French CaldwellGartner is known more for its strategic long term predictions, and short term predictions are left to the Wall Street analysts. But guess what, they failed to predict that the Fed would launch into quantitative easing — that is pumping money into the system.
Well — in November I posted that if the Dow dropped below 8000 for a substantial period, then it indicated deflation and we were in for a longer period of recovery — beyond mid-2009 — What I Learned Today About the Global Financial Crisis.
On 9 March, in a post What Quantitative Easing Means to IT Managers, I pointed out that the Bank of England had just started quantitative easing, which risks inflation down the road. In fact the amount of money injected by BoE risks runaway inflation that’s going to be hard to hold back.
The Federal Reserve Board and Chairman Bernanke have been more cautious — their $300 billion buy of mid-term (the Fed said long-term, but it looks like ten year treasuries, not thirty) is paltry compared to BoE’s gilts buy. The Fed also pumped $750 billion into buying mortgage backed securities from Fannie and Freddie — this is a much less inflationary move than holding treasuries and has more impact domestically, since so much of the money for treasuries will go to foreign holders of the notes.
Bottomline still for IT managers is the same I gave on 9 March — expect inflation to kick in sometime — my guess, and this is a SWAG, before the end of 2010, and maybe much sooner. Lock in on some of the fire sales from IT vendors now, and make sure there’s a cap on inflation adjustments in those long term contracts.
As for advice for the Wall Street types — get your heads out of those spreadsheets and look around. You should not have been shocked by Bernanke’s move on QE — the Fed’s been telegraphing it since November and the BoE move made the Fed move predictable. Maybe if y’all don’t have time to figure this stuff out yourselves, y’all should start reading some of the economic analysis in the FT instead of the headlines on the WSJ. Maybe you’ll be better prepared for QE2 — you can bet it’s coming.
This analyst and Gartner don’t give financial advice, but we do look at the macro-economic trends and how they affect our clients, and we’re in for a wild ride. Hold on to your hats!
——————————————————–
As co-chair of Gartner’s Risk Management and Compliance Summit, if you’re trying to implement risk management in your organization or you’re trying to prepare your compliance program for an onslaught of new regulations, I’d like to invite you to come to Gartner’s Risk Management and Compliance Summit, 29 April to 1 May, in Chicago.
Category: Uncategorized Tags:
1 response so far ↓
1 Mark McDonald March 20, 2009 at 8:12 am
French, I agree that there all the liquidity floating around the economy has to be absorbed somewhere and some how. Inflation is the first and most likely place. Finance in inflationary times calls for a few things like rapidly matching cash flow and cost to reduce exposure. It also often includes taking on more leverage — borrowing more valuable dollars today and paying them back with relatively cheaper dollars in the future. That relationship may be a basis for funding a new round of Enterprise and IT capital investments, perhaps not now with tight credit markets, but soon as those credit markets thaw out and there is a window of easing credit, low to zero interest rates and inflation on the horizon.
Such capital expenditures and debt structuring are more stable than the fire sale offers vendors are making now, as the vendor will recoup some of that lost revenue opportunity, whereas your debt structure is contractually obligated to stay the same.