This document discusses the debate around inflation and deflation forces currently at work in the US economy. It argues that the Federal Reserve is pulling hard to curb deflation by increasing the money supply, but risks overshooting and causing high inflation. The author believes the most likely outcome is that the Fed will keep interest rates too low and the money supply high for too long, eventually leading to distressing levels of inflation. The document advises protecting investments from inflation by diversifying out of cash, bonds, and annuities into other assets.
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
1) The document discusses volatility, interest rates, and taxes based on a note from Frank Pape, Director of Consulting at Russell Investments.
2) Volatility has been low recently but may pick up again as concerns arise. Low interest rates have helped the US economy but rates are expected to gradually rise starting in mid-2015.
3) Taxes can significantly reduce long-term returns through tax drag. Being tax-aware and using strategies like tax-loss harvesting can help minimize taxes and improve after-tax returns.
US Fed rate hike in September 2015: Who will be the top 4 winners and losers?Aranca
The much hyped US Fed rate hike likely to be in September 2015 will mark the end of an era of free money. While it brings the good news that the most powerful economy of the world is back on track and can sustain a rate hike, there may be certain repercussions for the global markets. Here’s our take on who may win, and who may lose.
The recent American election continues to have the world on edge. Seemingly every media outlet and investment manager around the world continues to hammer away at the bad or good that will be created by the actions of the new President.
This is a mistake.
While the entire world continues to be focused on President Trump and American Politics, it has become completely distracted as to what is happening in Europe.
Europe remains a pile of timber and in this issue of the IceCap Global Outlook, we describe how dramatic swings in politics and interest rates will be the spark that reignites the crisis in the old world.
The document discusses Japan's deteriorating financial situation, with a debt-to-GDP ratio approaching 200%, the highest in the world besides Zimbabwe. This has led S&P to downgrade Japan's credit rating, raising concerns that other countries like the US could face similar downgrades if deficits are not reduced. Rising debt is a major global problem with nations having to pay higher interest rates, making deficits harder to manage.
This document discusses trends and reversals in financial markets and the economy. It notes that while trend reversals create fear, they are natural and inevitable. The key is understanding the dominant trend versus short-term volatility. It also discusses how central banks have intervened in markets to smooth economic cycles, but that their policies may no longer be appropriate given high debt levels and slower growth. While recent trend reversals in markets have been correlated, the document argues they will likely revert back to the dominant downward trend.
3 Jan 2009: a bottom in breakevens, commodities, and global yields?Laeeth Isharc
The response of the authorities has been without precedent - the US has a new president, and perhaps confidence in the new administration may stave off the worst consequences of the epidemic contagion of fear - for now, at least. It is certain that for the time being we shall avoid the 29-33 collapse that was associated with every sovereign issuer in Europe except Britain, and much of Latin America and Asia defaulting as well as large numbers of banks in the US (in the days before deposit insurance).
This document discusses inflation and monetary policy. It begins by defining average inflation over the last 50 years as around 4% according to the Consumer Price Index. It then notes that the market currently expects future inflation to be around 2%, in line with the Federal Reserve's target. However, it expresses concern that monetary policy interventions in response to the financial crisis, which dramatically increased the monetary base, could sow the seeds for higher inflation in the future if banks begin lending out excess reserves more aggressively. Fiscal policy interactions with monetary policy are also flagged as a potential issue to monitor regarding inflation.
1) The document discusses volatility, interest rates, and taxes based on a note from Frank Pape, Director of Consulting at Russell Investments.
2) Volatility has been low recently but may pick up again as concerns arise. Low interest rates have helped the US economy but rates are expected to gradually rise starting in mid-2015.
3) Taxes can significantly reduce long-term returns through tax drag. Being tax-aware and using strategies like tax-loss harvesting can help minimize taxes and improve after-tax returns.
US Fed rate hike in September 2015: Who will be the top 4 winners and losers?Aranca
The much hyped US Fed rate hike likely to be in September 2015 will mark the end of an era of free money. While it brings the good news that the most powerful economy of the world is back on track and can sustain a rate hike, there may be certain repercussions for the global markets. Here’s our take on who may win, and who may lose.
The recent American election continues to have the world on edge. Seemingly every media outlet and investment manager around the world continues to hammer away at the bad or good that will be created by the actions of the new President.
This is a mistake.
While the entire world continues to be focused on President Trump and American Politics, it has become completely distracted as to what is happening in Europe.
Europe remains a pile of timber and in this issue of the IceCap Global Outlook, we describe how dramatic swings in politics and interest rates will be the spark that reignites the crisis in the old world.
The document discusses Japan's deteriorating financial situation, with a debt-to-GDP ratio approaching 200%, the highest in the world besides Zimbabwe. This has led S&P to downgrade Japan's credit rating, raising concerns that other countries like the US could face similar downgrades if deficits are not reduced. Rising debt is a major global problem with nations having to pay higher interest rates, making deficits harder to manage.
This document discusses trends and reversals in financial markets and the economy. It notes that while trend reversals create fear, they are natural and inevitable. The key is understanding the dominant trend versus short-term volatility. It also discusses how central banks have intervened in markets to smooth economic cycles, but that their policies may no longer be appropriate given high debt levels and slower growth. While recent trend reversals in markets have been correlated, the document argues they will likely revert back to the dominant downward trend.
3 Jan 2009: a bottom in breakevens, commodities, and global yields?Laeeth Isharc
The response of the authorities has been without precedent - the US has a new president, and perhaps confidence in the new administration may stave off the worst consequences of the epidemic contagion of fear - for now, at least. It is certain that for the time being we shall avoid the 29-33 collapse that was associated with every sovereign issuer in Europe except Britain, and much of Latin America and Asia defaulting as well as large numbers of banks in the US (in the days before deposit insurance).
The US dollar may be bottoming based on several factors:
1) Valuation measures like the Big Mac Index and OECD measures imply the dollar is undervalued by 30-35%
2) Increases in US oil and gas production from shale could reduce US imports and improve the trade balance by a third
3) A turnaround in US economic confidence and growth could support a rise in the dollar through upward revisions to interest rate expectations
The document provides an investment update for January 2011. It discusses the recent rise in 10-year U.S. Treasury yields and argues that while rates will continue to normalize, a major rise is unlikely in 2011 that could significantly hurt equities. It also critiques experts like Bernanke for being too confident in their predictions and argues many municipal defaults predicted for 2011 will likely not occur. The author maintains a below-average exposure to fixed income due to opportunities in equities but does not expect rates to rise enough to hurt the stock market in the near future.
The document discusses how interest rates around the world have been trending downward, with some central banks bringing rates below zero, as monetary policymakers engage in a "race to the bottom" to stimulate their economies through low rates; however, extremely low or negative interest rates could lead economies to become trapped due to rising debt levels that cannot be repaid, potentially devaluing currencies, though emerging markets face different challenges from developed nations in utilizing interest rate policy.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
The document summarizes the case for the appreciation of the British pound sterling over the coming years. It discusses how sterling declined significantly from 1987 to 2012 due to a series of policy errors and a perfect storm caused by the global financial crisis. However, it argues that sterling is now undervalued and conditions that caused its decline are no longer present, suggesting the currency is poised to appreciate back to more normal levels based on economic fundamentals.
