1) The world will be struggling with deflation instead of inflation?
2) US employment and housing experience another leg down?
3) China disappoints?
4) An Eastern European country defaults?
5) The US is on track to at least muddle through better than Europe?
…well, it might mean:
1) Commodities prices are “way” overvalued
2) Emerging stock markets are “way” overvalued
3) Long bonds are “way” undervalued
4) The US dollar is “way” undervalued
And another rational poster on the state of the dollar is Mish, http://globaleconomicanalysis.blogspot.com/2009/06/speculative-bets-against-dollar-highest.html
And the dollar has rallied since his post.
There is a greater than 50% chance per the futures market the fed raises rates by 50 basis points. US 30 year T bonds are now nearly 5%, the 5 years are near 3%, and the 2 years at 1.4%.
So PBR is undervalued when using the 2 year, fairly valued with the 5 year, and way overvalued with the 30 year.
PBR's valuation right now is close to the yield of 30 year T bonds. The bulls argue that it should be valued higher because of earnings growth. I would point out there is no guarantee of that happening. Earnings can stagnate or go lower.
Nonetheless, the pro-inflation, anti-dollar trend, which IMO was never based on anything other than fear mongering and money shifting, looks like it is reversing. That means short term PBR will likely fall.
<<No ma, we ain’t gonna have no inflation! >> LOL
Funny how we conveniently forget that it often takes two to finance a households living expenses now.
Will it be three soon?
Another day of green across the board in my portfolio. Big picture, I see a rotation coming from materials and financials into tech, which, despite the numbers, feels like it's trailed. I am positioned accordingly.
1) The world will be struggling with deflation instead of inflation? WON'T HAPPEN AS GROWTH IN EMERGING MARKETS WILL KEEP DEMAND SOLID FOR MOST COMMODITIES AND, INCREASINGLY, SERVICES. CHINA HAS HELPED SQUEEZE THE COSTS OUT OF MANY, MANY MANUFACTURED GOODS... IF PRICES DECLINE MUCH MORE, WE'LL LOSE PRODUCERS AND PRICES WILL STABILIZE AT A NEW EQUALIBRIUM BETWEEN DEMAND AND SUPPLY.
2) US employment and housing experience another leg down? COULD HAPPEN... EMPLOYMENT WILL CONTINUE TO ERODE UNLESS THE DOLLAR WEAKENS SIGNIFICANTLY AND/OR AMERICAN PRODUCTIVITY INCREASES SIGNIFICANTLY. HOUSING WILL REMAIN WEAK FOR YEARS.
3) China disappoints? MAYBE, BUT THEY HAVE DEEP POCKETS AND BIG AMBITIONS... MY MONEY SAYS CHINA CONTINUES TO GROW RAPIDLY FOR ANOTHER 5-10 YEARS. ALSO, INDIA, BRAZIL, RUSSIA, INDONESIA, ETC. A LOT OF PEOPLE HAVE BEEN LEFT OUT. fOR THEM, THE PARTY IS JUST GETTING STARTED
4) An Eastern European country defaults? LIMITED FALL-OUT. THE GLOBAL SYSTEM IS NOW PREPARED FOR, AND INCREASINGLY EXPERT AT DEALING WITH, THIS KIND OF THING. ANYBODY REMEMBER THE BANKRUPTCY OF ICELAND... NO.
5) The US is on track to at least muddle through better than Europe? HAS BEEN AND WILL CONTINUE BE. THE PURITAN ETHIC AND THE SPIRIT OF CAPITALISM WILL CONTINUE TO FORGE THE AMERICAN CHARACTER AND ECONOMY WHILE EUROPE CONTINUES TO DABBLE WITH STATE-ISM. GERMANY IS THE EXCEPTION; THE MOST TIGHT-FISTED OF THE ECONOMIES AFFECTED BY THE CRISIS... THEY COULD EMERGE MUCH STRONGER SINCE THEY ARE NOT ALLOWING STATE COFFERS TO RESCUE STUPID BANKS/EXECUTIVES/CREDITORS/SHAREHOLDERS.
The sky has still not fallen... again
The Q&A was written by a seasoned currency trader who if you read between the lines is pro-dollar.
<WON'T HAPPEN AS GROWTH IN EMERGING MARKETS WILL KEEP DEMAND SOLID FOR MOST COMMODITIES.>
I think there is a misunderstanding of emerging markets. Most think they are filled with young folks eager to buy their first car. The median age in Paraguay fits that scenario as it is 21. However, in Brazil, the median age is 29. Argentina is 30 and Chile 31.
If you look at the emerging markets and realize that age 47 is when commodity demand starts going down, the surge in demand from most of the emerging markets has fifteen to twenty years left. And that surge has to be stronger than the inevitable demand decline in the first world.
If the world housing market does not turn up and unemployment continues higher, credit will continue to become unavailable. Under that scenario, consumer demand has to stay low and the inflation scenario commodity traders are focusing on is impossible. This is not just limited to the U.S.
