The Inflation Trade / The Daily Reckoning

verfasst von - ELLI -, 12.11.2002, 19:27

-->The Inflation Trade

The Daily Reckoning

Baltimore, Maryland

Tuesday, 12 November 2002

-------------------

*** Monetary policy always works...doesn't it?

*** I spend; therefore I am rich...interest rates cut
both ways...

*** Dow dips...dollar in danger...$17 trillion lost in
Japan...Poor Dad...and more!

--- Advertisement ---

The World's Leading Austrian Economist:
"Almost Every American Economist Is DEAD WRONG!"

"It's not what you don't know that will hurt you; it's
what you think you know that's dead wrong and that can
destroy your wealth."

Fasten your seatbelts, investor. You're in for a wild
ride. According to the mainstream,"Happy days are here
again"... the fabled"recovery" is right on track.

Wrong!

In fact, the truth is quite different - and you haven't
even begun to see the fallout of the"profit carnage" on
Wall Street. One small group of investors will be fully
prepared to protect themselves and profit...even in the
worst of times.

Click here to find out how you can protect your money
during:

The Bogus Recovery
http://www.agora-inc.com/reports/RCH/MoneyHotline/

------------------------

Wow! What a beauty...

Here at the Daily Reckoning, dear reader, we are
connoisseurs of absurdity. We collect absurdities the way
some men collect beer bottles or stamps.

Most highly prized are those where the absurdity is both
profound...and right on the surface where everyone can
see it. We also have a fondness for those in Latin,
quoted by tweedy professors as if they were true.

"Cogito ergo sum," Rene Descartes wrote; I think,
therefore I am."How did he know?" we ask with malicious
delight."Too bad he didn't think he was a beer truck; at
least then, his friends could have enjoyed a brew."

Heh...heh...

Well, on our shelf, next to Descartes, we maintain a
prominent place in our collection for a more modern
absurdity, in English:

"Monetary policy always works," said Wayne Angell on CNBC
last week.

Angell was discussing the most recent bit of monetary
policy to fall upon the nation - the Fed's 12th rate cut.
The first 11 cuts may not have quite done the trick, the
former Fed governor admitted, but this one certainly
would.

Monetary policy is simple enough. You lower the cost of
money - or its supply - and thereby create a boom, which
makes people better off. One need not be a Nobel-prize-
winning economist to spot the flaw. If it were that easy,
why isn't the whole world rich? Even central bankers in
Albania or Lithuania could get the hang of it with a
little practice. Certainly, Argentina's central bankers
have gotten quite good at increasing the money
supply...they've practically destroyed that nation's
economy, not once, but several times.

"You can pump all the money you want," explains Frank
Shostak,"but it does not create anything; it only
destroys. It causes a misallocation of resources,
consumer capital, and makes everything worse."

The effect of the latest rate cut, says Shostak, will be
to delay the recovery, not hasten it.

"Consumers find low interest rates cut both ways,"
notices a Houston Chronicle headline. Alas, for everyone
paying interest, there is someone on the other end
receiving it. That is part of the problem. While
desperate debtors find their loads lightened a bit by
lower rates, the excess weight falls upon creditors like
a dead economist. The debtor may be able to spend
more...but the poor creditor, often a retiree who relies
on his savings, is crushed.

"Get ready for yields on U.S. money market mutual funds
to fall far, far below 1%," warns the Houston paper.

During the Carter Administration, savers could put a
dollar in a money market fund and receive 22 cents in
yield. Now, they will be lucky to get a penny.

And yet, the same economists who were sure we'd be in
full recovery - and that Greenspan would be raising rates
by now - are now sure that this latest cut will force the
issue. Who would want to save money in a money market at
less than 1% yield? Consumers will want to consume even
more, they believe - thus beginning a new boom.

"I still spend," the householders will think,"therefore,
I am still rich."

People can think anything they want. But it ain't
necessarily so...

Eric...?

-------

- Stocks continued their post-rate-cut swoon yesterday,
by falling for the third straight session. The Nasdaq
Composite slumped 3% to 1,319, while the Dow dipped 178
points to 8,359.

