Boring is Great

I’ve always liked investing rules, because they impose discipline. Here is one rule I find useful: boring investments are good investments. The more boring the investment, index, or asset class, the better it will probably be for your portfolio. This has been true throughout market history, and the rule manifests everywhere:

• Trading less often isn’t as fun, but it leads to lower costs (trading and taxes) and therefore higher long term returns.

• Index funds are plain and dull, but they outperform a significant majority of active managers over the long run.

• The best performing U.S. sector for the past 50 years is consumer staples, which includes companies that sell simple, boring products which rarely change.

No matter where you look, dull trumps exciting. Consider, for example, two very different industries at opposite ends of the dull/exciting spectrum: food, beverage & tobacco (Coca-Cola, Altria, Kraft Foods–BORING) and technology hardware & equipment (Apple, Qualcomm, Cisco—EXCITING).

The technology sector is almost always the most exciting part of the stock market, because technology companies offer new and exciting products and services. The market is rabidly speculating about every detail of the upcoming iPhone 6, but no one gives a crap about (or expects) some revolutionary new flavor of Coca-Cola.

So here is the remarkable fact: since 1963, the boring stocks (food, beverage & tobacco) have had a return of 13.6% per year (or 69,402% total), while the exciting stocks (technology hardware & equipment) have had a return of just 9.2% per year (or just 8,464% total).

You often hear that earning higher returns requires taking higher risk, but the opposite has been true for these two industries. Food, beverage & tobacco stocks have been HALF as volatile as technology hardware stocks (14.2% annual volatility versus 29.5%).

Technology is an incredibly competitive industry with a very high rate of change. It is impossible to predict what technologies will emerge in the future, and equally impossible to predict what companies will profit from those new technologies. 3-D printing may be revolutionary, but we have no clue what company will emerge from what will be an extremely competitive playing field.

And yet, even with such an unpredictable future, investors have almost always paid a premium for technology stocks, because they excite and inspire. Here is the historical valuation percentile (higher = more expensive) for the two industries in question.

This means that, historically, investors have paid more for stocks in one of the most competitive industries, where it has been the hardest to succeed and stay on top.

Change generates excitement, but as Warren Buffett has said, “We see change as the enemy of investments…so we look for the absence of change. We don’t like to lose money. Capitalism is pretty brutal. We look for mundane products that everybody needs.”

So buy Kellog (K) and sell Priceline (PCLN)

Cheers

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US money Markets and The FED

The stock market is at all-time highs and the bond market is still functioning….everything is great right? Wrong. Since the current state of the markets is entirely predicated on the actions of our Federal Reserve I thought it would be a good idea to show investors what is going on behind the curtains, so to speak.

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.

The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?

The Fed’s policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.

The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management.

This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

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Points to Ponder

Potential Bond Bubble – The U.S. bond market totals nearly $40 trillion which is far bigger than the stock market, which stands at about $28 trillion. The bond market is also more tightly linked to monetary policy than the stock market for the simple fact that interest rates affect all types of bonds whereas they don’t affect all types of stocks.
There are three indicators I’m watching that could point to a bubble. First, the rising level of private-sector debt as a percentage of the U.S. economy; Second, narrowing spreads between risk-free Treasuries and corporate bonds; and third, the growing proportion of corporate debt going to riskier companies.
I feel there is a belief among market participants that the Fed can safely deflate this bubble, but we have to remember what the Fed is currently doing is a grand experiment. Playing around with the economy in an attempt to create growth; While simultaneously keeping an eye on inflation. My fear is that they have overestimated their ability to do either.

Bonds don’t agree with Stocks -One of the things that I like to look at to get a gauge of the risk appetite out there is the ratio between High-Yield (Junk) Bonds and US Treasury Bonds. If money wants to go to work into risk assets like the US Stock Market, it makes sense that we would see similar action in the bond market. If money is flowing faster into risky Junk rather than the safer Treasuries, then we know that the behavior of the bond market is confirming the new highs in the stock market, Whenever the S&P 500 made new highs last year, the Junk/Treasury spread was also putting in new highs. This inter-market analysis helped confirm what we were seeing in stocks. But so far this year, we’re not seeing that confirmation at all. In fact, all we see are lower highs while the S&P hangs out near fresh highs.
The non-confirmation of junk bonds to the recent rally is a little concerning. Since it reflects the traders belief of economic progress if junk bonds rise versus treasuries the bet is for a better economic performance and vice versa. Of course, the stock market is a forward looking indicator on the health of the economy as well. I have always believed that bond investors are smarter than stock investors, so we will see how this plays out in the coming months.