The document provides a quarterly investment outlook and discusses recent volatility in financial markets. It notes that sentiment has been swinging between irrational optimism and excessive pessimism. While most equity markets have rebounded in recent months, bond prices have also risen due to deflation fears. The document discusses the debate around whether the threats are inflation or deflation and argues that subdued growth does not necessarily mean deflation will take hold. It outlines some areas where investment opportunities still exist, such as global equity income funds and Japanese equities, and concludes by emphasizing the need for diversification given the current environment of low predictability.
The document discusses the effects of the Federal Reserve reducing its $85 billion per month bond buying program. It notes that reductions in bond purchases can transmit to housing booms and busts which then impact banks and financial institutions. The document also discusses how quantitative easing (QE) has lowered yields, risk premiums, and increased wealth, but that real economic growth in the US is not happening fast enough. It questions whether large scale central bank asset purchases could lead to future financial bubbles or global currency and trade impacts. The conclusion is that developed economies must create real wealth rather than rely on nominal growth, and that banks will need to change their role in funding growth rather than asset bubbles.
The document discusses whether the current economic boom in the US will continue. It notes that while the US GDP has recovered from the pandemic recession, there are threats on the horizon. Inflation is rising due to excess stimulus and debt levels are high, which could cause economic turbulence if interest rates rise. The recovery also remains vulnerable to coronavirus variants. Overall, the document argues while the economy has recovered, threats remain that could undermine sustained growth and support further gold price rallies.
- Upcoming inflation may benefit gold prices, especially if inflation persists longer than expected by central banks. Inflation expectations have risen significantly in recent months.
- The large US twin deficits could negatively impact the economy and support gold prices. The US current account and fiscal deficits have ballooned to record levels.
- While gold does not always rise when deficits increase, it has benefited in past periods when easy fiscal policy was accompanied by accommodative monetary policy, as is the case currently. The Fed intends to keep interest rates low to support economic recovery.
Fasanara Capital | Investment Outlook
1. The Future Is Wide Open: Avoid The ‘Illusion Of Knowledge’ Trap
The single most dangerous thinking trap / optical illusion for investors today is to look at Trump, Brexit and Italy Referendum as non-events, buried in the past. We believe that 2017 may likely be driven by the same factors that failed to shape 2016. The non-events of 2016 are likely to be the drivers of 2017. Finally, we will get to find out if Brexit means Brexit, if Trump means Trump, if a failed Italian referendum means early elections and a membership of the EMU in jeopardy down the line.
2. Structural Shift: These Are Transformational Times
The macro outlook of the next years will be influenced the most by these structural trends:
› Protectionism, De-Globalization & De-Dollarization. In Pursuit of Inclusive Growth
› End of ‘Pax Americana’. The ascent of China. Geopolitical risks on the rise
› End of ‘Pax QE’. Markets without steroids, but still delusional.
› 4th Industrial Revolution: labor participation rate falling from 63% to 40% in 10 years?
3. Our Baseline Scenario: Bubble Unwind, Equities and Bonds Down
Starting this 2017, our major macro convictions are as follows:
› Global Tapering to progress
› US Dollar to keep grinding higher
› European Political Instability to worsen
› US Equities to weaken
Fasanara Capital | Investment Outlook
1. Fake Markets: How Artificial Money Flows Kill Data Dependency, Affect Market Functioning and Change the Structure of the Market
Hard data ceased to be a driver for markets, valuation metrics for bonds and equities which held valid for over a century are now deemed secondary. Narratives and money flows trump hard data, overwhelmingly.
‘Fake Markets’ are defined as markets where the magnitude and duration of artificial flows from global Central Banks or passive investment vehicles have managed to overwhelm and narcotize data-dependency and macro factors. A stuporous state of durable, un-volatile over-valuation, arrested activity, unconsciousness produced by the influence of artificial money flows.
- Passive Flows: The Prehistoric Elephant In The Room
- ETFs Are Taking Over Markets
- The Impact of Passive Investors on Active Investors: the Induction Trap
- How Narratives Evolve To Cover For Fake Markets
- Defendit Numerus: There is Safety in Numbers
- What Could We Get Wrong
2. Be Short, Be Patient, Be Ready
Markets driven by Central Banks, passive investment vehicles and retail investors are unfit to price any premium for any risk. If we are right and this is indeed a bubble (both in equity and in bonds), it will eventually bust; it is only a matter of time. The higher it goes, the higher it can go, as more swathes of private investors are pulled in. The more violently it can subsequently bust.
The risk of a combined bust of equity and bonds is a plausible one. It matters all the more as 90%+ of investors still work under the basic framework of a balanced portfolio, exposed in different proportions to equity and bonds, both long. That includes risk parity funds, a leveraged version of balanced portfolio. That includes alternative risk premia funds, a nice commercial disguise for a mostly long-only beta risk, where premia is extracted from record rich markets that made those premia tautologically minuscule.
Is the US dollar set for a correction as the year draws to a close?5Hantec Markets
Well, the bond markets certainly called the Fed decision pretty much spot on, in that there was very little volatility on the FOMC rates announcement. However, could it be that it was the euphoric reaction from the equity markets that was the wrong call?
The document discusses the debate around whether the world is experiencing secular stagnation, characterized by persistently weak growth despite low interest rates. It outlines arguments on both sides of the debate. Supporters of secular stagnation see recent declines in yields as evidence of an underlying trend of weak investment returns that prevent central banks from stimulating economies effectively through monetary policy. However, others argue recent weakness is primarily due to balance sheet adjustments following the financial crisis, which have occurred at different paces across countries. The recovery will be gradual as private sector balance sheets repair and banks increase lending. The path of the world economy depends on factors like the pace of balance sheet repair in the eurozone and potential new financial system restructurings in China.
IN THIS SUMMARY
Economists and business leaders alike are still trying to understand the forces that led to the United States’ current economic woes. Some believe it is a down financial cycle or a recession, but in Aftershock, David Wiedemer, Robert Wiedemer, and Cindy Spitzer detail why they believe that neither explanation is correct. They describe what they have termed a Bubblequake–a popping of the real estate bubble, the private debt bubble, the stock market bubble, and the discretionary spending bubble. More alarming is that the economy is not going back to the way it was before because there are still more economic bubbles waiting to burst.
SUBSCRIBE TODAY
http://www.bizsum.com/summaries/aftershock
The Federal Reserve has announced "Operation Twist" to try to stimulate the stagnant US economy. It plans to sell $400 billion of short-term treasury bonds and use the proceeds to buy long-term treasury bonds. This is intended to lower long-term interest rates to encourage more borrowing and investment. However, some economists are skeptical it will be effective since interest rates are already near record lows. Unemployment may remain around 9% in the short-term even if long-term rates fall. The Fed hopes this action, along with keeping short-term rates low until 2013, will spur growth but its ultimate goals of stable prices and lower unemployment may not be achieved.
