In past issues of The Boeckh Investment Letter (subscription required), Tony and Rob Boeckh recommended using the current bout of stock-market weakness to rebalance toward equities. In their latest issue (Sept. 22, 2011) they advise holding off until better value emerges, as they now believe the decline is likely headed toward a more severe stage due to continued temporizing from policymakers.
In Europe, the banking system is in danger of a Lehman-style calamity unless sufficient liquidity and capital is injected. And with a default in Greece no longer being a question of “if” but “when,” the eurozone will be hard pressed to find an orderly way to manage it without triggering contagion and a run on the banking system.
In the U.S., the Federal Reserve needs to do more than change the composition of its assets (as it did recently under Operation Twist). It also needs to launch another expansion in its asset base, i.e.a third quantitative easing (Q3).
Governments need to retrench fiscally, but this should not be pursued in the short term while the world economy is in danger of falling into recession when heavy debt loads are to be paid. The first priority is to keep a downward debt-deflation spiral from taking hold; once that scenario is less of a risk, reining in government finances can be considered.
As for Asia, a sustainable solution to current world problems requires China and other chronic surplus countries to allow their currencies to rise. It’s time for them to switch more to growth based on domestic sources instead of exports, for the sake of achieving a more sustainable global growth path.
Unfortunately, it seems political paralysis will continue until markets revolt and spread fear and panic. The Boeckhs urge investors to get ready to rebalance toward equities on the major dips they envision occuring until inaction gives way to a vigorous and coordinated policy response.