I haven’t done a “Monday Thoughts” in a while but I was thinking this AM, and the thoughts were a bit random but important. And since people who ask my opinion read my site too, I figured I would share those random thoughts (my site tends to focus on communicating with friends and associates – but am glad to have readers worldwide including in India & Europe).
Today’s thoughts center on monetary policy, asset prices, interest rates, and currency movements.
Right now, thinking financially (as I often do) I am trying to get my brain around monetary inflation (increasing of the money supply), rising interest rates (even though Uncle Ben wants them lower by buying bonds but it’s not working), and asset prices. I also have an eye on the economy but generally speaking, the economy in my mind is not the deciding factor for me with investing – it’s interest rates and money printing.
Let’s review some of my thought chains (which I have not concluded and may never conclude!):
1. Bernanke is buying bonds (and maybe other garbage) increasing the supply of money (the original definition of inflation = increase in money supply). His goal is to keep interest rates down to move asset valuations higher. Markets are responding – as money that flows
from the proceeds of these bonds sold to the Fed go into other investments. So far, more printing has equaled asset price increases (increasing money supply – it’s all done electronically now but we still use the term “money printing” like the old days of actually printing more paper currency). How will this play out? Do asset prices keep rising or do they fall, especially with leveraged assets, as the costs can’t be supported by current income levels (witness commercial real estate).
2. However, even though the goal of asset price increases has occurred, recently, with the this latest round of “Quantitative Easing” (financial snob geek speak for ‘money printing’), rates have not fallen, but risen. What will Bernanke do now? print even more and buy more bonds? What will the bond market do then – continue to sell bonds and let rates rise? Will asset prices go to the moon?
3. Commodity prices are rising – and the major new purchasers of commodity “assets” have been the developing and growing economies of Asia, parts of Africa, South America and the Middle East. For example, due to more people simply driving, talking on cell phones, and living in modernized homes, China has used more resources – but their average per person resource use is much lower than their Japanese neighbors nearby. And we can guess (rightly) that Indians, Malaysians, and Nigerians all want to have air conditioning, nice cars, and a toaster oven. The question: does China allow its currency to rise, making importing commodities CHEAPER for the Chinese, or do they slow down their consumption to let prices simmer a bit and accumulate needed commodities lower?
Allowing the Yuan to Rise – the Panacea that Congressmen Think It Is?
Notice that allowing the Yuan to rise, which many people in Congress seem to want and think is the solution, will give the Chinese greater buying power, allowing them to buy MORE commodities – like oil – cheaper. This means life will become even MORE EXPENSIVE for AMERICANS because the Chinese will drive the price up for everything they need. What will China do?
Here’s How I’m Positioned
In my mind, I am preparing for money printing to continue, and if the economy sputters, I expect Bernanke to put money printing into hyper-drive. If the economy sputters, Congress will likely spend even more money. All of this is bullish for commodities. Therefore, in my mind, though we could have a nasty snap-correction due to some worrying economic data point that arises (or maybe even a conflict like a Korean skirmish), my tendency will be to hold on to commodity positions and look for great bargains in assets I want to own more of if prices do correct.
Even for safe money, I prefer a mix of foreign currencies, merge-arb strategies, and physical metals. I do have dry powder (cash) waiting for buying opportunities but do regret not taking advantage more of some opportunities that have already arisen (I ALWAYS think this way – am fixing it though as I analyze my own behavior more).
What are your thoughts? I would enjoy discussing with you. This article is for educational/informational purposes only. Please do not construe this as personal advice. Consult your own advisor before making moves. See my full disclosure page HERE.
If you want to know more about me: Chris Grande
About my firm: Walnut Hill Advisors, LLC