Live Discussion: The Dollar, Inflation and Protecting Your Portfolio 40 comments
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While fighting the economic crisis over the past eight months, the Bernanke Fed has radically enlarged the U.S. monetary base. Arthur Laffer posits this will have "dire consequences," including hyper-inflation that could make the '70s look benign. Paul Krugman, for one, disagrees.
Which position do you find more convincing? And what does this debate mean for one's investments: How, if it all, should you brace your portfolio for Laffer's hyper-inflation scenario?
At 12:30pm EDT Thursday (June 18), Seeking Alpha hosted a live discussion on the dollar, inflation and protecting a dollar-based portfolio. Panelists were the following 3 Seeking Alpha contributors - here are links to recent posts they've written on the topic:
Peter Schiff, President and Chief Global Strategist of Euro Pacific Capital: Don't Be Fooled by Inflation • Don't Ignore Ben Bernanke's Bell • Team Obama's Charm Offensive
Mark Sunshine, President of First Capital and president and CEO of Siemens First Capital: The 'Debt Tsunami' Is Not a Serious Threat • Maybe the Fed Isn't Really Printing Money Like a Drunken Sailor
Scott Grannis, Chief Economist (1989-2007) at Western Asset Management, where he focused on Fed policy and TIPS: TIPS Are a Safe Haven from Market Risk • There's No Shortage of Money
You can replay the entire discussion in the box below.
~ Mick Weinstein, SA Editor-in-Chief
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This article has 40 comments:
No, the Nobel Committee isn't into political positioning...
I suspect that Paul was planted by the ruling class(which controls the media) to be a venting channel when bush (whom most people hates) was president and now to be a calming oil to cool down people's anxiety over america's future when obama(whom most people likes) is president.
the way paul argues against a runaway inflation makes me wonder aloud!
www.wealthalchemist.co.../
It's on Bloomberg too. Is this April Fool's Day? Wow I could not believe my eye.
White house would not like this news and US dollar is tanking if this is real...
Some of this new money is flowing to the hands of this electorate. Rather than purchase more consumer goods, which would stimulate the economy and increase employment, some of this money is used to bolster the stock market, the commodities markets and the precious metals markets. The result is temporary financial profit inflation, which misleads people into mistakenly thinking that there is an economic recovery underway. Financial Profit Inflation is not real wealth creation.
All of this printing of money, and massive increase in credit will eventually lead to price inflation. Each dollar will buy less and less goods as inflation sets in. Most of the loss of purchasing power is borne by the poor and the lower middle class. Inflation destroys that wealth which is denominated in dollars – the real value of bonds, bills, notes and cash are eroded by inflation. Money markets and CDs lose their purchasing power. Pensions and salaries are also eroded by inflation.
Thus the combined interventions by the Treasury and Federal Reserve result in price inflation which cause a destruction of wealth.
Will the panel discussion be recorded for later consumption for those who can't make the live showing?
What I'm not clear on is the value of the dollar in relation to other currencies if this hyperinflation/currency collapse scenario becomes fact. Will the dollar index tank; or will most or all the world currencies follow suit effectively loosing value in variations or lockstep? This is core to protecting assets. It stands to reason commodities would be the only logical place to park wealth under a world currency collapse. However, with regard to metals for instance, as the normal markets and uses dry up under a severe collapse of this kind on a global scale, their value shifts to intrinsic worth, as they become more a hedge against fiat currencies falling demand than industrial use commodities. How would that likely play out I wonder? Holding those assets may not preserve wealth as much as it appears. Or would they? Any discussion or food for thought on this issue would be interesting.
I for one agree with the hyperinflation scenario. See John William's "Hyperinflation Special Report June 2nd, 2008 "
www.shadowstats.com/ar...
www.ronpaul.com/2009-0.../
“Doctor, my eyes Tell me what is wrong” As a side note, keep an 'eye' on Ron's son’s political career, Dr. “Rand” Paul. He is much needed in congress in my opinion.
www.randpaul2010.com/
Yes, I would go for commodities but not ones heavily based on demand. This is tricky. Oil or other elastic commodities are probably the worst bet. China is into steel, copper (not too good), and rare earth materials (smarter). Gold is manipulatable by those who have it (governments) but may be an acceptable bet.
