The U.S. Equity market "loved" the rate cut. And why not? The Fed pretty much eliminated competition from short term fixed income and cash instruments for equities, and real estate is no longer a player, leaving equities and commodities as the only game in town. If the Fed increases the money supply, that money is going to go into something.
Grudgingly, it is my expectation that the equity market will continue to rally for a while. As before, my bets will be almost entirely on the natural resource sector of the market. The Fed might delay the inevitable, but cannot eliminate it. I would use the rally as an opportunity to sell other sectors. As to when, you are on your own.
Now that the Fed has unequivocally abandoned the $ the other major central banks will be forced at some point into coordinating some kind of support for the U.S. currency vis a vi their respective currencies. Look for this to REALLY ignite commodity inflation.
The deflation/inflation debate continues, with some sharp, well respected folks on both sides. As for me, I am in the inflation camp, although housing will not be included in that thinking.
Monetary policy cannot be THE economy. The U.S. is going to have to produce goods and services to trade with its import partners, and the American people will eventually be required to save enough capital to support our domestic borrowing needs. If the decline of the $ continues apace, this will be a most shocking adjustment.
It seems that people cannot conceive that anything can change in their particular environment. Several years ago, South Florida residential real estate was as hot as a pistol. When we issued a white paper to our real estate clients that the market was in critical condition and subject to an immanent plunge in prices the paper was welcomed with derision.
Several days ago I had a conversation with a prospect living in one of the residential hotspots of the Colorado ski industry. This market has not been hit yet - but it is as doomed as South Florida was. Energy prices and availability will doom these areas - yet my prospect could not conceive of this, and I probably impressed my prospect as being an intellectual dolt. After all, this market has been red hot for years! How could that possibly ever change? How indeed.
Stay tuned.
Yours for a better world,
Mentatt (at) yahoo (dot) com
3 comments:
I'm surprised at the inflation/deflation debate. It seems obvious to me that commodity inflation (oil & food for example) is driven by inelastic demand and therefore isn't vulnerable to interest rate adjustments. Inflation is the devaluation of currency, so low $-zone interest rates and printing more money will create inflation in anything which is internationally traded. Houses aren't, so will continue their fall, I'd guess by 40% in the U.S. (30% in the UK)and will not recover.
I'd also say we'll see $200 oil, 2€ to the dollar, and Sterling/Euro parity this year.
Regarding your idiot client - I've always been grateful that most people prefer to stare in wonder at their navel rather than study the world around them, think about what they see and enjoy the more discerning pleasures. After all, if the herd shared my tastes and judgements, my world would be a lot more crowded and they'd just drive up the prices!
Your prospect in Colorado is typical. This reminds me when I was talking with my uncle in Minnesota about Peak Oil. He immediately said "You are in the minority in this opinion". I wanted to tell him that I am happy to be in the minority. I started as a refugee at 13 when my family moved to the US. I have started my own company by 32 and grew it to 160 people. I retired at 37 and have more than doubled my net worth since then. I now live in paradise outside of the US. So damn right I am in the minority and happy to be in it.
Now my uncle is one of the most intelligent people I know. He is a Sr. Partner at a very prestigious international corporate criminal law firm. But he, like all of us has a preconceived notion of the world which has a blind spot that is not obvious. I would not presume to argue with him on corporate criminal law but I would also not have any worries with my opinion diverging from his when it comes to global energy issues either. Ones expertize in one field doesn't automatically transfer to other fields. And that is the key problem. Most people who are successful think that they could be successful in anything else they do. Or that their assumed or real intelligence gives them the right to have an opinion about things they have not spent any time actually researching in depth.
As far as whether we have inflation or deflation I think we can all agree that whatever way we get there the end result will be poverty and suffering for the majority of people.
Poets are better analysts of this than economists.
Some say the world will end in fire;
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if it had to perish twice,
I think I know enough of hate
To know that for destruction ice
Is also great
And would suffice.
- Robert Frost
My best wishes go out to you and your families.
Best regards,
Chuck H.
Thank you for your comments.
It has hard for non-analysts to spend their valuable time considering future market outcomes. I think this only natural.
Thankfully, this creates opportunities. In many markets, for every winner their is a loser. Who knows, my prospect may be proved correct and my analysis completely off the mark - but that isn't the point. THe point is that the prosepct could not even CONSIDER the possibilty that trend of the last decade might not be the trend for the next decade.
Markets tend to confound most of their participants in the short term. The last couple of days is a classic example. The $ rallied in the face of a 75 bps cut by the FED! Who'd a thunk it? Certainly not me.
I maintain that the primary talent of a good trader is the abilty to admit being wrong and close the trade before things get worse - and to accept being right, and hold that trade longer than you hold the losers. And still I violate my own rules from time to time.
Its a funny old world, ain't it?
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