Earlier this week, I described a base case, that the credit crunch is the solution, not the problem. You can find the details here but the key premise is:
The current "credit crisis" is in fact the source (commercial banks) of the problem (inflation caused by M3 supply growth) correcting itself through market forces (reversal through the refusal to extend as much new credit) due to fundamental questions about the underlying collateral (e.g. houses).
Our focus has been on the monetary side of the equation. Recently we've seen more and more (politically charged) focus on a new economic stimulus package that would form the core of additional fiscal policy.
A policy suggestion:
The stronger dollar, and resurgent US equities we've forecast indeed need support from both monetary and fiscal policy. A tax cut (as opposed to further rebates, expanded government infrastructure programs or anything else) is the most efficient way of providing fiscal stimulus, but if the government were to think strategically the tax cuts would further strengthen the dollar by encouraging the de-leveraging of America. That would mean not only:
- Reducing the total tax burden on US individuals and businesses
But also:
- Providing incentives to reduce legacy household debt by making those payments tax-deductible
- Ending the insane corporate tax preferences for debt over equity
History's shown that whatever you tax you get less of. We've taxed equity more than debt for a long time, and now find ourselves with too much debt and too little equity. Reform of the tax policy to encourage the opposite will carry forward the small beginnings of momentum we're seeing and steer America toward greater prosperity.
Overall recommendations for this environment continue to outperform and remain:
Long volatility (VIX)Long US Dollar (USDX/UUP)Long US Equities (SPY)Short World Equities Ex-US (especially the Euro zone) (VGTSX/VT)Short Commodities (DBC)
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