President Trump's election victory surprised markets. Interest rates rose sharply in response as markets anticipated less regulation, lower taxes, and stronger economic growth under Trump. However, nearly all forecasts predict more modest GDP growth of around 2.3% in 2017 rather than the 4% growth suggested by Trump. The future remains uncertain as Trump frequently tweets and singles out companies. Interest rates may soften in the first quarter but end the year only modestly higher than the start of 2017.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
- A liquidity trap is a situation where the short-term nominal interest rate is zero, meaning that increasing the money supply has no effect on output or prices according to traditional Keynesian theory.
- Modern theory argues that monetary policy can still be effective even at zero interest rates by managing expectations about future money supply levels when interest rates rise above zero again.
- For monetary policy to be effective in a liquidity trap, central banks must commit to maintaining lower future interest rates once deflationary shocks subside in order to stimulate expectations about future money supply levels and interest rates.
• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.
The document compares the performance of the QVP portfolio to the S&P 500 index over various time periods from one month to since inception in May 2005. It shows that the QVP portfolio outperformed the S&P 500 for all periods except the past month and since inception, with returns as high as 43.04% for the past three months compared to 23.45% for the S&P 500.
The US dollar may be bottoming based on several factors:
1) Valuation measures like the Big Mac Index and OECD measures imply the dollar is undervalued by 30-35%
2) Increases in US oil and gas production from shale could reduce US imports and improve the trade balance by a third
3) A turnaround in US economic confidence and growth could support a rise in the dollar through upward revisions to interest rate expectations
The document provides an investment update for January 2011. It discusses the recent rise in 10-year U.S. Treasury yields and argues that while rates will continue to normalize, a major rise is unlikely in 2011 that could significantly hurt equities. It also critiques experts like Bernanke for being too confident in their predictions and argues many municipal defaults predicted for 2011 will likely not occur. The author maintains a below-average exposure to fixed income due to opportunities in equities but does not expect rates to rise enough to hurt the stock market in the near future.
The document discusses how interest rates around the world have been trending downward, with some central banks bringing rates below zero, as monetary policymakers engage in a "race to the bottom" to stimulate their economies through low rates; however, extremely low or negative interest rates could lead economies to become trapped due to rising debt levels that cannot be repaid, potentially devaluing currencies, though emerging markets face different challenges from developed nations in utilizing interest rate policy.
1. The portfolio manager discusses the market performance in Q2 2014, with the Canadian equity markets outperforming other global regions.
2. He explains that central bank monetary policies, particularly from the US Federal Reserve and European Central Bank, have been a key driver for the stock market rally over the past few years by keeping interest rates low.
3. The portfolio manager reiterates his advice to investors to stick to their customized plans and not be deterred by short-term market fluctuations, as the plans are designed to navigate periods of volatility.
The document summarizes the case for the appreciation of the British pound sterling over the coming years. It discusses how sterling declined significantly from 1987 to 2012 due to a series of policy errors and a perfect storm caused by the global financial crisis. However, it argues that sterling is now undervalued and conditions that caused its decline are no longer present, suggesting the currency is poised to appreciate back to more normal levels based on economic fundamentals.
The document provides a quarterly investment outlook and discusses recent volatility in financial markets. It notes that sentiment has been swinging between irrational optimism and excessive pessimism. While most equity markets have rebounded in recent months, bond prices have also risen due to deflation fears. The document discusses the debate around whether the threats are inflation or deflation and argues that subdued growth does not necessarily mean deflation will take hold. It outlines some areas where investment opportunities still exist, such as global equity income funds and Japanese equities, and concludes by emphasizing the need for diversification given the current environment of low predictability.
The document discusses the effects of the Federal Reserve reducing its $85 billion per month bond buying program. It notes that reductions in bond purchases can transmit to housing booms and busts which then impact banks and financial institutions. The document also discusses how quantitative easing (QE) has lowered yields, risk premiums, and increased wealth, but that real economic growth in the US is not happening fast enough. It questions whether large scale central bank asset purchases could lead to future financial bubbles or global currency and trade impacts. The conclusion is that developed economies must create real wealth rather than rely on nominal growth, and that banks will need to change their role in funding growth rather than asset bubbles.
The document discusses whether the current economic boom in the US will continue. It notes that while the US GDP has recovered from the pandemic recession, there are threats on the horizon. Inflation is rising due to excess stimulus and debt levels are high, which could cause economic turbulence if interest rates rise. The recovery also remains vulnerable to coronavirus variants. Overall, the document argues while the economy has recovered, threats remain that could undermine sustained growth and support further gold price rallies.
- Upcoming inflation may benefit gold prices, especially if inflation persists longer than expected by central banks. Inflation expectations have risen significantly in recent months.
- The large US twin deficits could negatively impact the economy and support gold prices. The US current account and fiscal deficits have ballooned to record levels.
- While gold does not always rise when deficits increase, it has benefited in past periods when easy fiscal policy was accompanied by accommodative monetary policy, as is the case currently. The Fed intends to keep interest rates low to support economic recovery.
Fasanara Capital | Investment Outlook
1. The Future Is Wide Open: Avoid The ‘Illusion Of Knowledge’ Trap
The single most dangerous thinking trap / optical illusion for investors today is to look at Trump, Brexit and Italy Referendum as non-events, buried in the past. We believe that 2017 may likely be driven by the same factors that failed to shape 2016. The non-events of 2016 are likely to be the drivers of 2017. Finally, we will get to find out if Brexit means Brexit, if Trump means Trump, if a failed Italian referendum means early elections and a membership of the EMU in jeopardy down the line.
2. Structural Shift: These Are Transformational Times
The macro outlook of the next years will be influenced the most by these structural trends:
› Protectionism, De-Globalization & De-Dollarization. In Pursuit of Inclusive Growth
› End of ‘Pax Americana’. The ascent of China. Geopolitical risks on the rise
› End of ‘Pax QE’. Markets without steroids, but still delusional.
› 4th Industrial Revolution: labor participation rate falling from 63% to 40% in 10 years?
3. Our Baseline Scenario: Bubble Unwind, Equities and Bonds Down
Starting this 2017, our major macro convictions are as follows:
› Global Tapering to progress
› US Dollar to keep grinding higher
› European Political Instability to worsen
› US Equities to weaken
Fasanara Capital | Investment Outlook
1. Fake Markets: How Artificial Money Flows Kill Data Dependency, Affect Market Functioning and Change the Structure of the Market
Hard data ceased to be a driver for markets, valuation metrics for bonds and equities which held valid for over a century are now deemed secondary. Narratives and money flows trump hard data, overwhelmingly.
‘Fake Markets’ are defined as markets where the magnitude and duration of artificial flows from global Central Banks or passive investment vehicles have managed to overwhelm and narcotize data-dependency and macro factors. A stuporous state of durable, un-volatile over-valuation, arrested activity, unconsciousness produced by the influence of artificial money flows.
- Passive Flows: The Prehistoric Elephant In The Room
- ETFs Are Taking Over Markets
- The Impact of Passive Investors on Active Investors: the Induction Trap
- How Narratives Evolve To Cover For Fake Markets
- Defendit Numerus: There is Safety in Numbers
- What Could We Get Wrong
2. Be Short, Be Patient, Be Ready
Markets driven by Central Banks, passive investment vehicles and retail investors are unfit to price any premium for any risk. If we are right and this is indeed a bubble (both in equity and in bonds), it will eventually bust; it is only a matter of time. The higher it goes, the higher it can go, as more swathes of private investors are pulled in. The more violently it can subsequently bust.