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Taper or No Taper

 

To taper or not to taper? That is the big question facing the Federal Reserve. And as I have pointed out in previous columns, it’s the Fed’s actions that investors should be watching closely, because the U.S. central bank’s easy money policies have become the most powerful force affecting stock prices.

 

While most economists agree that continued tapering is inevitable, the Fed recognizes that it must be implemented in a manner that is least disruptive to the financial markets. Which means the debate is no longer about whether or not the Fed should begin tapering; instead it has shifted to how aggressive the Fed should be in executing its tapering plan.

 

A few weeks back, Janet Yellen, in her first press conference since assuming the position of head of the Federal Reserve, explained the Fed’s decision to continue its tapering plan and set out the central bank’s new “forward guidance” about future interest rates. Her comments about QE came as no surprise. Yellen said that the Fed’s purchases will slow by $10 billion to $55 billion a month starting in April, with this gradual taper continuing until QE grinds to a halt, potentially as early as October. When QE ends, the Federal Reserve will own bonds worth around 22 percent of U.S. gross domestic product.

 

 

 

With regard to interest rates, the Fed’s previous promise was to hold short-term rates below 0.25 percent until unemployment fell below 6.5 percent and inflation ticked up to approximately 2 percent. With the unemployment target coming within range, Yellen said future rate increases will be assessed using a range of economic data, with no single target. What’s more, Yellen went on to say that in her view, increases are a long way off.

 

That’s because the economic data is not as rosy as the QE cut suggests. For a start, there is little sign of inflation. Prices are rising at an annual rate of only 1.1 percent, well below the Federal Reserve’s target of 2 percent. Wages are hardly running away either, growing at about 2 percent. Home building has fallen sharply in recent months.

 

So the primary tapering concern is that without direct Federal Reserve intervention, rising interest rates could choke off the already fragile economic recovery.

 

But there is a more important reason to look through the current taper debate — one that is overlooked by many investors — and that has to do with the evolving role of the Federal Reserve in our economy. What sets our Federal Reserve apart from other central banks, most notably the European Central Bank, is its dual mandate originally established by Congress. Our Federal Reserve is charged with both maximizing employment and maximizing price stability. In the long run these are incompatible goals. In previous eras, the economic cycle determined which goal was emphasized — unemployment was the focus in recession and price stability in recovery.

 

In the current era these goals have become politicized, with the goal of employment gaining the clear upper hand. I do not see this changing in the foreseeable future. Like it or not, the Federal Reserve has become a proactive player in our economic system. Whether it is through direct purchases of government securities (which can easily be resumed at some future date) or some other form of direct or indirect stimulus, this is truly the “new normal.”

 

While Federal Reserve intervention five years ago arguably prevented a full-blown economic depression, the reasons behind the very modest global economic recovery are now largely beyond the Fed’s control. However, since the Federal Reserve has become such a powerful force in the economy, it will continue to seek the best levers for stimulating economic activity and increasing employment, even if there is no silver bullet.

 

While the stock market could decline as the tapering plan continues, the risk of a full-blown bear market remains relatively low. As long as Treasury bill rates remain around zero, and as long as the Federal Reserve is prepared to step in with additional stimulus if the economic recovery lags and unemployment rises, the Fed indeed “has the market’s back” and we remain in a sweet spot that supports high stock prices.

 

 

 

 

 

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Splits that will be Hits

Athletic clothing maker Under Armour (UA) made big headlines last Monday, announcing that its board had approved a 2-for-1 stock split. The news prompted a jump of 2% in UA stock, which helped shares close at a new all-time high of $119.67.

The stock split announcement was the second such move by the Under Armour board since the company began its publicly traded life in November 2005. And if history is any harbinger of things to come, UA stock is in really good shape — since the first stock split in July 2012, shares are up more than 150%.