All in all the current crisis is not an easy one to manage your money. You don't have a solid growth rebound to bet on (then cyclical and growth stocks would be great), nor do you have a commodities shortage or strong building cycle or war to bet on (commodities like oil and raw materials), nor do you have deflation (cash would be good) or even long term prospects of low inflation(bonds). Some are betting on China BRIC nations and emerging markets despite the potential instability. Personally, I think the risk is a bit too high to put more than 10-15% of your portfolio there regardless of your age or status. But that's just me.
Personally, short term bonds, cash, and dabbling your feet into good companies that will weather the financial storm, and a small bet on commodities are probably your best best regardless of where the dollar goes until the bottom is clear and a move to stock and commodities makes allocation simple again.
This is my personal opinion. I would advise to use the upmost caution when listening to people screaming dump the dollar and everything related. If the Fed tightens as it should do, the dollar can easily move the other way abruptly.Although it is unlikely the Fed will do so, it was also unlikely the Fed would blow up its balance sheet 400%. I would therefore classify it as erratic and unstable with no clear policy (a very bad state for a country's central bank to be in which is contributing to uncertainty leading to economic contraction, inflation, and the other ailments plauging the US economy).
On Jun 17 12:57 PM Head of Dog wrote:
> Seeking Alpha editors,
> Will the panel discussion be recorded for later consumption for those
> who can't make the live showing?
What the press calls the Nobel Prize in Economics is some foo-foo thing started by the bank that runs the Noble Prize trust fund. The official name is "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" and was only first awarded in 1969.
On Jun 17 11:08 AM JudeJin wrote:
> Recent comments from Paul Krugman makes me wonder whether this nobel
> prize is as much rigged as the one awarded to milton friedman. economics
> is the most rigged science!
>
> I suspect that Paul was planted by the ruling class(which controls
> the media) to be a venting channel when bush (whom most people hates)
> was president and now to be a calming oil to cool down people's anxiety
> over america's future when obama(whom most people likes) is president.
>
>
> the way paul argues against a runaway inflation makes me wonder aloud!
>
On Jun 17 09:44 PM Moon Kil Woong wrote:
…All in all the current crisis is not an easy one to manage your money. You don't have a …commodities shortage or strong building cycle or war to bet on…
Ouch! Whatever happened to planting, watering, weeding and harvesting? I realize these don’t have to be literal activities, but why must 2 of 3 options being presented to “managing your money” be associated with the likelihood of misfortune of others? I apologize for sounding so Pollyannish, but shouldn’t we act on what we know rather than “bet” on what we don’t? Planting and watering may take faith, weeding may involve the removal of bad growth that stymies good growth, but harvests can provide “30x, 60x or 100x what was sown”. These are activities that shouldn’t have to be reduced to the term “bet” in order to provide a reasonable return. They’re common sense and more likely than not result in profit. By the way, isn’t the US still involved in a war? Beyond that, your opinion of the Fed being … “erratic and unstable with no clear policy (a very bad state for a country's central bank to be in which is contributing to uncertainty leading to economic contraction, inflation, and the other ailments plaguing the US economy)”, I think is dead on.
Thanks,
G
On Jun 18 11:44 AM thotdoc wrote:
> They will be typing? Or, there will be a way to listen through the
> internet, Or?
>
> Thanks,
>
> G
> Sphira: Generally whn the US depreciates others try to follow suit.
Moon Kil Woong:
A succinct logical analysis, and I agree with most of what is written when taken with the traditional concept of markets. Thank you for that.
There are, though, factors that are hidden. Esoteric factors. They seem so crazy as to be laughed at, dismissed, and ignored by most people. Which is why they are so effective. Let me tell you of my ongoing observations over the last 4 months in my part of the world. They are almost daily occurrences seen with my own two eyes. At very least these occurrences are most news worthy and deserving of extensive debate. Alas, the silence is deafening; and telling. Have you heard of aerosol spraying? I suspect not. In a nutshell, the powers that be have been creating man-made cloud formations that expand and move over my country apparently for the purpose of manipulating weather patterns. Perhaps for other purposes as well. The obvious question is what is the chemical makeup of this "aerosol" being dispensed? See this site for more info.
www.carnicom.com/contr...
The point I'm trying to make is that I see very little that happens, especially in financial markets/central banks as accidental. On the contrary, it is very deliberate; purposeful; controlled. As you have stated, gold is manipulated. I'll go one further. The entire game is manipulated. See these presentations.
video.google.com/video...
video.google.com/video...