The risk of a combined bust of equity and bonds is a plausible one. It matters all the more as 90%+ of investors still work under the basic framework of a balanced portfolio, exposed in different proportions to equity and bonds, both long. That includes risk parity funds, a leveraged version of balanced portfolio. That includes alternative risk premia funds, a nice commercial disguise for a mostly long-only beta risk, where premia is extracted from record rich markets that made those premia tautologically minuscule.
Is the US dollar set for a correction as the year draws to a close?5Hantec Markets
Well, the bond markets certainly called the Fed decision pretty much spot on, in that there was very little volatility on the FOMC rates announcement. However, could it be that it was the euphoric reaction from the equity markets that was the wrong call?
The document discusses the debate around whether the world is experiencing secular stagnation, characterized by persistently weak growth despite low interest rates. It outlines arguments on both sides of the debate. Supporters of secular stagnation see recent declines in yields as evidence of an underlying trend of weak investment returns that prevent central banks from stimulating economies effectively through monetary policy. However, others argue recent weakness is primarily due to balance sheet adjustments following the financial crisis, which have occurred at different paces across countries. The recovery will be gradual as private sector balance sheets repair and banks increase lending. The path of the world economy depends on factors like the pace of balance sheet repair in the eurozone and potential new financial system restructurings in China.
IN THIS SUMMARY
Economists and business leaders alike are still trying to understand the forces that led to the United States’ current economic woes. Some believe it is a down financial cycle or a recession, but in Aftershock, David Wiedemer, Robert Wiedemer, and Cindy Spitzer detail why they believe that neither explanation is correct. They describe what they have termed a Bubblequake–a popping of the real estate bubble, the private debt bubble, the stock market bubble, and the discretionary spending bubble. More alarming is that the economy is not going back to the way it was before because there are still more economic bubbles waiting to burst.
SUBSCRIBE TODAY
http://www.bizsum.com/summaries/aftershock
The Federal Reserve has announced "Operation Twist" to try to stimulate the stagnant US economy. It plans to sell $400 billion of short-term treasury bonds and use the proceeds to buy long-term treasury bonds. This is intended to lower long-term interest rates to encourage more borrowing and investment. However, some economists are skeptical it will be effective since interest rates are already near record lows. Unemployment may remain around 9% in the short-term even if long-term rates fall. The Fed hopes this action, along with keeping short-term rates low until 2013, will spur growth but its ultimate goals of stable prices and lower unemployment may not be achieved.
President Trump's election victory surprised markets. Interest rates rose sharply in response as markets anticipated less regulation, lower taxes, and stronger economic growth under Trump. However, nearly all forecasts predict more modest GDP growth of around 2.3% in 2017 rather than the 4% growth suggested by Trump. The future remains uncertain as Trump frequently tweets and singles out companies. Interest rates may soften in the first quarter but end the year only modestly higher than the start of 2017.
- Emerging markets have experienced weaker economic growth compared to developed markets in 2013.
- Emerging market equities have significantly underperformed developed market equities since 2010, with the underperformance accumulating prior to recent tapering talk.
- Within emerging markets, BRIC countries like Brazil, Russia, India, and China have particularly underperformed the broader emerging market universe.
- A liquidity trap is a situation where the short-term nominal interest rate is zero, meaning that increasing the money supply has no effect on output or prices according to traditional Keynesian theory.
- Modern theory argues that monetary policy can still be effective even at zero interest rates by managing expectations about future money supply levels when interest rates rise above zero again.
- For monetary policy to be effective in a liquidity trap, central banks must commit to maintaining lower future interest rates once deflationary shocks subside in order to stimulate expectations about future money supply levels and interest rates.
• Spread sectors continued to rally as investors focused more on opportunities than on risks.
• The Fed maintained its stance, but new questions emerged about how much further influence the central bank can exert.
• With tax rates fixed for the near term, policymakers turned their attention to spending cuts.
• Despite tighter valuations in corporate credit, we foresee continued solid demand and fundamentals.
The document compares the performance of the QVP portfolio to the S&P 500 index over various time periods from one month to since inception in May 2005. It shows that the QVP portfolio outperformed the S&P 500 for all periods except the past month and since inception, with returns as high as 43.04% for the past three months compared to 23.45% for the S&P 500.
The document compares the performance of the QVP portfolio to the S&P 500 index over various time periods from one month to since inception in 2005. It shows that the QVP portfolio outperformed the S&P 500 in all periods except for the past month and year-to-date, with returns as high as 66.68% over 3 years compared to 20.11% for the S&P 500. A disclaimer notes that past performance is not a guarantee of future results.
This document provides an overview of National History Day (NHD) in Washington state. It discusses what NHD is, how it works, the annual themes and project categories. Students research historical topics, analyze sources, and create exhibits, papers, performances or websites. Projects can be entered into local, regional, and state competitions. The document shares student stories and outlines the benefits of NHD, such as developing skills in research, critical thinking, and presentation. It provides a sample calendar and resources to help teachers implement NHD in their classrooms.
In this brochure you will find a overview of the products and services that Daedalus Aviation Group can offer to the global military and civilian aviation market.
Una base de datos son bancos de información que contienen datos relacionados y categorizados de forma ordenada. Las bases de datos actuales suelen estar en formato digital y ofrecen soluciones para almacenar grandes cantidades de datos. Existen bases de datos relacionales que usan SQL y no relacionales como MongoDB y Cassandra que no usan SQL.
Daedalus Presentation Apa Seminar 2011 AirworthinessMarvalous Health
This presentation was given for a South American audience at the Aeronautical Engineering Seminar held on 18th of March 2011 at the Air Warfare College in Santiago de Chile
1. The document discusses regulations regarding airworthiness review certificates (ARCs) in India.
2. It outlines who can issue ARCs for different types of aircraft, including those used in commercial air transport, non-commercial aircraft, and aircraft of different weights.
3. The key requirements for an airworthiness review to be performed in order to issue an ARC are described, including inspecting the aircraft and records to ensure continued airworthiness.
The document discusses aircraft maintenance programmes and their importance in airworthiness management. It defines a maintenance programme as a schedule of maintenance tasks with documented management procedures. It notes key information sources for maintenance programmes include the MPD, CMM, SBs, and STCs. Approval of maintenance programmes may be issued to Sub Part G organisations. Effective maintenance programme management requires qualified specialists, applicable procedures, and oversight functions. Programmes aim to optimize maintenance tasks through reliability monitoring and review.
Global Macro-economics, Trends, Portfolio ImplicationsNikunj Sanghvi
My presentation to the Bombay Chartered Accountants' Society International Economic Study Circle on Global macro-economics, trends, portfolio implications
Aug 7th 2013
Mumbai, India
The document discusses concerns about future inflation given recent monetary and fiscal policy actions. It provides three key reasons to be wary of inflation:
1) Monetary policy - The Fed has increased the monetary base significantly and its exit strategy from quantitative easing may be difficult. This compromises its independence.
