Hennessee Group LLC, an adviser to hedge fund investors, predicts the future of the market and illustrates actions to take in the next five years for asset classes including hedge funds, bonds and precious metals.
According to Hennessee Group global market can repeat the inflation scenario of 1970 where monetary policies led to extremely high levels of inflation, forcing the Fed to quickly raise interest rates in order to reduce growth in money supply and reduce inflation which contributed to the 1981-82 recession with unemployment reaching 11%.
Moment when the economy experienced both rising price levels and slowing growth can repeat beginning in 2010 or 2011. While there has been a recent pullback in the price of oil and other commodities, as well as inflation in general, the Hennessee Group believes this is a short term correction in a longer term upward trend in inflation. A trend that could be exacerbated by the recent aggressive fiscal and monetary actions.
The Fed has aggressively lowered interest rates in recent months and has injected a tremendous amount of liquidity into the market place, two notable actions being the $700 billion Troubled Asset Relief Program (TARP) and the recent Commercial Paper Funding Facility. As a result of these actions and several others, the money supply has been growing at an increasing rate in recent months.In total, the U.S. has lent out nearly $1 trillion in bailout money and some estimate this number could reach $2 trillion before the credit crisis comes to an end.
Having estimated the recent US market situation, the Hennessee Group believes the money supply could reach $8.6 trillion between June and August of 2009. Assuming M2 does reach $8.6 trillion between June and August of next year, the money supply would be growing on a year-over-year basis of approximately 13% (M2 in June of 2008 was $7.6 trillion).
The thing that helped in difficult time of 1970 and can serve now is the fact that commodities, namely gold and other precious metals are good hedges against inflation going forward. The Hennessee Group plans to analyze the hyperinflation and subsequent stagflation days of the 1970’s in further detail, specifically the effects the inflationary environment had on different asset classes and publish their research results in the coming weeks.
A hyperinflationary period could be the next crisis on the horizon beginning in 2010 or 2011, says Charles Gradante, co-founder, Hennessee Group. If the money supply continues to grow at its current pace, we could see inflationary levels similar to those experienced in the 1970’s once the current credit crisis begins to subside.
L.D.