I don't pretend to understand everything, and, though it may appear otherwise, I don't tell others what to think. I'm just putting some facts and information out there to chew on.
I do, though, conclude that this "economic downturn" is no accident. It is by design, and on a global scale. My last post is more in the spirit of a "total" and absolute currency collapse. A what if, worst case scenario. I'm not saying it will be that severe or happen in exactly that way; but if it were to play out as I outline, and when taken in the context of absolute manipulation, what would be the best preservation play.
Peace,
Sphira
Anyway, Krugman has been a shoe-in for the prize for more than a decade, long before he become a NY Times columnist. The joke was all he was rbored sitting and waiting until he was old enough to get the prize, so he started venting his spleen at Bush...
On Jun 17 09:37 AM ebschor wrote:
> Paul Krugman deserved the Nobel Prize in Economics as much as Arafat
> deserved the Nobel Peace Prize. A NY Times columnist? Winning the
> Nobel Prize? Really?
>
> No, the Nobel Committee isn't into political positioning...
Got to do it again soon.
He said that we HAD the best system in the world, and now the implication is that we HAVE the worst.
So let me get this straight Peter. When we were muck deep in overleveraging, free market dealing, and raking in the big bucks, we had the best system. But now that we have the face the music and dig out of this hole by taking arguably appropriate measures to not dive into a full blown Depression we are now a terribly worse system because of the meddling.
Other than Peter agreeing that a low fixed rate mortgage is a good hedge against inflation, I found little substance to anything he said.
Wake up and stop drinking in the afternoon for christs sake!
On Jun 18 02:37 PM Victor84 wrote:
> On the contrary, I lost a lot of respect for Peter because he sounded
> like an immature child blindly bashing everything possible about
> the U.S. while offering little insight.
>
> He said that we HAD the best system in the world, and now the implication
> is that we HAVE the worst.
>
> So let me get this straight Peter. When we were muck deep in overleveraging,
> free market dealing, and raking in the big bucks, we had the best
> system. But now that we have the face the music and dig out of this
> hole by taking arguably appropriate measures to not dive into a full
> blown Depression we are now a terribly worse system because of the
> meddling.
>
> Other than Peter agreeing that a low fixed rate mortgage is a good
> hedge against inflation, I found little substance to anything he
> said.
I think the most interesting thing to come out of this was the basically unanimous agreement that prospective homeowners have a "once-in-a-lifetime" opportunity to leverage up with low fixed-rate debt into a rising interest rate environment. With the end of the $8k tax break coming and the threat of interest rates rising, I think the procrastinators (like me) will spark the housing market in the fall. That will be a big boon to the recovery, and I'd expect inflation would take hold thereafter.
Also, I still don't understand the Fed's exit strategy out of QE -- and I'm not sure Krugman or Sunshine do either. I actually agree with the idea of the liquidity trap that he and Krugman are so fond of, but I think they misunderstand the ultimate choice that the "trap" forces upon the central bank/gov't: you either put up with inflation or you sink back into depression. (Since a gov't with a gigantic deficit likes inflation, it's pretty easy to guess where we end up.) Krugman essentially argues that we must avoid depression and stay the course. That I agree with. But Krugman's argument against inflation consequences is very weak (pointing to expanded money supply in the Great Depression and Japan). We are going to have inflation because it will start before the Fed is comfortable undoing QE (by selling its stash of Treasuries and ABS). Indeed, creating inflationary expectations is the whole point of Bernanke's helicopters.
Finally, regarding present statistics on money supply and velocity, the fact that velocity hasn't increased and fueled inflation *yet* doesn't mean that it won't. Schiff is ultimately right when he says one shouldn't wait for the effects of inflation to set in before doing something about it.
Disclosure: long options in DBC, DBA and GLD
Let it be said that Mark has no idea how debt markets work (or other markets for that matter). This from
www.briefing.com/Inves... :
"The supply problem is coming in an environment where corporate issuance is expected to ramp up while global government debt is seen at ever expanding levels, crowding the market across the board."
For corporations to borrow more they will have to raise rates and pay money they don't have with earnings they won't get. Given the default on bonds of late, they will also have to offer risk premium in the rates.
Greenshoots can't grow in BS...no matter how much sunshine is upon them!
