I was asked to participate in a 2010 look back/2011 look forward sort of thing with Seeking Alpha. It will run sometime in the next couple of weeks but here is a preview of one of the eleven questions;
5) What are your expectations for commodities, the dollar and precious metals in 2011 and beyond? Will we finally start to see some real inflation in the coming year?
It makes to qualify one thing before trying to address this question which is that, inspired by John Hussman, we are focused on the portfolio result over a longer period of time like an entire stock market cycle. Going back over the last five years things like currencies and commodities have had favorable returns even if they have not done well every single year. Looking forward I can't construct a fundamental case for the US dollar but of course, like in 2008, the dollar can go up. The dollar winning an ugly contest and going up in 2011 is not what I would call a fundamental argument. I do think the euro is worse off and we are avoiding that as much as possible.
We own gold in the belief that no matter the price, if something bad happens today it will go up tomorrow--insurance. Ex-gold our commodity exposure is in the related equities for now. In the past we have had agricultural commodity exposure but for now do not. This could change at any time.
One thing I would add here is that some of the asset allocation suggestions of 20% in commodities is way too much for us. Commodities, among other things, are a source of volatility. Such a large component in such a volatile space invariably causes a lot of anguish during a down turn as people find out the hard way they had too much exposure.
As far as inflation, we already have it--inflation being an increase in the money supply. The question everyone cares about is whether it leads to price inflation. It would be hard for me to peg whether meaningful price inflation starts in 2011. What is more important to me is that the Fed and the Treasury are resorting to desperate measures to try to pump up the economy. Expecting unintended consequences is only logical. Disbelieving that Bernanke can control inflation is only logical. As our debt is not denominated in another currency I do not believe true hyperinflation is in the cards but inflation that is high enough to be a meaningful drag on the economy is easy to visualize as bond yields would have to go up to an uncomfortable (for borrowers) level.
As one anecdotal note, my health insurance premium went up 25% for the New Year.
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18 comments:
Flip side of the coin is the fed does not increase inflation it just creates a bubble in commodities etc.
Bubble bursts and major deflation in commodities and continued decline in housing prices gives us deflation. I think going in and out of deflation is more likely for years to come.
Lots of bad debts (mortgages, etc.) out there that will be defaulted on. Very deflationary.
a deflationary outcome is plausible although i think commodity bubble is not where this argument's strength is because much of what is driving demand is occurring elsewhere.
I think bubble is also a grossly over-used word. I am not saying prices could not drop, just that more pain in US housing market would likely be independent of whatever commodities do.
To be clear i think the greater probability now is "uncomfortable" inflation starting shortly after 2011--maybe 2012 or 2013.
Enjoyed the post, Roger. The general consensus is to own some gold in a portfolio, as insurance against falling markets and financial catastrophe. Seems to me we already had the catastrophe and the pieces are being picked up; there was potential for the banking system to fall apart but it was deemed TBTF.
On the other hand, the general consensus means if you're not at the least a little in gold you might lose respect in the marketplace. So you're also buying insurance so as not to create any negative waves that'd distract your clients. Either way; seems a logical route.
And before anyone pipes up with 'Japan!' can I just say 'No comparison!' Japanese equities and property prices were the mother of all bubbles - if you need confirmation just look up the Japanese asset bubble on Wiki; homes in Tokyo lost 90% of their value in 5 years and were still listed as the most expensive in the World.
i don't doubt Japan was a bubble in the late 1980s into 1990 but now everything that is up a lot seems to get the bubble tag. Rare earths get called a bubble despite the entire industry only being worth a few billion. anything can be an overpriced mania, very few things are bubbles.
I don't follow you on gold. I've been saying the same thing as to why we own it for years.
Roger, you are very good about choosing your words with one exception. It is grossly distorting to suggest the Fed is "using desparate measures". QE for example, is just one of many tools in the Fed's toolbox to help maintain price stability. I don't see anything desparate about it at all.
I concede bubble is over used.
I think japan is the most relevant comparison and we have turned japanese. Comparisons and history may not be exact but it sure does rhyme.
Nasdaq bubble, followed by housing bubble.
The banks are insolvent and have more bad debts than you can imagine. How they they loan money. We now have zombie banks like japan.
We will continue to disagree as I see deflation for many years to come
i absolutely think of QE as a desperate measure, resorted to when they have no more room to lower rates
QE is very very desperate
When was the last time QE was used?
Do we really know the effect it will have?
They can not lower rates below zero so they use their last tool like a blind man clutching for his cane to defend himself in the dark. I would grab for the cane as well. But it is Very Very desperate.
