Bonds Down, Stocks Up

The market can't have it both ways forever.

And in other news, Germany is pushing Greece toward default. While Greece wants to borrow at 4-4.5%, Germany says emergency bailout loans should be priced at 6-6.5%. The situation is impossible.

What I can't figure out is what Germany's thinking is on this. If they push Greece into default, maybe they figure the rest of the PIIGS will shape up. Ireland is trying their best. But it may not be enough, as their banks recently required recapitalization to the tune of 50% of GDP. At some point, an internal devaluation becomes a debt spiral. Real GDP could rise, even as nominal GDP falls due to deflation, raising the debt level. Maybe Germany knows that for moral hazard to be avoided, there must be a precedent of failure set. And in the long run, the Euro is probably stronger if Germany is the only country left using it. The strong euro is what Germany wants, and they are willing to sacrifice Greece to get it.

So, where am I in this mess?

For the past year, things have worked out like this. We have the Eurozone pursuing a policy of (relative) austerity. We have the U.S. in the middle, with the massive fiscal stimulus. And we have China, whose response was to increase credit by 25% of GDP.

No wonder raw materials and financial assets have rebounded. The question is where do we go from here? It doesn't look sustainable to me, but then what do I know?

The feeling I get is that we have a trend of worldwide fiat currency devaluation in an environment prone to deflationary/debt default shocks.

So, what's the thing to do here? Wait for a shock and buy the (temporary) fix. I like gold more than raw materials. Maybe that's because I have an idea that raw materials are not worth much if they're just hoarded.

Well, I'm only about 40% in with equities, and only half in with bonds. Might buy some more gold. It looks like Barrick got a steal with their latest deal with Kinross.