2) Fiscal policy - The US government faces large deficits and debt levels that could put pressure on the Fed to pursue inflationary policies.
3) Interaction of policies - The Fed's actions during the financial crisis reduced its independence, making it harder to maintain low, stable inflation as fiscal pressures rise. Close monitoring of inflation is prudent given these challenges to monetary policy.
- The document discusses whether the current stock market is in a bubble. It notes that by some measures like price-to-earnings ratios, stocks are not yet in bubble territory as they were in 2000.
- It provides several facts to counter the "hair on fire" media coverage of the stock market: there are no true market gurus, markets tend to rise over time, trying to time the market often fails, and cash is not king compared to long term investing in stocks.
- Even if a bubble forms, bubbles always burst eventually but stocks recover over time, so investors should stick to their plan and not panic during downturns.
This document summarizes the challenges of saving money in today's economic environment of low interest rates and steady inflation. It discusses how inflation encourages spending now rather than saving, and how low interest rates on savings vehicles provide little protection against inflation. It provides a hypothetical example using the purchase of a toaster to illustrate how inflation can motivate unnecessary spending. The document examines factors like the Federal Reserve interest rate that impact bank savings rates. It also notes that some consumers turn to riskier long-term investments or debt to cope with these economic conditions, making it difficult to build financial stability. In the end, it argues that maintaining liquid savings is still important despite low returns, and that opportunities may arise when economic activity slows.
Despite hopes that the anti-QE rhetoric would die down, the noise continued last week, and unfortunately, become more political. One of the key aspects of the Fed is its independence. The Fed is answerable to Congress, and ultimately, to the American people. However, it is not controlled by Congress – nor would we want it to be controlled by Congress. Attacks on the Fed and its latest round of asset purchases aren’t helping.
The document discusses concerns about potential future inflation in the US economy. While current official inflation measures are relatively low, some argue these measures underestimate true inflation. There are also signs that raw material costs are rising, which could eventually flow through to higher consumer prices. The Federal Reserve's stimulus efforts are intended to boost inflation, with some insiders suggesting a target of 4-6% inflation for a couple years. If high inflation returns, it could pose risks to investors not prepared for that environment.
What happens if the us credit rating is downgraded 7.22.2021 - Kurt S. Altric...Kurt S. Altrichter
1) The US government debt level of nearly $30 trillion poses risks even though low interest rates have kept debt servicing costs low currently. The upcoming expiration of the debt ceiling raises the possibility of a downgrade in the US credit rating or a technical default.
2) A credit downgrade or hitting the debt ceiling without a resolution could negatively impact risk assets, as occurred in 2011. Investors should take a longer term view and pay attention to weakening economic fundamentals rather than just focusing on record high stock markets.
3) The options available to address the growing debt problem like raising taxes or interest rates all carry risks for either the economy, financial markets or the US dollar. The government appears backed into a corner with
Question 1Response 1Development inside and out effects t.docxaudeleypearl
Question 1:
Response 1:
Development inside and out effects the entire country's economy. It impacts the managing body, regardless the clearly irrelevant subtleties in the average person's dependably life. Both a conditions and clear deferred results of how the economy is getting along, swelling has the two its fans and spoilers. Distinctive envisions that particular degrees of swelling are helpful for a prospering economy, yet that progressively critical rates raise concerns. It can degrade the money basically and, at logically lamentable, has been a key part to subsidences.
Swelling, as referenced, is the rate a worth ascensions, and fundamentally how much the dollar is worth at a given moment concerning checking. The idea behind swelling being an impact for good in the economy is that a reasonable enough rate can nudge financial movement without debasing the money so much that it ends up being basically vain (Kohn, 2006).
Swelling can in like manner falter from asset for asset. Subordinate upon the season, the expense of gas could go up independently from with everything considered headway as it routinely does as summer moves close. In reality, there is even a term - focus improvement - for swelling that parts in everything except for sustenance and imperativeness (gas and oil), as these regions have separate factors that add to them. There are a wide degree of sorts of swelling, subordinate upon what remarkable is being viewed comparatively as what the development rate truly is by all accounts. For example, what happens if the swelling rate is well over the Fed's normal goal? At a higher rate, yet still in the single digits, that is known as walking swelling. It is seen as concerning yet sensible (Ball, 2006).
Swelling is generally depicted reliant on its rate and causes. By and large, Inflation happens in an economy when vitality for thing and experiences outmaneuvers the supply of yield. in this manner, clarifications behind Inflation have different sides, the intrigue side and supply side. The widely inclusive activity of hazard premiums in driving enlargement pay over the scope of advancing years is dependable with secured budgetary improvement and inside and out oblige cash related procedure events in the moved economies. The degree for further fitting budgetary enabling seen with money related stars seems to have declined amidst the enough low advance charges and gigantic monetary records of national banks (Bodie, 2016).
In relentless time, the correspondence of perils has wound up being constantly phenomenal, the general point of view has lit up, and money related conditions have engaged on net. With the work superstar proceeding to reinforce, and GDP improvement expected to keep up a vital good ways from back in the consequent quarter, it likely will be fitting soon to change the affiliation supports rate. Likewise, if the economy propels as shown by the SEP concentrate way, the affiliation supports rate will probably app ...
This document provides advice on finding and maintaining employment during an economic recession. It discusses understanding recessions and their causes, the competitive job market during hard times, emphasizing versatility in skills and qualifications, effective job hunting strategies, and tips for career progression even when opportunities are limited. The key messages are that recessions are a normal part of the economic cycle, employers seek well-rounded candidates with extra value to offer during downturns, and persistence, adaptability, and maintaining long-term goals are important for professional success in challenging economic conditions.
Secular Stagnation
Why Might Equilibrium Real Rates Have Fallen?
Increased Savings
Changes in distribution of income and profits share
Reserve accumulation or capital flight
Increasing deleveraging and retirement preparation
Decreases in Investment Propensity
Declining growth rate of population and/or technology
Demassification of the economy
Fall in price of capital goods
Other factors
Increased global save asset demand
3/14/2020 The Age of Secular Stagnation | Larry Summers
larrysummers.com/2016/02/17/the-age-of-secular-stagnation/ 1/6
HOME CONTACT SEARCH
Lawrence H.
Summers is the
Charles W. Eliot
University Professor
and President
Emeritus at Harvard University. He
served as the 71st Secretary of the
Treasury for President Clinton and
the Director of the National Economic
Council for President Obama.
FULL BIO
Larry Summers on
SECULAR STAGNATION READ MORE
FOLLOW @LHSUMMERS
on Twitter
Larry Summers
COMMENTARY RESEARCH TEACHING MEDIA RESOURCES
Summers published an article title, “The Age of Secular
Stagnation: What It Is and What to Do About It,” in the February
issue of Foreign A�airs. The article explores how expansionary
�scal policy by the U.S. government can help overcome secular
stagnation problems and get growth back on track.
The Age of Secular Stagnation: What It Is and What to Do About It
February 15, 2016
published in Foreign A�airs
As surprising as the recent �nancial crisis [1] and recession were, the behavior of the
world’s industrialized economies and �nancial markets during the recovery [2] has been
even more so.