Monday’s event reminds me of the halcyon days of trading in the late-1990s tech bull. I was working at a small private hedge fund then, and one of the tools we used to juice up gains was something called a stock split alert service. In a sign of the times, we used to receive a page (yes, via a pager) when a company had announced a stock split. This was important information, because during that dream-like bull period, a stock usually was good for a 2% to 5% pop on news of the split.

I always thought this was strange, because from a pure math standpoint you don’t gain anything with a split. If you have a stock trading at $100 and you own 100 shares, you have $10,000 worth of that stock. After a 2-for-1 split, you’d have 200 shares, sure, but they’d only be worth $50 each, and you’d still have the same $10,000 in stock.

Yet the curious logic of investing applies here, and in this case, the lower share price actually does attract more investors (especially individuals), and more capital. The reason why is that psychologically, retail investors tend to think they are getting more for their money if the share price is low. The willingness to buy a stock, and more shares of a stock, when it trades at a lower nominal price prompts some buying, and that prompts a rising share price.

The split announcement by Under Armour caused me to speculate on what other companies might be ripe for a 2-for-1 split, and would hence benefit from a headline trading price set about half of where it trades at today.

The ideal candidates would be 1) Big, well-known names that consumers have embraced, 2) High-profile stocks individual investors feel comfortable trading, and 3) stocks that trade above $100 a share.

So, if you are making up your personal watch list, then here are six stocks that fit that above criteria.

Amazon.com (AMZN), $375: The online seller of everything has seen its stock split before, but not since the aforementioned late-1990s bull. Amazon shares split 2-for-1 in June 1998, and then twice in 1999 — a 3-for-1 split in January when the stock traded at $354, and a 2-for-1 split in September. With shares near $375, we could be likely to see a new split soon.
Apple (AAPL), $528: Apple is no stranger to splits, either, having pulled off 2-for-1s in 1987, 2000 and 2005. And while the tech giant has recovered from its precipitous drop from $700 between late 2012 and mid-2013, AAPL has been languishing for months in the low $500s. A new iPhone might do the trick, but a stock split would almost certainly reinvigorate retail investors as well.
BlackRock (BLK), $299: The private equity stalwart knows how to invest and make money for clients, but now that its shares are near $300, is it time to split? One thing we know about financial firms like BlackRock is that if there is value for shareholders with a split, then that’s the move they’ll make.
Chipotle Mexican Grill (CMG), $591: Shares of the fast-food slinger have been a darling of Wall Street’s fast money for some time, and over the past five years the stock has soared 842%! Yet that gain could likely be built on further with a 3-for-1 split of the shares, which would still leave the stock at just under $200.
Priceline.com (PCLN), $1,301: The online travel site has split its stock before, but in reverse, at 1-for-6 in 2003. More recently, PCLN shares have been an extreme high-flier over the past five years, having soared some 1,550%. And with shares now trading around $1,300, this example of an online commerce winner would be more than able to handle a 3-for-1 or more split and still keep gaining altitude.
Tesla Motors (TSLA), $237: If Elon Musk can drive TSLA stock more than 1,100% since June 2010, why would he split the shares? Simple, because more people would move to grab a stake in this game-changing company, and that would smack down the haters who think Tesla shares are unsustainable.
Each of these companies would likely get a trading boost, and possibly a sustained boost, by seeing their respective share prices come down by at least half. In the case of Priceline, it could easily undertake a 3-for-1 split and still have a relatively high share price.

Finally, one company that isn’t on my list is Google (GOOG), but only because the Internet search giant already announced it will undergo a split later in the year.

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Why The Stock Market Keeps Going Up as The American Economy Keeps Going Down

