Gregor Weekly Model Portfolio Update: 11 November 2009

• Gregor Macdonald
• November 11th, 2009

The USDollar index finally got below the .7500 level this morning, and subscribers know this will set in motion some of my plans for the Gregor Weekly model portfolio. In short, this is a lovely reflation we’re having. But between the reflation stage and any currency-crash or hyperinflation stage, I anticipate a battle over the dollar. And, some further deflationary breakout-type pressure in the real economy.

Let’s recall that deflation leads to reflationary policy, which triggers inflationary pressures that then crush the real economy–leading to more deflation. The policy response? More reflationary policy. And so on. This is the doom-trap the United States has fallen into since the year 2000. The problem is that we keep fiddle-diddling with monetary and fiscal policy without putting into place industrial, transport, and energy policy. Adam Smith’s invisible hand which magically organizes the economy and which transitions everything smoothly between different eras does not always work. Unless, of course, one believes the Crash and Rebirth dynamic is also natural, and therefore a good thing. And maybe it is.

A significant stock market rally is a prerequisite, in a collapsed economy, to a bout of hyperinflation. While I’m still not ready to sign on to any hyperinflation call just yet, let me say two things about the phenomenon. One, an economy can easily experience a hyperinflation that is less than the magnitude of the kind unleashed in Wiemar and Zimbabwe. For example, Israel experienced just such a hyperinflation in 1982-1985 and I happened to be there to witness it. So don’t let polemical debaters snooker you with their false dilemma arguments: there is a ton of inflation risk that exists well before one reaches the most extreme historical examples of hyperinflation. The deflationistas will try to bury the discussion of inflation risk by casting everyone as silly, Weimar hyperinflationists. Don’t let them do it. Secondly, the US economy has so much spare capacity, so much unemployment, and so much classical debt deflation that the route to hyperinflation here is rather singular: it would have to come through the currency, and the currency alone. But that should give no comfort.

The model portfolio is currently positioned quite well, for these eventualities. We are now on watch, for example, to track the way in which market fear expresses itself …(this article continues for subscribers through the membership gateway, on the right side of this page)

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More from Gregor Weekly

• Gregor Weekly Model Portfolio Update: 23 September 2009
• Gregor Weekly Model Portfolio Update: 07 October 2009
• Gregor Weekly Model Portfolio Update: 10 December 2009
• Gregor Weekly Model Portfolio Update: 18 November 2009
• Gregor Weekly Model Portfolio Update: 04 November 2009

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