Tuesday, August 31, 2010

The Great Reflation: A Book Review

The Great Reflation, by Anthony (Tony) Boeckh, is a brilliantly crafted book that gives the reader a fundamental top-down understanding of how markets interact with each other. As long-time readers of BCA (Bank Credit Analyst) research, much of Boeckh’s message is a review of what we’ve learned over the years. But for most readers, who haven’t invested in BCA, Boeckh’s views will be a revelation. While Boeckh currently publishes his own investment letter, from 1968 until 2002 he was chairman and editor-in-chief of BCA publications, publisher of The Bank Credit Analyst. Many would say he is largely responsible for BCA’s stellar reputation among institutional investors for providing exceptional independent research. I suspect that anyone who reads this book will instantly see the genius in how Boeckh sees the world.

The title, The Great Reflation, says it all. The book offers a thorough overview of the market forces that led to the Great Recession, and then goes on to describe the unprecedented risks posed by policy makers’ efforts to reflate the economy and avoid a new Great Depression. Part One of the book is a primer on how credit creation is a driving force in the market cycle and how fully understanding the cycle from a “top down” perspective can lead investors to a better understanding of market risks and opportunities. Part Two of the book discusses asset allocation and the major asset classes that investors should consider when building a diversified portfolio, including U.S. stocks, interest rates and the bond market, the U.S. dollar, gold, commodities, and real estate. Part Three of the book is a somewhat gloomy and overly political view of the future. As an example, Chapter 14 is entitled, “Declining America, Will it Recover?” Fortunately Boeckh’s gloomy assessment of U.S. politics and policy makers does not in any way take away from the clear and concise lessons he shares throughout the book on how to build portfolios and assess investment opportunities.

For the curious, Boeckh generally likes stocks and dislikes bonds, gold, commodities, and real estate, although he points out that all of the above could outperform for a short period of time in the Great Reflation. The one surprise for me as a long-time BCA reader is that Boeckh subscribes to what he calls Long Wave economic theory, or what many readers may recognize as Kondratieff waves. I don’t recall BCA ever emphasizing long waves, although Boeckh goes out of his way to put the theory into the proper context and cautions us not to be overly deterministic in its use. In fact, so much of this book echoes the thoughts and philosophy of Pinnacle that I spent most of my time nodding my head and agreeing with the author. Do yourself a favor and make the time to read this book.