Be Careful What You Wish For

Central banks around the World can print money but they cannot ultimately control where that money goes. It seems a lot of that money has been finding its way into commodities recently. The effect on the economy of higher inflation and higher interest rates will be very real but the effect of the euphoria causing investors to buy stocks because of "liquidity" will be fleeting.

6 comments:

nicasurfer said...

It sure does seem like a double edged sword. Keep printing and kill us with high prices, or stop printing and kill the equities and the economy.

Market Owl said...

But what about high inflation with low interest rates? Isn't that the perfect environment for stocks? The Fed controls interest rates, and they will keep them low till we get hyperinflation.

Tsachy Mishal said...

I don't believe the Fed will keep printing once the CPI shows inflation and the bond market will sniff it out. There could be a period before that where everybody thinks they will be able to get out before everyone else. I will pass on that bet.

Dr. Dre said...

Tsachy... I saw this and copied/pasted my post from capitalmercenary blog... its the same story expanded: liquidity is sloshing around... today its in the commodity markets. If QE expectations aren't met this will correct fiercely, and then they will have to print....
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Bull Market in Politics: don’t fight the policy, (f* the tape)

My latest lesson from a 25% net long position (75%) short is that you can f* the fundamentals. Today’s world is about policy.

I could get extremely complex about this but to keep it simple – if the fed wants to stimulate the economy and stoke inflation with a weak dollar all other assets will rise (esp. assets priced in dollars). Yes this investing 101 but holy crap, every now and then even those with PhD’s need to get re-educated. Just look at the futures markets today:


What is also happening is our low interest rate world and abundant capital to invest (thanks to excessive credit in the system) is also amplifying these gains. Its not a 1 to 1 relationship with the falling USD, it’s a 10 to one relationship. When many of the Austrian school economists warn about excess/excessive credit this is what they are referring to: a multiplier effect in assets due to excessive credit. Okay, now I think I finally passed the Austrian Econ 101 final. It only took me 5 years of reading it to get it. See dollar move driving all of this -- its a moving but as said a fraction of the percentages as seen in "risk" assets that are dollar denominated:


What is the trading takeaway? The only one I can think of is to make calls when, yes, the fundamentals of the markets are in your favor, but most importantly, follow the government policy. That is the only wind at our backs these days brothers and sisters. When this pop corrects, which it always will, I will get back (or Double Down) into these assets that are dollar denominated where I am comfortable the fundamentals are also there. Examples include royalty trusts like MVO, PWE and go long and strong into Ags. Still think Gold is overbought and due for some pullback but is in a bull market. So I will sit on my hands: I could leg in this moment in to the favorable sectors but that would be foolish. There are always corrections and volatile pullbacks – especially in this high volatility, fractured market with excess capital and HFT computer systems banging around true valuations. Noise aside, forget following the tape, follow the government. It is indeed a bill market in politics.

Dr. Dre said...
This comment has been removed by the author.
David Wozney said...

If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2010 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

The October 5th metal value of these nickels is “$0.0612951” or 122.59% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” at Coinflation.com.