Most observers expected the unusually deep recession to be followed by an unusually
rapid recovery, with output and employment returning to trend levels relatively quickly.
Yet even with the U.S. Federal Reserve [3]’s aggressive monetary policies, the recovery
(both in the United States and around the globe) has fallen signi�cantly short of
predictions and has been far weaker than its predecessors [4]. Had the American
economy performed as the Congressional Budget O�ce fore cast in August 2009—after
the stimulus had been passed and the recovery had started—U.S. GDP today would be
about $1.3 trillion higher than it is.
Almost no one in 2009 imagined that U.S. interest rates would stay near zero for six
years, that key interest rates in Europe would turn negative, and that central banks in the
G-7 would collectively expand their balance sheets by more than $5 trillion. Had
economists been told such monetary policies lay ahead, moreover, they would have
con�dently predicted that in�ation would become a serious problem—and would have
been shocked to �nd out that across the United States, Europe, and Japan, it has
generally remained well below two percent.
In the wake of the crisis, governments’ debt-to-GDP ratios have risen sharply, from 41
percent in 2008 to 74 percent today in the United States, from 47 percent to 70 percent
in Europe, and from 95 percent to 126 percent in Japan.
Secular Stagnation
Why Might Equilibrium Real Rates Have Fallen?
Increased Savings
Changes in distribution of income and profits share
Reserve accumulation or capital flight
Increasing deleveraging and retirement preparation
Decreases in Investment Propensity
Declining growth rate of population and/or technology
Demassification of the economy
Fall in price of capital goods
Other factors
Increased global save asset demand
3/14/2020 The Age of Secular Stagnation | Larry Summers
larrysummers.com/2016/02/17/the-age-of-secular-stagnation/ 1/6
HOME CONTACT SEARCH
Lawrence H.
Summers is the
Charles W. Eliot
University Professor
and President
Emeritus at Harvard University. He
served as the 71st Secretary of the
Treasury for President Clinton and
the Director of the National Economic
Council for President Obama.
FULL BIO
Larry Summers on
SECULAR STAGNATION READ MORE
FOLLOW @LHSUMMERS
on Twitter
Larry Summers
COMMENTARY RESEARCH TEACHING MEDIA RESOURCES
Summers published an article title, “The Age of Secular
Stagnation: What It Is and What to Do About It,” in the February
issue of Foreign A�airs. The article explores how expansionary
�scal policy by the U.S. government can help overcome secular
stagnation problems and get growth back on track.
The Age of Secular Stagnation: What It Is and What to Do About It
February 15, 2016
published in Foreign A�airs
As surprising as the recent �nancial crisis [1] and recession were, the behavior of the
world’s industrialized economies and �nancial markets during the recovery [2] has been
even more so.
Most observers expected the unusually deep recession to be followed by an unusually
rapid recovery, with output and employment returning to trend levels relatively quickly.
Yet even with the U.S. Federal Reserve [3]’s aggressive monetary policies, the recovery
(both in the United States and around the globe) has fallen signi�cantly short of
predictions and has been far weaker than its predecessors [4]. Had the American
economy performed as the Congressional Budget O�ce fore cast in August 2009—after
the stimulus had been passed and the recovery had started—U.S. GDP today would be
about $1.3 trillion higher than it is.
Almost no one in 2009 imagined that U.S. interest rates would stay near zero for six
years, that key interest rates in Europe would turn negative, and that central banks in the
G-7 would collectively expand their balance sheets by more than $5 trillion. Had
economists been told such monetary policies lay ahead, moreover, they would have
con�dently predicted that in�ation would become a serious problem—and would have
been shocked to �nd out that across the United States, Europe, and Japan, it has
generally remained well below two percent.
In the wake of the crisis, governments’ debt-to-GDP ratios have risen sharply, from 41
percent in 2008 to 74 percent today in the United States, from 47 percent to 70 percent
in Europe, and from 95 percent to 126 percent in Japan.
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice presiden...Nigel Mark Dias
Rumpelstiltskin at the Fed by Harley Bassman, PIMCO, executive vice president & portfolio manager
SUMMARY
Has the Federal Reserve reached the bottom of its policy toolkit? Many things are still possible, at least in theory, including negative interest rates (which we believe would be ineffective and potentially harmful) or a “helicopter drop” of money. Another option is to resurrect a successful plan from 83 years ago: Purchase a tremendous amount of gold at a price substantially higher than market levels.
A massive Fed gold purchase program might finally lift the anchor on inflationary expectations and consumers’ spending habits. It would increase the price of a globally recognized store of value. It almost sounds like a fairy tale – but it’s happened before.
Though it seems incredibly farfetched, a massive Fed gold purchase program could echo a Depression-era effort that effectively boosted the U.S. economy.
Warren Buffett famously railed against the shiny yellow metal in 2012 when he noted all the gold in the world could be swapped for the totality of U.S. cropland and seven ExxonMobils with $1 trillion left over for “walking-around money.” His point was that these assets can generate significant returns while owning gold produces no discernable cash flow.
While this observation is certainly true, the rub is that this is not a fair comparison since gold is not an asset; rather, it should be considered an alternate currency. Pundits often describe the five factors that define “money”:
Its supply is controlled or limited,
It is fungible/uniform – this is why diamonds cannot qualify,
It is portable – this is why land cannot qualify,
It is divisible – thus art cannot be money, and
It is liquid – this means people will readily accept it in exchange.
By this definition, gold is certainly a form of money, and to Mr. Buffett’s point, one also earns no cash flow on paper dollars, euros, yen or yuan.
This document discusses the business cycle and its effects. It begins with an introduction to business cycles, which are periodic fluctuations in economic activity. It then discusses the impacts of business cycles on employment, consumption, business confidence, and other macroeconomic variables. The document also provides examples of impacts from specific business cycles, such as the impact of the 2001 recession in the US. It analyzes unemployment, job losses, poverty levels, and other economic indicators from that time. Finally, the document argues that the 2001 recession may have been avoided through more proactive fiscal policy interventions.
As expected, the Federal Open Market Committee has embarked on another round of planned asset purchases. In its November 3 policy statement, the FOMC wrote that it expects to buy another $600 billion in long-term Treasuries by the end of 2Q11 ($75 billion per month), in addition to the $35 billion per month in reinvested principal payments from its portfolio of mortgage-backed securities. There has been much criticism of the move in the financial press. Certainly, there are risks in the Fed’s strategy. However, it’s hardly reckless or ill-advised.
1) Recessions are caused by a decline in overall demand for goods and services, both consumption and investment. This can be triggered by various events like the end of wars, rising commodity prices, or increased interest rates.
2) Governments can help cure recessions through stimulus packages and automatic increases in benefits to boost demand. However, governments often underestimate the decline in demand and are slow to respond.
3) While recessions cannot be fully prevented due to uncertain economic conditions, governments should aim to reduce the impact of large shocks through financial regulation to limit high leverage and risky lending practices.
The document discusses the rationale and potential methodical decline of the US dollar as the global reserve currency. It notes that empires that hold the global reserve currency are typically net creditors, but the US has become a net debtor due to large budget and trade deficits. This makes the dollar's status vulnerable. While China has taken steps to challenge the dollar's dominance, the yuan is not ready to become a reserve currency. However, if China and others diversify reserves away from dollars over time, it could lead to a controlled, gradual decline in the dollar rather than a sudden crisis. Technical indicators also suggest monitoring support levels for signs the dollar may begin a longer-term downward trend.