Bernanke knows tarriffs, etc will cause a trade war and will lead to a depression.
Bernanke simply does not understand that QE and a currency war will also lead to a trade war.
Desperate, stupid and severe unintended consequences
More important than inflation/deflation is the overall standard of living. I believe we are in decline as Americans,expecting countless unsustainable"goodies" without the national work ethic to create true wealth.
Housing is an interesting sector to ponder. My view is that single-family home ownership will decline. Rental accomodations will be strong (and that is where I am throwing some cash into as I speak - small apartment complexes). I will only purchase property that can stand in positive cash flow without the mortgage interest deduction, as I sense that the deductability of mortgage interest will soon be modified if the budget crisis is to be addressed. Look for the perks of home ownership to vanish, which will result in lower home prices and a corrresponding lower standard of living for many Americans. Anything not labeled a "tax" is subject to contraction and/or elimination. Already, I observe that many Americans know that renting is both a more predictable expense (less risk) and less stressful than buying. I would advise that investors look at large apartment holding companies as a good long term investment, as small landlords having poor management skills will not be able to use writeoffs to bail them out of marginal property investments. I like that, as it will drive novices out of the game.
Merry Chrismas/Holidays to Roger and his large band of readers. The site is almost always a welcome stop within my daily routine.
T
thank you T
i hope you and your family have a great holiday and healthy new year
Merry Christmas and Happy New Year to Roger, RW, SEG, T, Jeff from Milan, sorry if I forgot anyone.
Roger, you continue to put out some of the best stuff in the blogosphere. One of the things I most appreciate about your blog is your "common sense" approach to investing and portfolio management.
BTW, I like to give credit where credit is due.
Props to SEG. You were obviously right about the April to early July drop just being a bull market correction.
thank you Mike C
For T and anyone who would like to comment.
"I sense that the deductability of mortgage interest will soon be modified if the budget crisis is to be addressed. Look for the perks of home ownership to vanish, which will result in lower home prices and a corrresponding lower standard of living for many Americans."
Thought provoking statement. How would reducing the mortgage deduction produce a lower standard of living for many Americans? (1) It would be a shift in wealth as home owners would lose a significant percentage of their wealth. (2) It would cause hardship on people who rely on the deduction to keep their taxes down. (3) It would cause many more people to default, as many houses would be pushed to "under water" status. (4) The home building industry would suffer. (5) It would be a windfall for people in the market to buy would be able to get more house for the dollar.
I think any meaningful change in mortgage detectability would be phased in over a 10-20 year time period.
Surely congressmen looking at this potential action to address the budget are considering the many side effects.
2 things:
A few years ago people were claiming fed was 'out of bullets' when it took rates to near zero. Along came a crisis and along came QE1. Whether desparate or not isn't really important -- it was appropriate.
QE2 is a little more contraversial --- but 'QE1' was an excellent proactive move from Bernanke.
For the record,
An increase in M2 is not inflation --- if velocity (GDP) doesn't go up a lot, then M2 going up won't be inflationary.
"Fed and the Treasury are resorting to desperate measures to try to pump up the economy. Expecting unintended consequences is only logical. " --This is most eloquent. But the interesting thing about it is that no one is sure just what those consequences are, yet. Or, let us know when you spot them.
Health premiums going up--surely you saw that coming, with the Health Reform bill spectacularly failing to do anything about price control or even competition. We have insurance companies skimming 20% of our health care costs (yes, they are supposed to reduce this, but that's just a call for more creative accounting) as well as inducing more costs on the provider side as doctors scramble to provide redundant paperwork for a bevy of different insurers. This is a cost our society cannot afford. Already it's bankrupting local governments and other employers with guaranteed health coverage for retirees. Eventually, we'll have to adopt a single-payer system like the rest of the civilized world.
The notion that increasing the money supply AKA "printing money" (not that the Fed actually does this) is inflation doesn't hold up well even in normal times and times are far from normal now: Bank and shadow bank balance sheets were ravaged in the collapse so the demand for reserves has increased (by a trillion dollars since 2008) but the demand for currency held by the public has not only not increased it has shrunk in some areas; e.g., corporations are sitting on cash hordes they can find no productive purpose for and, io ipso, their need for additional credit is zero even though the cost of credit is now virtually zero anyway.*
*as good a definition of a liquidity trap as any: cash and shorter-term paper have equivalent value.
Ditto on the health insurance: The reform need was for a bold move to single payer, not more deal making in a vain attempt to keep the fat cats happy and the mad dogs docile; fat cats eat more than their share and mad dogs tear up the joint because, like the scorpion, it is their nature.
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