The strength in the stock market is not due to the U.S. economy. Nor is it due to money printing, corporate earnings, or any of the usual suspects.
The stock market is simply going higher and will go much higher over the longer-term because …
A. Europe is in worse shape than the United States. And …
B. The finances and policies of our government are driving investors away from the sovereign U.S. bond market and into stocks.
If you understand those two forces, you will not only be able to protect your wealth in the months and years ahead, you’ll also be able to profit, very well indeed.
Yes, I know, it makes no sense. If America is on the decline, how can stocks go higher?
Well, it’s actually simple. Most companies in America are in better financial shape than our own government. Moreover, most blue-chip stocks these days pay you income in the way of dividends or royalties and much better than you can get just about anywhere else.
And, most importantly, stocks are considered largely non-confiscatable.
On its way down, Washington will seek to nationalize part or all of your retirement assets, confiscate gold, and certainly tax you more and more.
Yet, they will never subpoena Apple for a list of its shareholders. They will never confiscate your shares in a publicly traded company or nationalize any industry. Right now, the strength you are seeing in the stock market is largely due to an influx of the initial money coming out of the sovereign bond markets in the United States and Europe due to its troubles.
Not to mention Ukraine, which I am sure is lighting a fire under savvy Eastern European investors to also get the heck out of Europe.
The fact is that huge amounts of capital now view U.S. stocks as a safe haven, and it is rightly justified in doing so. So sit back and enjoy the decline of western civilization..if you have money in stocks and commodities it will be enjoyable as well as profitable.

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The Future of The American Dollar

Imagine a central bank that prints so much money that the nation’s currency falls to one billionth of its value — in just two and a half decades.
Imagine another currency that plunges five times further in the same time frame.
Or worse, imagine a currency that’s so thoroughly smashed and decimated that it’s left with just one hundredth of a billion of its original value after just 23 years.
Unimaginable? Perhaps. Impossible? Absolutely not!
In fact, I’m not talking about the hyperinflation that swept Germany after World War I. Nor are these examples taken from pre-modern times.
Rather, the examples I just gave you are from modern economies, the last of which is the eighth-largest in the world — Argentina.

Just to match the buying power of a single peso in the year 2000, you’d need 100 billion pre-1983 pesos (called the peso ley).
If you stacked those old 1-peso bills on top of each other, you’d have a pile that’s 6,896 miles high. And if you laid them end to end, they’d go around the earth at the equator, loop from pole to pole, and reach all the way from our planet to the sun.
The cost of the paper alone was thousands of times more than the money’s current value. Even the speck of ink used to engrave the letter “B” in “Banco Central de la República Argentina” cost more than that peso is worth today.
And with that destruction of the money came the demise of the country as well — not only the structure of its economy … but also the fabric of its society … the ethos of its culture … the core of its psyche.

Not long ago, during the climax of its post-inflationary collapse, it went through three presidents in 11 days.
Its National Congress was ransacked by rioters.
In Buenos Aires and other major industrial centers, professional, middle-class citizens — plus their children — could be found at rat-infested dumps, collecting bottles, cans, paper and cardboard.
So many trash pickers, or cartoneros — including young adults still dressed in work clothes — were sitting on the sidewalks throughout Buenos Aires that tourists said they had to be careful not to step on them when walking down the street.
As the crisis spread, street riots resulted in hundreds of deaths. The suicide rate soared. Banks closed. The economy virtually shut down.
Unlike Syria today, there was no civil war. But for many long months, Argentina virtually ceased to exist as a cohesive nation.
The Impact of Currency Collapses on the Wealthy Can Also Be Severe
Let’s say you were a well-to-do Argentinean industrialist. Your family grew its assets over many generations. You built factories and office buildings.
But about three decades ago, you sold your vast empire and retired, netting $50 billion Argentine pesos. Do you know how big your fortune would be worth today if you kept it in cash? Not even enough to buy a cheap cup of coffee!
Other Examples of Currency Chaos Abound …
The currency collapse in Germany in the 1920s was also driven by massive money printing by its central bank. End result:
• When people went to buy food, it doubled in price every 48 hours.
• When thieves encountered a wheelbarrow of cash, they took the wheelbarrow and left the cash behind.
• When the collapse finally climaxed in 1923, a loaf of bread that had cost one mark was going for 726 billion marks.
The currency collapse in Russia after the fall of the Soviet Union provides another illustration:
• In 1992, when post-Soviet Russia abandoned price controls, the inflation rate hit 2,520%.
• The value of the currency plunged from 100 rubles to the U.S. dollar in 1994 to 30,000 rubles to the dollar in 1999.
The currencies of other East European republics got slammed even more severely, again due mostly to money printing:
• In the Ukraine, if someone had robbed a bank and stashed 2 million of their currency in 1992, ten years later the most they’d buy with the loot was a candy bar. And last week, after the fall of the pro-Russia government, even a candy bar would be unaffordable.
• In Belarus, Yugoslavia, Romania, and other countries, the currency collapses were similar — or worse.
Not long ago, we also saw disastrous currency collapses in Turkey and Zimbabwe … and before that, in Thailand, Malaysia, the Philippines and Indonesia.
In each and every case, when the currency fell, international capital fled. The value of local debt instruments was obliterated. People’s lives, whether rich or poor, were shattered.
Some People Seem to Think This Is Strictly
the Fate of Developing Nations. Not So.
France suffered a series of currency devaluations in the years following World War II, also largely due to the central bank’s excesses.
Then, in 1981, it happened again. The French government began implementing nationalizations and economic reforms. But international investors didn’t like that. So they dumped the franc and took their money elsewhere.
At first, the French made some futile attempts to support their currency. But soon they were forced to devalue — three consecutive times between October 1981 to March 1983.
Eight years later, nearly all of Western Europe was swept up in a sweeping currency crisis in 1992.
Five years after that, currency collapses hit nearly all of East Asia.
In short …
This is No Game. Nor Is the United States Immune.
Let’s review the history.
President Nixon’s moves to devalue the U.S. dollar in 1971 set off a decade of rampant inflation.
President Carter’s neglect of the dollar in the late 1970s culminated in surging interest rates and the collapse of the U.S. bond market.
Not to be outdone, President Reagan let the dollar fall in early 1987, which set the stage for the worst single-day stock market crash in American history.
And now, here we are, with the greatest money printing-press extravaganza of modern times — $3 trillion and counting.
Right now, the U.S. dollar isn’t collapsing — yet. But that’s not because it’s strong. It’s strictly because the measuring sticks we use to value the dollar — other major currencies — are just as weak, or even weaker.
My advice: Get ready to invest in the many instruments that inevitably rise when the dollar (or other paper currencies) falls.