Outside of a few items and the government purchasing commodities, demand for Chinese products continues to stink. If the export market fails to revive, China has the ability to right itself with a more vibrant domestic market but not if workers continue to save 30, 40% of what they earn.
The point on Eastern Europe is the big Western European banks have loaned a lot to Eastern Europe. With increased defaults in Eastern Europe, the point is the dollar surges against the Euro. And point #5 is another reason for the dollar to surge against the Euro.
<The sky has still not fallen... again>
Actually, Musk, you have it in reverse. The people running around saying the sky-is-falling are the anti-dollar, anti-fiat currency crowd. Do you think oil prices are going up because of a lack of supply and a surge in demand? Do you think copper went up because of a surge in construction?
No. the rationale is based upon the dollar being worthless because of the U.S. government cranking up the printing press. Investors including the wealthy Chinese have bought into Friedman's theory, which I think I have shown is pure bunk, and moved out of currencies (and currency related issues like stocks and bonds) and into commodities.
Musk, I was totally with this crowd when the U.S. (and much of the world) was inflating the money supply and giving it away with cheap credit. However, with world wealth falling by $30 trillion, the surge in world money supply has not come close to replacing the amount of lost wealth. The world is in a different place in 2009 than 2007, and the old arguments for the surge in commodities don't apply.
Mish is an idiot...is and always has been.
See the dollar yen chart since 1945. One dollar
used to be 360. Now it's only 96.
How does does a currency of a superpower lose so
much value against that of a defeated country?
Long term trend for USD is down.
ZSMA: Forgot to say...
You mention USD, by which I presume you mean US Dollar.
USD is also the symbol for the 2x ultra semiconductor industry ETF... which is an excellent investment at this time, up around 8% today.
"See the dollar yen chart since 1945. One dollar
used to be 360. Now it's only 96. How does does a currency of a superpower lose so much value against that of a defeated country?"
During the period in question, Japan went from bombed out shell of a country to world's second largest economy. Under the circumstances, appreciation vs the $ seems inevitable.
"Long term trend for USD is down."
Of course... We've had a 60+ year period of absolute american hegemony -- including the cold war, which ultimately exposed the USSR as a hollow shell of an economy. As other economies have grown, their currencies have appreciated against the $ -- this is right, logical and good.
In the long run, the most important factor contributing to the value of the dollar is, IMHO, the demand for american goods and services. If the world want's to buy our products, there is demand for our currency and it's value is strong. If there is no demand for the goods and services, there is none for the currency and it's value falls. That demand is a function of the perceived value of the products, mediated by the relative value of the currency... the widget of equal quality sold by china for a dime will be favored of the same product sold by the USA for a dollar.
I'm no expert, but i agree with Doc that the issue of how much currency is in circulation is a side-show. Sure we can debase our currency by printing too much. But the crisis destroyed so much wealth that currency has to be created somewhere, and that is what the Fed is doing. More important in the long run is the relative quality and cost effectiveness of what we produce, which ultimately is about productivity and innovation. The dollar lives or dies by the relative productivity and innovation of our economy... Unfortunately, we are losing ground there, too.
<Inflation returns because dollars are thrown into circulation?>
It's funny how Milton Friedman's economic theory, the Godfather of inflation-is-the-government's-fault, is now accepted as reality. Inflation is always the government's fault, right?
And this article, http://seekingalpha.com/article/127585-the-gold-standard-and-inflation, seems to back up the concept that fiat currency is inherently inflationary.
But the theory breaks down when you look at the actual data.
You can see the actual data here, http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=7
The worst four year period for inflation ever was when the U.S. was on the gold standard from 1917 to 1920. (But wait, I thought inflation didn't exist when we were on the gold standard.) From 1917 to Sept. 1918, the U.S. was in WW I, but that only explains about half that period.
Then things go the other way, and from 1930 to 1932, we had -22% deflation with the peak being in 1932 with -10.3% deflation.
Only a Republican economist could wax on about the good ol' days when we had the gold standard and inflation went from 17.8% to -10.3% over fourteen years.
If you compare the period with a half gold standard (1933 to 1970) with the period when the U.S. was totally off the gold standard, the difference is 2.97% to 4.47%.
But this includes the 70s and early 80s when we had the oil embargo and the incredibly stupid wage and price controls. Probably the biggest bone headed policies were price controls on oil that limited companies from looking for new supply. Reagan immediately dumped that dumb policy after being elected.
From 1974 to 1982, inflation was never less than 5.75% and hit a multi-year high in 1980 at 13.6%.From 1983 to 2009, inflation has topped 5% once and 4% three times.
So the nine year period skews the results. For twenty seven of the thirty six years the U.S. has been off the half gold standard, inflation has been about the same rate as when we were on the half gold standard.
In the mean time, the last currency in the world to be pegged to a metal standard, the Swiss Franc, is now a fiat currency as well. The people pining for the gold standard have been to inwardly looking to see that the whole world is going in the opposite direction.