- Gold fell one dime to $321.60 an ounce, while the bond
market took the day off in observance of Veterans Day.

- Yesterday, we mentioned Sir John Templeton's
surprisingly dire pronouncement that the US current
account deficit - because of the risk it poses to the U.S.
dollar - is the greatest threat imperiling the American
economy. Morgan Stanley's Stephen Roach emphatically
agrees with the 90-year old investment guru.

-"Never before," says Roach,"has a nation had to come
to grips with annual external financing requirements such
as those faced by the United States - now approaching
some $500 billion and likely to rise toward $600 billion
in 2003...The United States accounted for fully 71% of
the total global deficit in 2001."

- Roach calls this imbalance"an accident waiting to
happen." And yet, most Americans still manage to sleep
soundly at night. They care no more about the current
account deficit than we at the Daily Reckoning cared
about Eminem's cinematic debut last weekend...

- Unfortunately, our national insouciance toward the
current account deficit makes it no less threatening.
America's dependence on external financing is growing at
an alarming rate."At the end of 2001," says Roach,
"foreigners owned 18.3% of the total market value of U.S.
long-term securities. By way of comparison, the pre-
bubble reading at the end of 1994 was a mere 11.0%."
Foreign ownership of U.S. Treasuries has more than
doubled since 1994 to 41.9% at the end of 2001. Foreign
ownership of US stocks and corporate bonds has been
surging a like amount since 1994.

-"Finally," says Roach,"there can be no mistaking the
sharply increased foreign appetite for the debt of U.S.
federally sponsored agency securities (i.e., Fannie Mae
and Freddie Mac); the foreign ownership share of such
paper surged from 5.7% at the end of 1994 to 14.4% at the
end of 2001." In other words, an ever-growing number of
folks who are refinancing their homes have foreigners to
thank for the loan.

-"Until the mid-1980s," Roach recalls,"the U.S. was still
a net creditor to the rest of the world. Now its net
international indebtedness is in excess of 20% of U.S.
GDP...[This] external shortfall is very much a by-product
of subpar national saving...The problem is that America's
national saving shortfall is now getting worse again. The
net national saving rate fell to a record low of 2.0% in
2Q02, less than half the 5% average of the 1990s."

- That's because saving is boring and spending is fun. So
why would anyone want to save? And besides, won't the
stock market - when it recovers - do most of our saving
for us? Stocks always go up over the long run, right?

- We're living in the"post-prosperity economy,"
according to the New York Times...The prosperity itself
may be gone, but not the fond memory of it. In fact, the
memory of prosperity is so fresh that many folks expect
the good times to return very soon, and this confidence,
misguided though it may be, emboldens them to take on new
debts.

-"Few consumers bothered to hunker down during last
year's recession or this year's stuttering recovery," the
Times observes."Despite the loss of about two million
jobs, the steep fall in the stock market and the Sept. 11
attacks, household spending has defied the traditional
pattern and grown every quarter since the recession
began."

- We American can't help it...Accumulating debts and
spending money we don't have is part of our national DNA.
Unfortunately, defaulting on our debt is another part of
our DNA...And lately, these"bad genes" are showing up
everywhere.

- Bankruptcy claims in October jumped nearly 15% above
year-ago levels. Credit card delinquencies are soaring
and mortgage foreclosures have jumped to a 30-year
high...No doubt about it, there's nothing fun about
trying to pay back money that you owe. So let's just hope
that foreigners never ask Uncle Sam to pay them back.

-------

Back in Baltimore...

***"It is not the money supply that really matters," we
told listeners at the New Orleans Investment Conference,
"It is the way it is taken up by the economy."

If banks don't lend and people don't borrow - the Fed's
new money just sits in a big lump...as lifeless as a
member of congress.

Business borrowing has fallen off since the slump began.
Most of the lending is now in the real estate market. But
even real estate is showing signs of slowing down.
Homebuilding stocks are headed down. And lumber hit a 6-
month low yesterday.

