If you read enough you can find persuasive arguments for both deflation and inflation. We've have clearly had an asset price deflation and people like Mish are convinced there will be a debt deflation, which would be bad. One bit of clarity about deflation is that prices coming down for certain types of items like computers and TVs due to efficiency and innovation is not really deflation. I'm pretty sure that cheaper TVs is not included when discussing deflation.
The case for inflation seems to be more of a looming threat as opposed to right here right now. The actual definition of inflation is increasing the money supply which we would expect to result in higher prices (more money chasing the same amount of goods). The numbers can be spun however the end user wants but while money has been printed and some debt monetized there does not appear to be more money hitting the street in the form of lending which might be why despite the many months of zero interest rates and quantitative easing we have not seen higher prices work their way into the government's inflation data. Point taken about the G manipulating the data but I think that data would at the very least capture the direction and trend even if not the magnitude.
If you read Peter Schiff or others like him they really pound the table with words like collapse and destruction in such a way as to make you think the end is nigh, as in tomorrow or the next day. The US has had these same types of systemic threats or problems for years and they have not torn the social fabric nor had the sort of widespread damage and panic that some tell us we should expect.
Given the dollar's role in the world it would seem very unlikely that there will ever be a violent dislocation. The damage to the dollar has been meaningful this decade but has not caused martial law, the collapse of our government or a complete breakdown of the country's infrastructure.
The US has become an increasingly less attractive investment destination and this trend will probably continue but it is not reverting to a third world country. The hyperbolic commentary from the various Schiffians does a great job making the bear case and explaining the problems (and to be clear there are a lot of problems) but I think the magnitude they call for is incorrect. Zimbabwe played almost no role in the world economic order when its problems started. It is right to expect headwinds galore in the US but not the USD going to zero, I actually read something yesterday that asked why can't the dollar go to zero.
The investment implication is simple and been repeated here often, more foreign exposure added slowly over time.
Tomorrow I'm flying to NYC for a scheduled appearance in CNBC for Friday and then on to Boston for my 25th highschool reunion. I've come to realize through FaceBook that I knew far fewer people than I thought I did back then, far fewer, but I do know some buddies from the basketball team will be there so at least I won't be sitting by myself at a table for two hours listening to my iPod.
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12 comments:
WIP and TIP both play very useful hedging roles in my portfolio. I don't get all worked up by the pop economists and lean one way or the other, depending on the trends.
This is a slow motion train wreck so the inflation/deflation debate will continue for quite some time. Then we will see deflation.
Heck we may even hear the term Goldilocks being used before deflation takes over.
You are right that the dollar will not go to zero, but the pound went from roughly $4.70 to %1.50 over several decades and we may see something similar IF a dollar replacement ever emerges. There are no dollar replacements currently on my horizon even if we can speculate about potential dollar replcements at this time.
The US is turning Japanese not going away.
Strong dollar bears typically overstate their case: There seems to be some psychological connection between strength of currency and strength of country in a lot of minds. Regardless I'm in the camp that was never particularly impressed with the so-called strong-dollar policy in the US -- made travel cheaper and gave a lot of countries pegging to the $USD an easier ride but it frankly lost us business and jobs IMO -- so I have no problem with a cheaper dollar per se but there are probably better ways to go about depreciating a currency (you can't devalue a reserve currency as a matter of definition) than those forced upon a country during crisis.
That is, attempting to avoid deflation during economic crisis cuts off other options including appetite for infrastructure building which increases the odds of overshoot: Your currency becomes of too little interest to too many folks to maintain value unless your economy is growing faster but the capacity to grow faster is limited. JMO
Semi-OT (I figure the post on AMT is close enough [g]): Here's a pretty picture of one of the "slower" growing cell/wireless markets at http://tinyurl.com/yk6kqfs -- My pappy always told me to never forget that the folks who made the big money during the gold rush were the guys building and selling shovels.
I looked at WIP as a suppliment to TIP but I just cant get behind a bond fund that has only paid 1 distribution this year. Several other of the sprd bond funds have similar problems.
Rhianni32--Take a look at a chart for WIP. Harvest a little of that gain and you won't miss the divvy. Gold has been a nice dollar hedge as well.
The rise in the share price is nice but not really the point.
I want my bond assets to act differently than my equities. WIP though has pretty much followed the equities rally chart pattern and stopped paying a distribution. Can it be counted on then too to drop down whenever equities plummet again? Is it a diversifying asset class like many trust it to be?
What concerns me is I do not know why they just stopped paying. If I did then at least I could plan and adjust accordingly but I havent found an answer. Heaven forbid if I was retired and needing my fixed income fund to give me income.
these are inflation products and there is no (reported) inflation.
True Roger. I would expect that during times of no inflation or even deflation I would receive less, perhaps a lot less of a distro.
But comparing TIP with IPE (to keep it both US) TIP did not pay a distro for 5 months starting last november. IPE also cut their distro in november but did not pay for 9 months. Thats a fairly big difference for two funds that are effected by the same inflation rate and, after an admittidly quick scan, with similar coupon rates in their holdings. The only thing I can think of is that the fund managers of IPE made the decision to not pay a distro when they could have. I feel like I am missing something obvious and very basic here but it alludes me.
WIP and TIP don't really provide a hedge for your portfolio. If inflation protected securities work correctly then they merely maintain their own value rather than defending the rest of your portfolio. The term hedge is usually used to describe a levered position that can actually compensate you for losses taken by the rest of your portfolio. A short equity ETF could be used as a hedge against a stock crash. Gold is often seen as a hedge against inflation. WIP can provide some currency diversification, but you may not actually want that. Besides using it as such might be too expensive anyhow.
"Can [WIP] be counted on then too to drop down whenever equities plummet again?" WIP is being wagged by the relatively value of the dollar. In a similar environment it will fall with equities again in the future if/when the dollar corrects up.
Regarding distributions, some ETFs do seem to have a spotty record with paying dividends. On top of this the free reporting services like Google and Yahoo finance seem to have a really hard time recording dividends accurately. Take TLT for example, both of those services show spotty dividend history for this year - but I own it and I know that it has actually paid out every month.
WIP and TIP are super unbelievably popular, but I would stay well away from them and use a prudent amount of gold to hedge your portfolio.
I prefer buying TIPS from Treasury Direct.
There are valid arguments pro and con in regards to inflation. I fall into the inflation camp, but am not placing too strong a bet.
Deflation and inflation are facts of life and temporary in nature. Investors can deal with either.
T
Great post, Roger. Coming from a British perspective I can totally agree with your thoughts. My holdings (PI, diversified out of sterling assets partly on your advice and partly on advice from a magazine I receive and the Fool), which are largely profiting from Asian affluence and infrastructure/materials, are off their highs by a small amount in the terms of sterling. Yes, my pound does not have the same purchasing power it once did - not that I earn pounds now, but instead a currency that is tied to the dollar and is entirely commodity-related, again a decision I made partly because of the above.
Am I happy that my 100 pence do not buy the same amount of goods or services they once did? Hell no, but do I let that influence my decisions over my future? Yes, see above.
Making historical comparisons is a human trait, and from my perspective I view the dollar as rhyming with the pound, barely. In my view the US dollar is here to stay as a reserve currency for decades yet; talk of its demise has been overstated/exaggerated but its 'decline' (and the Yuan's appreciation, as well as other currencies) is needed to maintain the general trend of growing global trade, with all the pitfalls and advantages that brings.
So, coming from a British background, I can view the road ahead as being highlighted with opportunities we can share in, if we can ignore/dismiss our wrongly-directed concerns.
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