Back to the dance floor

May 27, 2010

It was Chuck Prince, former CEO of Citigroup, who famously said on July 9, 2007: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still standing.”

PARAGUAY/

Little did he know the music did nearly stop for Citi with its shares tumbling to less than $2 in 2009 from $55 in 2007.

A year later, worldwide reflation from huge liquidity injection and stimulus packages helped the global economy from collapsing.  The music may have started. The question is, should investors return to the dance floor?

Anthony Boeckh, president of U.S.-based Boeckh Investments, argues in his new book “The Great Reflation”,  that they should, but only cautiously.

“Many people ask whether the Great Reflation will work… In one sense it already has; the crisis of 2008-2009 could have caused a depression but it didn’t,” Boeckh writes.

“But the Great Reflation certainly doesn’t solve any of the real problems… It did put some air back in the baloon but that was just Act I. Investors should be preparing for Act II. That will be all about correcting the structural problems, distortions and disequilibriums that came with 25 years of money and credit excesses and the series of asset bubbles.”

He says the stock market is one place investors should bet given the asset class has done well following major financial crises, but investors should reaccumulate capital slowly and patiently until higher levels of risk can be tolerated.

They should also consider well-managed small companies. Energy/oil should remain attractive; Treasury yields won’t rise much for a few years; gold’s uptrend should continue and 5-10 percent allocation is good in the long term.

“The music has started playing again and people are out on the dance floor,” he writes.

“But remember, there are a lot of things that can go very wrong on very short notice. Keep your eye on currencies and interest rates as benchmarks, keep lots of liquidity, and cut risk early when the indicators start flashing. This is musical chairs, and when the music stops, there won’t be a chair for everyone.”

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