Happy hangover to the bulls. For the rest of you, don't be fooled!
Krugman wrote that in 1999, but seems to have forgotten it. I think this gives us a clue into why Bernanke has been so coy about how/when he will exit QE.
On Jun 18 02:37 PM Victor84 wrote:
> On the contrary, I lost a lot of respect for Peter because he sounded
> like an immature child blindly bashing everything possible about
> the U.S. while offering little insight.
>
> He said that we HAD the best system in the world, and now the implication
> is that we HAVE the worst.
>
> So let me get this straight Peter. When we were muck deep in overleveraging,
> free market dealing, and raking in the big bucks, we had the best
> system. But now that we have the face the music and dig out of this
> hole by taking arguably appropriate measures to not dive into a full
> blown Depression we are now a terribly worse system because of the
> meddling.
>
> Other than Peter agreeing that a low fixed rate mortgage is a good
> hedge against inflation, I found little substance to anything he
> said.
What did Bush say? "There's an old saying in Tennessee — I know it's in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can't get fooled again."
Too LATE! Americans love being "fooled". Over and over again.
On Jun 18 03:35 PM long roh wrote:
> "In a liquidity trap monetary policy does not work because the markets
> expect the bank to revert as soon as possible to the normal practice
> of stabilizing prices; to make it effective, the central bank must
> credibly promise to be irresponsible, to maintain its expansion after
> the recession is past."
>
> Krugman wrote that in 1999, but seems to have forgotten it. I think
> this gives us a clue into why Bernanke has been so coy about how/when
> he will exit QE.
On Jun 18 03:12 PM Stealth031 wrote:
> I'm curious, is Mr. Sunshine a real person or did they put boneheaded
> comments in to make the conversation more interesting? If "Sunshine"
> is real, he must live in the Wonderland with the Mad Hatter where
> nothing makes any sense and logic is nonexistent.
/Is that really his name? Bwahahaha.
I also constantly hear that money hasn't been "printed", so it isn't really there or isn't really moving (out of the banks). But the banks that are "hoarding" the money to improve their balance sheets can and are borrowing against it...not to make loans to overleveraged Americans, but perhaps to speculate in the oil, natural gas, industrial metals, and other markets. So the theoretically nonexistent, unmoving money is probably still significantly moving markets. Isn't all this inflationary, despite the alleged lack of velocity and actual dollar bills?
Will any of these things be possilble ?
On Jun 18 12:54 PM van Schayk wrote:
> The policy challenge
> is to reduce government deficits and increase our international competitiveness
> while maintaining a strong dollar and retaining its reserve status.
> This will entail, inter alia, reforming entitlement programs and
> revising our tax code -- reduce subsidies to agriculture, oil, finance;
> favor manufacturing; reduce corporate income tax; reduce FICA on
> low income workers; consumption tax.
In conservative theory all things magically balance out. If real estate prices get too high, then they correct in a natural cycle. Eventually, all false value is removed; buyers lose equity and investors will lose too. So gains and losses exactly equal. The just invisible hand of Adam Smith creates equilibrium; the invisible hand of this invisible god corrects all. This god is all knowing, all powerful. All works out in a completely spontaneous process. Yes, in life you must worry, but in economics we have a great exception to life because here some unknown god is in control. Whereas in your own life or in education or coaching your child’s soccer team or cooking a holiday dinner there is no god to make things work out automatically. Finally, we have a realm of our lives where all is easy and free of worry! What a relief!
Sounds like it to me!
"Commodity Conundrum Solved: The Hidden Parameter in Interest Rates"
seekingalpha.com/artic...
Which have been rewritten recently and will appear on my Blog:
blog.yield-curve.net/
What we say is that although we are in an unstable equilibrium with an inverted yield curve, because the unstable equilibrium, thanks to Bernanke Quantitative Easing, has not resolved in a chaotic behaviour of credit market, we are almost in a Liquidity Trap but not yet.
That unstable equilibrium will necessarily resolve in a chaotic manner what is known as the butterfly effect.
Now because we are confronted with an inverted yield curve we have a mineral price induced inflation which is reminiscent of the one we had in the 70's.
That mineral price induced inflation explains the stagflation paradox.
So, following my framework, both Arthur Laffer and Paul Krugman are right!
It is probable however that the FED won't hike the sort-term rates this time and that long-term rates, as a consequence, won't rise!