What does it all mean?

There are a few schools of thought it seems about whether we’re facing inflation or deflation. You can cross-categorize them by the time-frame they address. I’m not going to get deeply into the debate because I think it’s been discussed ad nauseum almost everywhere else. Personally, I think the Fed has done everything it can to reignite inflation, but we’re well-past the point where the Fed can single-handedly fill the gap. And even when you add in all the additional Federal spending and the liquidity from the other central banks, I still think the wealth destruction and necessary de-leveraging will overwhelm this coordinated attempt. The best they can do is try to soften the landing a little bit.

At the end of the day, US consumers don’t need more credit… they need better wages. Until real wage growth returns to the United States (and I’m not too optimistic in this department), neither will inflation for domestically produced goods. Unfortunately for many, it is certainly possible that inflation will return for many foreign goods (including petroleum-based auto fuel) prior to that wage growth. Realistically, most of the new money “printed” by the Fed has gone to recapitalize the banks and assist the credit markets. It will not make it off their balance sheets in any meaningful way. To wit, the demand for credit is declining. Until we reach a more sustainable level of societal leverage, you can expect more of the same.

Uncategorized Fed, Inflation, USDollar

since I last posted. Obviously things have gotten a little wooly since then. Of course, when I started this blog, I figured some people would read and comment, but that apparently takes more marketing acumen than I possess.

As I suggested here on Seeking Alpha, the market was highly oversold and due for a bounce. Little did I know all hell was about to break loose.

I caught a decent amount of the bounce, but frankly was underinvested. I’m still waiting for my pullback to add some more long exposure. At the rate this thing is moving, I’m not getting that shot. Even before today, I was desperately looking for some place to put more money to work and I couldn’t find one. Leave it to the Fed to spoil the party.

With today’s announcement, the Fed has crystalized a trend that I saw forming last week. I was worried about the fact that as the equity markets were rising, the dollar was falling.  I sent my observation to a buddy at a hedge fund.  He didn’t seem too concerned.  Then today, BANG!  The Fed drops $1T in future purchases on the market.  The dollar index dropped 2+% after the announcement.  It was the third largest drop in the index since 1970.

You do the math:

S&P index     – up 2.09%
USD index    - down 2.6%

What does this mean?  Basically if you were fully invested in the S&P today, you actually lost money on a relative purchasing power basis… about a half of one percent of your wealth went up in smoke today.  The S&P had the best performance today among the three major indexes in the US.  If you were tilted more towards the others you lost more.  If, sadly, you were sitting on a lot of cash today, you just got stone cold smoked by the Fed.  2.6% of your relative wealth just got vaporized.

Who were the big winners today?  If you held 10-year treasuries, you made out like a bandit.  If you held gold or silver either through an ETF or physically, you made out a lot better. 

Strange times indeed.

Quantitative Easing Fed, smoked, USDollar

China is now realizing the folly of their currency manipulation. Just as they sought to keep the Yuan from appreciating so that China could attract cheap capital to drive its growth, the Chinese are now realizing that the result is an over-exposure to the USD and its Treasury paper with no escape in the offing. The yuan has actually moved away from the upper limit against the dollar within the range it’s allowed to float to the tune of 10% or so. I think that’s a first.

Some of its academics had argued against massive dollar reserves and continue to suggest a diversification away from the dollar into the euro and the pound sterling. You’d think the Yen would make the list, but maybe there’s a cultural bias.

For now, we’re tied at the hip…

Also ironic is that a lot of investors/speculators were long Chinese assets on the currency revaluation play. Apparently, there was limited upside based on the peg… but now it’s just downside. Guess that’s the price you pay for investing in a centrally-planned economy. Long term, China is still in a decent position, but one misstep and it starts to look like Venezuela or Iran or Russia with social programs beginning to act like high fixed costs for its economy.

As an aside, if every country in the world’s balance sheet is backstopped overwhelmingly by US$ paper, would a devaluation of the dollar have any material effect for the holders on a relative basis other than reducing the relative importance of the dollar within the international reserve system as a whole? Obviously anyone that was SOLELY in dollars would get slammed. I wonder who falls into that category…

https://gm.bankofny.com/Research/MorningUpdate/Article.aspx?Type=0&ContentManagerID=7908

China, US Dollar China, USDollar