T
TheGreatBear
Guest
I don't think this belongs in the news section because this is the beginning of a long term trend.
http://iht.com/articles/2008/01/31/business/inflate.php
Significance:
The deflationary impact from cheap Chinese goods, as well as from other emerging market economies, will diminish. The inflationary tendencies of the fiat money system will not change and this will mean... higher inflation, than we have seen for the last errr umm 20 years.
Inflationary expectations change slowly, seeing how it took the Fed so many hikes to finally put an end to the inflationary spiral of the 70s and early 80s. So people in developed countries have been used to low inflation, which Greenspan acknowledges in his memoirs as "mainly due to economic forces, not central bank/guv policies". We are now starting to see a shift towards higher inflationary expectations, as evidenced by the clamor by the Europeans for a wage hike.
(http://iht.com/articles/2008/01/10/business/gcon.php)
Now, what Greenspan told Clinton in 92/93 is that, lower inflationary expectations cause lower long term rates.
Same process is going on now. Bernanke's desperate attempts are so far keeping rates low but that makes no economic sense at all. When people panic, bad debts rise and credit tightens, rates are supposed to go up. Granted there's flight to liquidity, but for god's sake 30 year mortgage rates are down to 2004 levels. So shifting inflationary expectations will cause long term rates to go... yes.. up.
Or Bernanke could try to keep rates low and we head into higher inflation.
What this means for the investor:
I do not take a doomsday view of all this. Like Greenspan would say, we humans prosper in adversity(paraphrased).
And I am rather wary about gold. The real money was made by people who bought at $250 when the USD started losing ground, and $450 after gold broke out of a long trading range and went parabolic. That does not mean we won't see higher prices but still... Jewelry demand is big for gold. If the world economy heads into a recession, you'll see jewelry demand from US decline, and perhaps evaporate from India and China. OF course you might argue that Chinese are putting more money into gold etc, but you would need a real panic for people to be buying gold for that reason. And I don't think we're near those levels yet.
Sell bonds. Prices for fixed income securities(except maybe subprime securities :smxF
like tbonds/tbills are sky high due to this flight to liquidity and safety. I read that China sold $30+billion of their T-Bond/bill holdings last November.(It holds around $400 billion of US guv securities.) Long term rates are already historically low at 4-5%. Not much downside left. Plenty of upside, once inflationary expectations start changing.
As to stocks... Well just keep in mind that the next bull market is coming. A bear market won't last forever. Though it may be safe to tone down expectations for the general market. Breaking new highs again and again doesn't seem like the kind of thing we'll be seeing in the next 5 years. The 1965-1982 period may be of reference. Remember what Buffett said... The DJIA has returned 5.3% compounded annually for the last century.(The numbers that you see ranging from 9-11% are post-WWII numbers. Funny if you think about it, because the US economy was a lot more managed by the gov after WWII, during the Cold War, and until the Reagan era. Does this imply more regulation is good for business? Interesting to ponder...)
I won't take a doomsday vision on stocks either. As at trader, whether the market goes up or down doesn't matter, just that there's a clear, definable trend to trade and good risk reward entry points etc. But some stuff are interesting to keep in mind.
Let's say a year from now, 10 year treasury note yield is 6.5%. China,India, and other countries are exporting more inflation. Would I attempt to pick a bottom in bonds? No, I would probably expect higher rates, even if the media screams this is a 5 year high or whatever. Economic fundamentals can perpetrate a trend till it gets into the speculative frenzy period.
Off the soapbox, hope you enjoyed it.
http://iht.com/articles/2008/01/31/business/inflate.php
Significance:
The deflationary impact from cheap Chinese goods, as well as from other emerging market economies, will diminish. The inflationary tendencies of the fiat money system will not change and this will mean... higher inflation, than we have seen for the last errr umm 20 years.
Inflationary expectations change slowly, seeing how it took the Fed so many hikes to finally put an end to the inflationary spiral of the 70s and early 80s. So people in developed countries have been used to low inflation, which Greenspan acknowledges in his memoirs as "mainly due to economic forces, not central bank/guv policies". We are now starting to see a shift towards higher inflationary expectations, as evidenced by the clamor by the Europeans for a wage hike.
(http://iht.com/articles/2008/01/10/business/gcon.php)
Now, what Greenspan told Clinton in 92/93 is that, lower inflationary expectations cause lower long term rates.
Same process is going on now. Bernanke's desperate attempts are so far keeping rates low but that makes no economic sense at all. When people panic, bad debts rise and credit tightens, rates are supposed to go up. Granted there's flight to liquidity, but for god's sake 30 year mortgage rates are down to 2004 levels. So shifting inflationary expectations will cause long term rates to go... yes.. up.
Or Bernanke could try to keep rates low and we head into higher inflation.
What this means for the investor:
I do not take a doomsday view of all this. Like Greenspan would say, we humans prosper in adversity(paraphrased).
And I am rather wary about gold. The real money was made by people who bought at $250 when the USD started losing ground, and $450 after gold broke out of a long trading range and went parabolic. That does not mean we won't see higher prices but still... Jewelry demand is big for gold. If the world economy heads into a recession, you'll see jewelry demand from US decline, and perhaps evaporate from India and China. OF course you might argue that Chinese are putting more money into gold etc, but you would need a real panic for people to be buying gold for that reason. And I don't think we're near those levels yet.
Sell bonds. Prices for fixed income securities(except maybe subprime securities :smxF
like tbonds/tbills are sky high due to this flight to liquidity and safety. I read that China sold $30+billion of their T-Bond/bill holdings last November.(It holds around $400 billion of US guv securities.) Long term rates are already historically low at 4-5%. Not much downside left. Plenty of upside, once inflationary expectations start changing.As to stocks... Well just keep in mind that the next bull market is coming. A bear market won't last forever. Though it may be safe to tone down expectations for the general market. Breaking new highs again and again doesn't seem like the kind of thing we'll be seeing in the next 5 years. The 1965-1982 period may be of reference. Remember what Buffett said... The DJIA has returned 5.3% compounded annually for the last century.(The numbers that you see ranging from 9-11% are post-WWII numbers. Funny if you think about it, because the US economy was a lot more managed by the gov after WWII, during the Cold War, and until the Reagan era. Does this imply more regulation is good for business? Interesting to ponder...)
I won't take a doomsday vision on stocks either. As at trader, whether the market goes up or down doesn't matter, just that there's a clear, definable trend to trade and good risk reward entry points etc. But some stuff are interesting to keep in mind.
Let's say a year from now, 10 year treasury note yield is 6.5%. China,India, and other countries are exporting more inflation. Would I attempt to pick a bottom in bonds? No, I would probably expect higher rates, even if the media screams this is a 5 year high or whatever. Economic fundamentals can perpetrate a trend till it gets into the speculative frenzy period.
Off the soapbox, hope you enjoyed it.
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