|
|||
$3,000,000 for a cup of coffee? Part 2Ceri Shepherd In the first part of this article, I talked about currency devaluation and its potential affects upon the stock market. It seemed like some form of economic nirvana, a true utopia that a government by way of a simple currency devaluation can artificially raise the stock market. Unfortunately there are some nasty side effects with this course of economic treatment. Dollar devaluation whose inverse is always price appreciation or INFLATION is primarily caused by expanding the money supply faster than the available supply of goods or services in an economy. In the old days this was simply too much printing of physical money. Today it is a little more sophisticated but the net result is inherently the same. When you apply for a Bank Loan or Mortgage and you are accepted electronic numbers magically appear in your bank account this is new fresh money created out of thin air. You can then even use your ATM card to get physical cash drawn against your new electronic numbers. Now if Alan Greenspan drops the interest that you are going to pay the bank for the use of these electronic numbers, and the banks lower the lending criteria so that anybody who is warm and breathing can get a loan history shows that people then really load up on the numbers. We have therefore created an expanding money supply. All of this new money is eventually going to find a home in goods and services solet the good times roll!. The inherent debt default risk of the expanding money supply is carried by the banks however in our modern world of securitised packages of loans, leases, and mortgages this risk is now passed along the chain, now we can really crank the party up!. We have a huge amount of electronic numbers ready to be spent on the available supply of Houses, Cars, Computers, etc. Because there are more numbers than physical goods the prices of these goods rise it is a classic case of supply and demand or put another way the prices of virtually anything that the market deems more finite than the expanding money supply will probably rise in price. In reality it is not the price appreciating but the unit of currency the medium of exchange depreciating in purchasing power. For example if interest rates are high and a house is for sale at $100,000 maybe only one person can afford the interest payments on the electronic numbers so it is now a buyers market and the house was probably sold at a discount. When interest rates are low many people can afford the interest payments so suddenly there are maybe five buyers all competing for the same house which is then probably sold for a hefty premium. If houses can be built very quickly and if all land can be developed without restriction you will have no property boom as the increased money supply fostered by low interest rates will be equally met with an increase of housing supply. This is best demonstrated with the price of cars and many consumer goods where market overcapacity is limiting price rises despite all the available electronic numbers. The same argument can apply to Stocks and Bonds as the float or issuance is defined . Therefore an increasing money supply can have the affect of inflating these paper assets for the very same reason as the house example used above. The apparent rise in prices can then have a multiplier affect as more electronic numbers are drawn to the newly inflated assets in the hope of still further gains. In the first article I showed that a devaluing currency can increase foreign earnings. In this article I show that by dropping interest rates which ultimately causes the dollar devaluation you also increase the money supply. Which will boost the domestic economy and in Americas case because there economy is so large it will probably cause a spill over boom overseas as well. This is all fantastic and the only down side is a weaker dollar. Hold on a minute, did you say weaker Dollar? Yes a weaker Dollar, so what! Well firstly if the Dollar devalues relative to other currencies then everything that America imports priced in these foreign currencies is now going to cost more. Secondly imported raw materials and energy priced in Dollars is also going to cost more as foreign suppliers demand more units of the devalued currency to maintain there international purchasing power. So now companies have a choice either pass the higher prices on to the customer or accept the higher costs if they are unable to pass the costs along. Which will squeeze earnings the real driver of the stock market. Finally unless wages rise in line with the increasing prices in real terms people are becoming poorer. Not so good now is it? and there is another big problem because the American Government spend about $500 billion dollars more than it takes in taxes every year the mighty budget deficit. They have to sell a lot of bonds and notes to foreigners every week. Over the last few years these have been a very bad deal they pay you about 4% for a 10 year note but real inflation as discussed in detailed articles by Bill Gross and George Paulos is probably closer to 5%. You are actually losing money your return is negative but for a foreigner it is much worse they have a currency hit as well!. Imagine the Japanese a few years ago buying $1,000,000 of Bonds at JPY 130 to the Dollar that costs 130 million Yen assuming the bonds increased in value by 10% (although this price appreciation now drove there yield negative) they have $1,100,000 in the Bonds and today they decide to sell the exchange rate today is JPY 106 to the Dollar so they get back 116.6 million yen!. Not a very good deal is it ? If they all decide enough is enough and sell out remember they account for a very large part of this market. The bond price falls sharply which means yields the inverse or real interest rates also rise sharply! This would not only pop the housing bubble as mortgages rise. As a financial institution why would you lend to an American family at a lower rate than you can get in a liquid market lending to the Government? It would also mean that all new government debt issuance and debt rollovers will also be at the new higher rate of interest stressing the budget deficit yet further. To conclude stock market valuations were so extreme leading into 2000 there was a real risk of a full blown crash. A decision had to be made either to let the stock market go, or the Dollar go, or a bit of both something had to give. It is like being asked do you want a very hard punch in the face or the stomach? But you have to take this punch the choice is yours!. Both markets could no longer be kept up. They chose the bit of both route which in the short term has worked quite well the PE on the S&P 500 has been reduced from over 40 to about 20 today which is pricey but not insane, the bears should take note of this fact, and also remember that most of these companies are multinationals with a high percentage of earnings sourced overseas it is not just the American market! And denominated in a multitude of largely appreciating currencies. The problem has been selected rising prices as dollar devaluation which is the same as inflation bites, most notable among the commodities. We have not seen so much inflation yet in many finished goods owing to tight markets because of global overcapacity. We have also seen a massive worldwide property boom as the banks simply love secured lending of the electronic numbers. The major risk is a bond revolt leading to sharply higher interest rates, this would in my opinion provide a support of sorts for the dollar but rollover the housing and stock market. Politically I feel this would be unacceptable so they will turn to unconventional methods first as they have already threatened to do, which primarily involves the production of more electronic numbers to buy there own debt. Because if the housing market which is now so leveraged is allowed to deflate it has the potential to take the banking and financial sector with it this time. Another hard leg down in the stock market lasting a few years would also be perceived as a disaster for the baby boomers about to retire. Remember, nobody has yet told them about the simple fact that what they have been promised and what the government has ready to pay them, is and how can i put this delicately the small matter of $40+ million, million dollars apart. All of this is now pointing me to the conclusion that the stock and bond markets are being politically managed! and will not fall hard but will probably not show significant rises either for a while. The dollar is also being politically managed! and will continue to decline albeit in an orderly fashion. Commodities and the precious metals the dollar inverse, are also politically managed! In my opinion they will continue to rise this is the true bull market not only for dollar devaluation reasons but also for superb supply and demand characteristics. A decreased supply largely the result of poor investment owing to a 20 year bear market allied to explosive new demand emanating primarily out of China, India, Eastern Europe/Russia. My advice is
simple if it is an internationally recognisable tangible commodity
or hard asset that has to be worked for, and produced, is finite
in character and marketable then get into it. Because Ben Bernanke
and his friends are very good printers, with fast machines and
some big orders to fulfil, they are flooding the market with
more and more printed paper and electronic numbers! Trendinvestor
Capital Management Freephone [UK] 0800 321 3205 We claim that our Trendinvestor Capital Management S&P 500 system has produced results over the last 14 years, that make it without doubt the world's No 1 Investment System. 321gold Inc |
website:
