"Panic Now! And Beat the Rush" and Other Investmentisms...1

The end of QE2 removed a powerful support for asset prices in general (Equities, Houses, Commods) while bonds rallied. Wrapping up QE2 also coincided with a cyclical weak period driven by numerous factors (the weather, Japan, Europe's fiscal issues).

Perhaps the most important take away from QE2 ending is that the problem in the U.S., like the problem in peripheral Europe, is structural. The current cycle of debt growth and debt restructuring is driven by central bank management of interest rates and asset prices. Households and Financials are in the (still) early stages of de-leveraging, after 30 years of debt accumulation. But, the effect of household/financial de-leveraging is offset by central bank "re-leveraging": since 2008 household debt is down by $600bn, financial sector debt is down by $3tr, and the balance sheet of the Federal Reserve has increased by $2tr.

No wonder that the end of QE2 marks the end of cyclical economic and asset strength. The Fed will eventually have to de-lever, at which point the next phase of this economic cycle will emerge: the re-privatization of risk. This will occur in an environment of positive real interest rates and little support of asset prices. We expect that the eventual (necessary and certain) restructuring of household debt in the U.S., and European peripherals, Brazilians, and local Chinese municipalities and State owned enterprises will occur with significant pain.