The document provides a seasonal market outlook and review of global markets in Q4 2014 and for the year as a whole. Key points:
- Global stock markets fell sharply in mid-December due to falling commodity prices but recovered by Christmas. The FTSE 100 ended 2014 down 2.7%.
- Mining stocks and food retailers struggled while utility companies performed well, benefiting from growing demand for income and declining rate expectations.
- Commodity prices are expected to remain weak in 2015 due to slowing demand from Europe and China and increased supply, particularly of oil from US shale production.
1. Look Both Ways:
Inflation or Deflation
[Type the document subtitle]
Kruse Asset Management on the inflation/deflation
debate and how to protect yourself.
J. Stuart Kruse, CFA
10/5/2009
2. Look Both Ways: Inflation or Deflation?
Most people are very familiar with the concept of inflation, which is the process in which
the cash that you hold today becomes increasingly less valuable with time, and thus buys
fewer goods and services in the future than it could buy today. During modern times,
slight inflation has been the norm, but just a few decades ago inflation was a huge
problem that was eroding the savings (and purchasing power) of all people holding US
dollars.
In general, economists believe that inflation is a monetary supply and demand issue.
Stated another way, it is the result of too many dollars (over supply) chasing too few
goods (high demand). Items that are in great supply are devalued (dollars) and items
whose demand cannot be met (good and services) have a price increase and bam:
Inflation!
Then it should come as no surprise that deflation is thought to be the opposite of
inflation: too little money trying to buy an excessive amount of goods. If there is an
over-supply of goods, they must be devalued (or deflate via lower prices) and the under-
supplied currency should increase in value (or purchasing power)…supply and demand.
So what forces are at work today and which ones will prevail?
Currently, we are at an unsustainable point of equilibrium between a high-supply of
money (due to liberal monetary policies) and a low demand of goods (due to our most
recent recession and increased savings rate). Normally these two forces are in opposition
with each other and it is not that difficult for the Federal Reserve to pull off the balancing
act and maintain a slight inflationary atmosphere. But as the opposite forces become
more powerful, as they are today, the balancing act becomes more difficult.
Think of it like this: you are overseeing a tug-o-war match between two groups of people.
You are not impartial. You want one group to win, but not so much that the group gets a
big head. So you stand in between the two groups and pull on the rope a little one way or
another to make sure the event goes as planned and your favored side wins, just barely.
Easy enough if there are 7-year old kids on each side. If there are 22-year olds on each
side of the rope, however, it is decidedly more difficult to influence the outcome, and in
spite of your efforts, it now looks like your favored side might lose. What do you do?
You can call in reinforcements. The problem with that is that your helpers tend to
become very loyal to the side you place them on, and it is hard to stop them once they get
going. As the game begins, the rope starts to move one way and then another. After a
while, a team will gain a stronghold and begin consistently moving the rope to its side.
As momentum builds to one side there is generally a release by the other team and the
rope flies to the winning side as the losing side releases hold.
The Fed faces this same problem. When the deflation and inflation side are “7-year
olds,” that is, when neither is that powerful a force, the act of maintaining a slight
inflationary atmosphere (making sure inflation just barely wins) is much easier. When
3. deflation and inflation are as powerful as they are today, however, the balancing act
becomes much more difficult, if not impossible. The deflation side was starting to win,
so the Fed had to call in help (lots of help) just to stop the deflation team from gaining a
stronghold. By the time the Fed is sure that deflation has stopped, so much momentum
will have probably built up on the side of inflation that, with all that extra force tugging
away, it will be very challenging to stop the rope from flying over to the inflationary side.
Right now, the Federal Reserve is pulling hard in favor of the inflationary side of the
rope, focused mostly on curbing deflation. It is doing this by attempting to offset the
reduction in demand with an increase of monetary supply. There are good reasons to stop
deflation, of course. Indeed, many economists believe that a generally deflationary
environment is a self-fulfilling downward spiral that is difficult to break out of, which
could result in a repeat of Great Depression-like scenarios.
The theory goes like this: if prices are decreasing (deflationary), and if there is an
expectation that that trend will continue, then people with cash will not spend on goods
and services today. Those goods will be less expensive in the future and waiting rewards
consumers. Because there is less demand, however, those goods build up in quantity,
become less valuable, and fall in price. Also, the number of transactions will decrease,
and by definition, the velocity of money will be lower. Lower monetary velocity and a
greater quantity of available goods and services will then cause more deflation and
decrease spending even more. The cycle is a self-fulfilling downward spiral to ugliness.
It is this type of deflationary death spiral, coupled with a mishandling of monetary policy,
that most economists believed solidified the hold of the Great Depression over our nation
in the 1930s. In spite of many economic policy changes after deflation took hold, that
cycle was only ultimately broken by extensive governmental spending due to World War
II.
Mr. Bernanke, a student of the Great Depression and the Fed’s current Chairman does not
wish for history to repeat itself on his watch, and has stated so on many occasions. As
such, the Fed has entered the “Great Ease” of monetary policy and supply-side economics
in attempt to “reflate” any short-term deflationary forces. It has also said repeatedly that
it will continue this easy economic policy until it is sure that the risks of deflation and a
Great Depression II have passed.
This policy can result in three possible outcomes:
1. Ineffective and useless: the policy may fail. After pouring trillions of dollars into
our economy and keeping the lowest Fed funds rate possible for extended periods
of time, the Fed may be ultimately ineffective in stimulating our economy out of a
deflationary cycle. The US enters “GD II.”
2. Perfect World: the policy succeeds. The Fed’s policies may “reflate” the
economy correctly and with perfect foresight. It may effectively increase interest
rates and decrease the money supply to match the unfolding economic growth in
4. exact lock-step – knowing that if it were to tighten too quickly, it may have to
repeat this entire debacle. Only this time there would be more fear and distrust
from consumers creating an even bigger hurdle to correct the next go-round.
3. Most Likely Case: the Fed is likely to err on the side of caution, leaving interest
rates too low and keeping the faucet open on the money supply for too long. This
is mostly because changes in monetary policy generally do not begin to take
effect for at least nine months after their implementation. So, you might think
about it like this: Many summers ago, you had severe heat stroke and you don’t
want that to happen again. Consequently, you wait for the temperatures to cool,
the leaves to turn brown and fall off the trees and the first snow fall before you
declare summer is over. Now you are freezing and you realize that you have no
coat, so you order one from the internet but takes nine months to make and
deliver. The Fed will likely wait until the snow before ordering its coat (raising
rates and decreasing the money supply) and freeze through the winter.
Well, you’re not going to have heat stroke again, and the Fed will avoid deflation, but at
what cost? Distressing levels of inflation. By the time the Fed takes its foot of the
stimulus gas peddle, it will be too late to stop the inflation car from launching itself off
the ramp of inflation. It might be a few months from now or a few years, but it is likely
to arrive.