*** Since the bubble burst in Japan, the average house
price has fallen in half, reports the Singapore Straits
Times. Stock market losses are trivial in comparison,
with $17 trillion in lost value from real estate...an
amount equal to twice the nation's entire GDP.

*** China reported that its exports are growing at a
phenomenal 14.2% annual rate. Either China will become
the world's most important economy some day...or it will
blow itself up trying.

***"How's your modeling career going?" your editor asked
his daughter by phone yesterday. Maria, 16, is an
aspiring fashion model. Her Paris agency sent her to New
York to work there for a month.

Her father, of course, wishes her well in her career. But
he is worried. He knows what it is like to be all alone
in a big city with no one to talk to...no one to have
lunch and dinner with...no one with whom to share life's
triumphs and sorrows. Of course, Maria is young and
beautiful; she has an uncle and a grandmother in New York
to keep an eye on her...and hardly a day goes by without
an invitation from some admirer. But what about her
father!? He does not like to see his little girl grow up
so fast.

"It's going very well, Dad," comes the answer."They want
to send me to Los Angeles, too..."

"Great..."

--- Advertisement ---

Double Your Money in 9 Days...In This Market? You Bet!

Forget the gloom and doom! Not everything is in a bear
market. You could have seen profits of 77%, 90% and even
145% in just the past few weeks. The most recent pick
jumped 116% in 9 days. If you need to shore up your
portfolio...or rebuild it...read this FREE report.
Click here for:

Fast Profits
http://www.agora-inc.com/reports/RTA/WealthBuilder/

-----------------------

The Daily Reckoning PRESENTS: Long slow-motion
deflation...or Fed-goosed inflation? They appear to be
the only questions worth debating when it comes to the
U.S. economy. With respect to the latter, an
'unanticipated' return of inflation offers potential
profits for investors in commodities and natural
resources...


THE INFLATION TRADE
by Andrew Kashdan

We're as skeptical as the next guy that the Fed's latest
rate cut will be any more beneficial for the U.S. economy
than the 11 prior rate cuts. But we're not skeptical at
all that the Fed's easy-money policies, coupled with a
rapidly growing money supply, will rekindle inflationary
forces. The question is simply...when?

Governments do so few things well. But they have always
excelled at inflating away the value of currencies. We
see little reason to doubt that the Greenspan Fed's
reflationary efforts will 'succeed.' In the meantime,
certain market factors indicate that an immediate return
to inflation is unlikely.

In fact, the financial markets seem to be anticipating a
period of low inflation unprecedented in the modern era.
Inflation-indexed Treasuries, for example, are pricing in
an average inflation rate of about 1.5% over the next 10
years.

The last time the 10-year average inflation rate dipped
below 1.5% was in the early 1960s. President Lyndon
Johnson's Great Society was still in the incubation
stage, and the escalation of the war in Vietnam had not
yet begun. Will our next rendez-vous with ultra-low
inflation occur as the war on terrorism is heating up,
and the budget is falling further into deficit? Not
unless Chairman Greenspan and his merry band suddenly
decide that 'printing money' to pay for spending is a bad
idea. (File that one under 'not bloody likely.')

As hurtful as inflation can be for the average Joe over
the long term, it is very helpful for commodity prices.
In fact, investing in commodities and natural resources
is one of the very few ways in which an investor can
profit from inflation. But a successful 'inflation trade'
doesn't require a dramatic inflationary spiral. Even a
slight uptick in the inflation data would be sufficient
to create big profits for some trades.

For example, Eurodollar futures (Eurodollars are priced
off of short-term interest rates) have been rising
lately, effectively"pricing in" an expectation of low
inflation and low short-term interest rates. In a recent
issue of Outstanding Investments, John Myers and I
recommended buying long-term puts on Eurodollar futures.
These options will increase in value if short-term
interest rates rise. And because of widespread concerns
about deflation in the marketplace, puts on Eurodollar
futures can be had at bargain-basement prices. Those who
hang back from buying Eurodollar puts until it dawns on
everyone that inflation is alive may well pass up a
chance to profit from inflation's resurgence.

