What’s Next? 2012 Credit Risk, Inflation Risk

What’s the best way to trade and invest, given the economic situation as we head into 2012?

Here’s the quick synopsis of the problem: On the one hand, there are destabilizing credit problems in Europe. The risk is restructuring, or outright default, by sovereign countries and commercial banks. See Greece. The problem may play out across Europe, and possibly elsewhere (like Japan). U.S. investors are not immune.

On the other hand, there’s the risk of inflation brought about by central banks trying to keep these same banks and countries afloat.

“The debt levels around the globe are unprecedented in peacetime. The odds of restructurings and/or defaults are higher than most believe. [In the video below] Chris Ciovacco of Ciovacco Capital Management compares healthy markets to the current state of affairs. Which investments tend to perform well during deflation/defaults/restructurings? Which investments tend to perform well during periods of inflation/money printing by central banks?”
European Debt Crisis Explained, Chris Ciovacco, Ciovacco Capital Management

Bill Gross of PIMCO has a more detailed view in the firm’s January 2012 Investment Outlook:

“This new duality — credit and zero-bound interest rate risk — is what characterizes our financial markets of 2012. It offers the fat-left-tailed possibility of unforeseen delevering — or the fat-right-tailed possibility of central bank inflationary expansion.”
January 2012 Investment Outlook, William H. Gross, PIMCO Managing Director

What’s that mean? In short, there are two possible scenarios that could occur, neither of them good. He describes the problem in gory detail, gives a brief history showing how we got here, and how we might get out of it.

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