It is all About the Transmission

By: Roy Darphin | Tue, Nov 4, 2008
Print Email

It has become more difficult for investors to recognize where the investment opportunities can be found in the future. Complexity, uncertainty, timing and volatility are the cause.

After Wave 1 - the bursting of the asset bubble more than one year ago - Wave 2 brought us the demise of the banking system and the near meltdown of the financial system. We have entered Wave 3, the worsening outlook for the real economies around the globe. The light at the end of the tunnel is not visible, yet.

We may very well see a Wave 4 which shall be triggered by the feedback of the economic slump back into the banking and again the financial system. Banks, having benefited from the lifesavers thrown at them by governments and central banks in Wave 2, may again have to reach for more support from equity investors of all sorts. Then only, the current uncertainties may begin to stabilize. But at that point, the impact of today's rescue actions by governments and central banks may come to the fore. Today, nobody knows what negative implications all these actions may present to us in 12 or more months from today.

To us the key question is if or how effective the bailout and support efforts are going to be transmitted into the real economies.

If the stimulus and rescue programs for banks, agencies, automobile manufacturers and for a daily growing number of other recipients, transmit into the economies in due time then the old tools of money supply and favorable lending conditions work one more time. We then see also inflation come back, possibly with a vengeance we would not like to experience. We then look at a repeat of the effects of central bank and government stimulus dating back to the early 2000.

At the other extreme, if banks and all other institutions benefiting today from the lifesavers are either not willing or able to pass the benefits of such lifesavers on to the real economies, then this deleveraging process may end up in a case of severe deflation.

We at Cottonfield cannot see the transmission mechanisms work this time around:

Our assumption for now is that the transmission mechanisms for reflating are not in place.

So far few of the problems have been resolved but rather band-aids have prevented worse from happening. In the next few months, the deleveraging process shall continue. As part of this process we may not experiencing the wished for kick-start of economies but rather the onset of fundamental changes to economies, societies and political landscapes.

We expect a material global economic slowdown lasting well into 2009 if not longer due to:

The changes to culture and societies may include

What do we expect for the political landscape?

The current discussion deflation versus inflation looks not like a matter of either or but rather a matter of sequence. Overall and of course differing in extent from country to county, we expect (deep) recessions and a deflationary environment for the next 6+ months. Today's rescue efforts, a resurfacing energy and food demand-supply dilemma and possibly other factors shall then lead us to stagflationary economies before ending in an outright inflation environment.

Future investment decisions must focus on timing and the selection of opportunities as appropriate for the outlined stages of economic development.

Cottonfield as an asset manger for Swiss domestic and international clients evaluates opportunities today for tomorrow.



Author: Roy Darphin

Roy Darphin, Partner
Cottonfield Family and Investment Office
Zurich / Switzerland

Specific investment advice and -recommendations is reserved for our clients. Cottonfield Family Office AG is an asset management company and member of the AQUILA Investment AG. Among our clients we count Swiss and international high net worth individuals as well as institutional clients. We are located in Zurich, Switzerland. Previous Market Updates can be received upon request. Other information please revert to

Copyright © 2004-2009 Roy Darphin

All Images, XHTML Renderings, and Source Code Copyright ©