bottom (with all the rule changes again) then this is a critical positive development.

Yields are rising for treasuries.....despite the Fed's recent open market buy actions....supply simply exceeds demand and the market is starting to price in inflation.....a positive for equities....negative for cash and bonds. A bigger positive for creditor nations or emerging markets.

Inflation in Germany during the 1920's, after WW1, required the country to have 133 printing companies with 1,783 machines supplied by more than 30 dedicated paper mills to keep the country adequately stocked with currency paper. In the last three weeks of October 1923 inflation rose 10,000 fold, doubling every couple of days. It became meaningless to talk about the price of anything. Some $30 billion of the country's debt when first issued was bought back for the equivalent of $45 million. It is critical people understand the "game" being played out right now......

Danny Boy seen here enjoying the first warm day of spring...sitting in Barkly's Garden.