There's also money to be made in metals. Silver and
copper prices have rallied nicely in the last month. The
upturn coincided with the stock market's rally in
October, as the metals tend to do well when economic
optimism is on the rise. The interesting thing is that
even in the face of a weak global economy this year,
demand for base metals has remained surprisingly healthy.
As a result, inventories of various metals like aluminum,
nickel and copper haven't built up since July, as would
typically be the case. Over the past few decades, there
has been a seasonal inventory build in late summer when
vacations, year-end changes by manufacturers and the move
to indoor construction activity punched a hole in demand.
But not this year. Furthermore, this year's change of
pattern may be the beginning of a longer-term trend as a
thriving China and offsetting seasonal effects around the
world even out demand.

Copper consumption, in particular, is usually highly
leveraged to an economic recovery. So, if demand remains
stronger than normal in present conditions, the red metal
would be poised to move higher when the global economy
improves. Even after the past month's rally, copper
prices remain at historically low levels; as recently as
1995, the price hit a high of more than $1.30 per pound,
vs. $0.72 now. However, recently announced supply
cutbacks will lead to a tighter market in the next few
years, thereby shrinking relatively high copper
inventories and subsequently lifting the price - assuming
demand increases, of course. Silver prices also remain
historically low.

Recently, however, the commercial traders - what's known
as the 'smart money' - pulled back their short positions
in both silver and copper, a move that tends to
anticipate a rally.

Finally, any discussion of the inflation trade isn't
complete without a look at the prospect of a weakening
U.S. dollar. The threat of inflation only tightens the
noose on a currency already suffering the effects of the
mammoth U.S. current account deficit. One way to play the
greenback's weakness is to go long the Canadian dollar,
which also tends to move with commodity prices.

The 'loonie' has rallied more than 2 & 1/2% since early
October, a fairly significant move, particularly if
you're using options as leverage. Our northern neighbor's
currency also does well in an improving economy, but it
might benefit additionally from a period of global risk
aversion. The reason, quite simply, is that Canada is
running a current account surplus of about $12 billion,
compared to a U.S. deficit of more than $400 billion.
Unlike the United States, Canada doesn't have to worry
about attracting foreign capital to plug its financing
gap. The euro's recent rally indicates that wariness
about the greenback is growing, and buying the loonie
allows us to take the same side of the bet without having
to invest in a struggling European economy - or even
worse, a still-sinking Japanese economy.

In sum, there are many ways to make money in these
markets while steering clear of stocks that still carry
nosebleed valuations. Why worry, for example, that Main
Street will one day catch on to the risk presented by all
those underfunded pension plans? Now that we've entered
an era in which throwing darts at the stock tables will
no longer fund a retirement plan, the return to favor of
some good, old-fashioned hard assets may be just
beginning.


Sincerely,

Andrew Kashdan,
for The Daily Reckoning

Editor's note: Andrew Kashdan, a top writer at Apogee
Research (formerly Grant's Investor), is a regular
contributor to John Myers' Oustanding Investments and
Resource Trader Alert. Both of these excellent
publications cover longs and shorts in the commodities
and resource markets. Recent trades in the Resource
Trader Alert, for example, have included these gains:
304% on soybean calls (in only 12 days!)...another 125%
on coffee...and 145% on the Swiss franc. For more
information on trading through these volatile markets,
please click here:

The Resource Trader Alert
http://www.agora-inc.com/reports/RTA/WealthBuilder/

---------------------

If you'd like, please e-mail this issue of the Daily
Reckoning to a friend:

http://www.dailyreckoning.com/emailfriend.cfm?id=4233

--------------

-- Been to the Daily Reckoning Marketplace Yet? --

If not, you ought to see what you've been missing.

Want to read more from our regular contributors? This
is the place to find it.

We've collected some of the best financial advice and
commentary available anywhere and presented it to you
all in one place. Take a look:

http://www.dailyreckoning.com/marketplace.cfm

Thread gesperrt

 

gesamter Thread:

• The Inflation Trade / The Daily Reckoning - - ELLI -, 12.11.2002, 19:27