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Fed Policy is Good for Investors

Thanks to Fed (US) monetary policy, a state of stable economic dis-equilibrium has settled over the US and it is just what the market needs to maintain its lofty level and perhaps even move higher in these uncertain times.
Iit’s the Fed’s easy money policies that are the key to maintaining current conditions, because without the central bank’s continued intervention, the current status quo where savers are unfairly punished while speculators are rewarded would almost certainly fail.
That’s why it’s imperative for investors to keep a watchful eye on the Fed so you can keep your portfolio out of harm’s way should the Fed’s policies change.
The Fed’s easy money policies are the key to maintaining current conditions.
Recall that since the onset of the financial crisis the Federal Reserve has repeatedly maintained the stance that it will keep interest rates low until unemployment falls to around 6.5 percent and inflation (as measured by PCE, or Personal Consumption Expenditures) starts to track around the 2 percent level.
But now that the unemployment rate is coming within the desired range, Fed officials are beginning to distance themselves from exact numerical targets.
How do we know?
A careful review of the minutes from the central bank’s meeting three weeks ago — which happened to be the final meeting for former Chairman Ben Bernanke — reveals that Fed officials agree that with the unemployment rate now nearing its target, “it would soon be appropriate for the committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold is crossed.”
In January, the unemployment rate fell to 6.6 percent. While that is the lowest level in more than five years, it’s a well–known fact that the labor market is still far from vibrant. Indeed, much of the decline in unemployment has been the result of a large number of Americans dropping out of the labor force.
That’s why instead of pinning guidance on an exact level of unemployment, some Fed officials favor a new guidance strategy. The minutes show that several members emphasized that the Fed should support a “willingness to keep rates low” as long as inflation remains below its 2 percent target.
Newly appointed Chairman Janet Yellen provided even more relief for worried investors when she recently told House lawmakers in her prepared remarks to Congress that the Fed would pause its tapering of asset purchases if there was a “notable change” in the economic outlook, and increase asset purchases again if there were “a significant deterioration in the economic outlook — either for the job market or if inflation would not be moving back up over time.”

She then borrowed a phrase from her predecessor, Ben Bernanke, in his final speech as Fed chair by stating that “purchases are not on a preset course” and that “the committee’s decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.”
What all of this means is that we are likely to remain in the sweet spot for stock investors of tepid economic growth and low inflation that I described in a recent Money and Markets column. In that article, I presented the chart below that shows that an economic environment characterized by lukewarm economic growth and price stability is the only one that is good for stocks going forward.