When inflation does manifest in our economy, if you have followed recent trends and
moved your savings to “safe and secure” investment instruments like cash, bonds and
annuities1, you may suffer in the same way as if you lost 40% of your net-worth in the
stock market decline. Your dollar buys ½ of what it did not too long before, but instead
of seeing the dramatic effects spelled out for you on C-NBC or in your account
statements, your purchasing power will be silently eroded by the force of inflation. Less
publicized, but just as real. Even more so because decreased awareness of what is
happening disables your ability to adjust accordingly.
In general, people don’t get hit by a train if a train has just passed or if they know it is
coming. Most people get hit if they have:
• Fallen sleep on the tracks (complacency),
• Don’t look for the train (turn a blind eye), or
• Are tied down to the tracks (locked into long-term, illiquid investment like
annuities and long-term bonds).
The same is true for your investments. It is rarely the case that people are plagued by the
same issue twice (and almost never in a row). In recent history there was the “tech
bubble” when the masses where lured into the speculative returns of “tech companies”
and invested in products that they knew little about. These masses concentrated their
wealth into one sector, technology, and turned a blind eye to the dubious valuations. The
tech market corrected 80%.
1
In general, annuities lock-in a fixed payment, acting like a long-term bond.
5. Next came the real estate bubble and condo-flipping. Money was easy and cheap
(because the Fed was trying to engineer its way out of the bursting of the previous
bubble). Banks became complacent and lent people money that they couldn’t pay back
on houses that weren’t worth as much as they thought and then leveraged the investments
to insane levels. Guess what? That bubble burst too. We saw the largest real estate
decline in recent history.
After that, money poured into commodities looking for a home. Oil rose from
$30/barrel to $140/barrel in a few short years. All commodities were rising: silver,
platinum, gold, corn – there were even rice shortages and rationings for a short time. Not
much later, oil was back in the $40/barrel range, and many commodities prices had
returned to a normal level.
During that same time, the global economy slowed and we entered a world-wide
recession. Even diversification didn’t work for a relatively short period (a long period
from the perspective of those watching their assets melt away). Stocks, bonds, real
estate, commodities, emerging markets all went down big and in unison. The only safe
haven was cash and some short-term government bonds (even derivations of those were
threatened in the forms of money markets and bankruptcies).
So what is likely to be the next wave to threaten your livelihood? The declining global
stock market? How about a sudden collapse in real estate prices? Those trains just
passed. Commercial properties? Maybe, but we can all see that coming, so I don’t think
we will get killed by that train.
The next significant threat will likely stem from current economic policy that is
attempting to engineer and control a “free market.” The force to correct the current
problem could easily create an even larger imbalance later. Moreover, it is likely to
affect something that everyone is currently holding, but thinks is safe. Cash and
Government Bonds. Inflation causes those over-supplied, over-horded asset to be
equalized back to normal levels with the rest of the investible universe. As a result, there
will be other such casualties such as mid- and long-term bonds, preferred stock and
annuities (which tie you down to a fixed payment for life and will be worth less and less
with each payment).
The forces of the markets generally do not reward the excessive collection of one asset
class. We saw this with technology, real estate, commodities and debt. Right now, there
is more cash “on the sidelines” than ever before, and it is improbable that the current
holders of that cash will be blessed with deflation. The opposite is more likely true.
So what should you do?
1. Diversify: diversify your assets. Diversification has not worked for only a few
short periods in history and we just went through one of them, so that is a good
start.
6. 2. Hard Assets: invest in commodities, real estate, and currencies. If you wish to
protect yourself from inflation, then you need to own assets that will “inflate”
along with the rising tide. In general, you need to own “hard assets” such as:
a. Commodities: commodities go up directly with inflating prices. Make
sure, however, that you own a basket of commodities. Don’t just buy gold
and/or oil (or even a commodity index, which is often 70%+ oil-related).
You can buy a variety of ETFs (Exchange Traded Funds) that move with a
variety of commodities in different sectors: industrial and precious metals,
agriculture, livestock, etc. If you don’t know about ETFs, ask your
financial professional.
b. Real Estate: land will appreciate with inflation and your purchasing power
will be protected. This can be done via ETFs or REITs (Real Estate
Investment Trusts).
c. Currencies: if the U.S. dollar is inflating, then perhaps you should own
other forms of currency (from countries that are not devaluing their
currency by pumping cash into their economies). The Euro and the Swiss
Franc are potential candidates. Buying different currencies will hedge the
effect of US inflation and loss of purchasing power. This can also be done
via ETFs or by literally exchanging US dollars for those other currencies.
3. Global Equities: yes, the U.S. is a still a good place to invest, but just because
you are more familiar with the U.S. doesn’t mean that you should limit yourself to
investing only in companies that you know locally. There are other countries that
are not pumping their economy full of debt, so spread your investments around.
The U.S. stock market represents approximately 60% of the global investible
opportunities. There is a strong argument that, at equilibrium, only 60% of your
equities should be invested in the U.S. If you want to protect yourself from issues
domestically, however, you should consider over-weighting internationally.
Adjust your investment strategy accordingly.
4. Market Neutral Strategies: don’t know which way the market is moving? Don’t
care. Market neutral strategies are designed to hedge your portfolio in any
environment. This can be done by purchasing one stock and shortingi a related
stock in the same sector. It is the relative difference between the two stocks’
prices that is important, not the general direction of movement. This strategy’s
performance is independent of the market’s direction.
5. Principle Protection: if some of these above strategies seem a little too risky for
you, then you can buy a “structured product” that links a CD to an index and has a
feature of principle protection (you will be taking on the credit risk of the issuing
bank). If that index (say commodities) goes up, you win and participate 100% or
more in that victory. If, on the other hand, if the index falls, you get your money
back at the maturity of the note. You don’t win or lose, but live to fight another
7. day and by that time the landscape is sure to have changed, and you can redeploy
that money accordingly. Furthermore, CDs are currently protected by FDIC
insurance up to $250,000 per account. The down side is that CD returns are
taxable at the ordinary income rate, so think about using them in retirement
accounts.
6. Short-term Bonds: If you are going to buy bonds (and you probably should),
focus on “ladder” short-term maturities. Do not “chase yield” locking yourself
into a long-term commitment just because those bonds pay more. While bonds
will pay a periodic interest payment provided the issuing company is still viable,
that fixed income is devalued in a rising interest rate environment. For example,
if inflation hits 8% (extreme for today, but not in comparison to our history), in
only five years from now those payment will be devalued by almost 25% and in
10 years they are more than cut in half. Just think what happens if you lock in a
30-year bond or buy a lifetime annuity. That income stream that you depended on
today may seem like nothing in the future.
Be a student of history, with an eye to the future by watching that tug of rope carefully.
Don’t trap yourself in long-term or illiquid investments that protect you from recent past
catastrophes. Do keep a disciplined diversification plan that is inclusive of asset classes
that can protect you from future problems. There are many trains out there, so instead of
getting hit by one, let’s get on it and let it take us to where we want to go.
8. i
“Shorting” is selling a stock that you currently don’t own at what you hope is a higher price so that you can buy it back
later at a lower price. Opposite of being “Long” or owning the stock first, if the stock price declines, you make a profit.