The good news is that a close reading of the minutes from last month’s Federal Reserve meeting and Chairman Yellin’s follow — on remarks were consistent and confirm that the Fed understands the precarious position the economy and the financial markets are in.
Make no mistake, this period of stable economic disequilibrium can’t and won’t go on forever. But for now, I think that the Fed continues to thread the economic needle of price stability and tepid growth. And in the short run, that’s good for stock investors.

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Week in a Blink:

Equity markets built upon last week’s strength to bring markets back within striking distance of all-time highs. Small cap shares had the greatest gains after lagging their peers last week, while emerging markets had their second straight week of strength against developed markets. All sectors were higher this week, with utilities showing the greatest gains after being the worst performer last week. While utilities have shown the best performance over the last week and on a year to date basis, the sector has lagged the broad market over the past year by more than 8%. Healthcare, which finished a close second last week, is nearly 6 % higher on the year and has been the best performing sector over the past 12 months.

Tweet of the Week: @ReformedBroker “Identifying bubbles is the easy part. Identifying the needle that will prick them – that’s the thing!”

“The financial writer “Adam Smith” (the pen name of George J.W. Goodman), who died last month, once wrote, “If you don’t know who you are, this is an expensive place to find out.” In fact, he wrote it twice, in his sparkling best seller “The Money Game,” first published in 1968. The italics were in the original; by “this,” he meant “the stock market.” If you have been glued to financial television or websites, fixated on the sight of falling arrows and reddening charts, then this year’s short-term turbulence already has told you something about yourself that has enormous long-term importance: You probably have too much in stocks.”
After a 30%+ increase in stocks in 2013, this year has opened with a little volatility. As the author notes, if you are concerned about the volatility, you are probably over allocated to stocks. But putting the recent volatility in historical context, it is nothing that shouldn’t be expected. For instance, research from Ned Davis shows that 5% dips in the market from highs occur on AVERAGE more than 3 times a year (1928 – 2011). Last year was highly unusual in the lack of real pullbacks in the market and should we revert to normal, one would expect a few more 5% dips this year and perhaps even a 10% correction at some point.

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Global Economies (Where We Have Been and What Lies Ahead)

In the wake of the Great Recession the most powerful crisis since the Great Depression, a powerful negative multiplier descended upon the developed world. Unlike other recessions the Great recession forced a massive deleveraging of consumers and businesses, which inflicted high unemployment and stagnant wage growth. Five years into the recovery consumer and business spending remains weak. The deleveraging and weak spending has forced governments to increase deficit spending to prevent a repeat recession. Now governments are beginning their own deleveraging process. The resulting government austerity has only exacerbated the vicious economic cycle of low growth, high deficits along with an uncertain consumer and business environment. Ironically our financial markets which were the cause of the Great Recession have been the only part of the economy to benefit from the unprecedented level of accommodative monetary policy of governments worldwide. Over the past five years, the global stock of dollars, euros and yen has risen 21%, even as nominal GDP grew only 10% over the same period. The global monetary base has expanded by a remarkable 150%! The effects of these actions are readily apparent. Banks and financial intermediaries have made loans only to those entities that don’t need the money. While at the same time they engage in balance sheet reshuffling stock repurchase and cash hoarding. Consumers aware of the massive government attempts to right the ship has for the most part decided to hold on to their discretionary money. As previously stated the area that has benefited from the lax monetary policies is the financial markets. Thanks to the flood of money firms of all sizes and stripes have made stock repurchases and stock market investments all the rage. The market is now at levels not seen since the Great Recession began prompting some commentators to declare we have created a new market bubble. The question on everyone’s mind is where we are going from here. One thing is for sure bonds are going nowhere as the US Fed ramps up its tapering program we will see yields on intermediate and long term bonds rise and rise. The bright spot is housing which has finally stabilized and begun to show signs of growth if this continues and consumers start to spend again all will be well. However don’t count on it. When governments start trying to make things better they often times make things worse. I predict this will be the case even though it will take a long time before people see the effects. For now I predict more sluggish growth for global economies with US growth to be better than the rest thanks to the continuing oil boom.

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