Melbourne, Australia Saturday, January 10th, 2015 |
The Right Assets at the Right Time |
From Callum Newman in Albert Park: --Besides the direction of the oil price and worries about possible contagion from a distressed Russia, the big question of 2015 is when will the US Fed raise interest rates? However, today’s Weekend Daily Reckoning tackles the underlying assumption of whether the Fed will raise them at all. --Investors take note. --On Thursday The Wall Street Journal reported Eric Rosengren, the President of the Boston Federal Reserve Bank, as suggesting that ‘with inflation at very low levels, the Fed faces little urgency to begin the process of lifting borrowing costs.’ --Jim Rickards, author of Currency Wars and The Death of Money,says the expectation of rising rates in the US is one reason behind the surge in the US dollar of late. However, the US Fed doesn’t want a strong dollar because it’s deflationary. One of the Fed’s primary policy objectives is to hit 2% inflation. It’s not getting it. --Neither is the European Central Bank. The Financial Times reported yesterday that there are now 1.2 trillion euros in Eurozone debt that have a negative yield. Investors are effectively paying to hold short term government debt. --The problem for the Fed is, if it raises interest rates now, it makes the US an even more attractive target for capital. Investors get a higher return than in European debt and a strengthening dollar as well. Rickards conclusion is that the Fed will therefore not raise rates in 2015. This goes against the idea that the Fed is set to return them to ‘normal’ levels. --The question, of course, is what’s ‘normal’ in the first place?Bloomberg reported back in December that interest rates right now are actually closer to their historic norm than any time in the last half a century. From Bloomberg:
--Those that bet on higher inflation are now nursing losses. One of those men is a man called Michael Aronstein, who runs the MainStay Marketfield fund. The Financial Times reported the day after Christmas that, ‘One of the hottest mutual fund managers of recent years crashed to earth in 2014, after his bets on rising inflation turned sour because of the sluggish global economy.’ --Aronstein’s fund, according to the Times, took in more money than any other US mutual fund in in 2013. That tells us which way the crowd was thinking. Aronstein, as is my understanding, is a student of Austrian economics. --This model of the economy led him to the conclusion that the prodigious money printing since 2008 would see higher inflation. He took positions such as natural resource stocks like BHP and Rio Tinto. --The credit analysis of the Austrians is an essential thing to know. But it needs to be combined with understanding the land market. At the end of real estate cycles, when we get a credit induced land market crash, it is deflation that usually rules. --That’s because all the money printing so far still does not make up for all the credit destroyed or written off in the downturn from the banking system. New bank lending is yet to replace it. Most commentators focus on the global financial crisis as a crisis of debt. But first and foremost it was a land crisis, which few people study. --Professor Fred Folvary calls this combination of land and credit analysis his ‘Geo-Austrian’ synthesis. You’ve probably never heard of him. He predicted a collapse in the US real estate market and subsequent bear market — long before it happened. This is the model of the economy you want to use so you’re in the right assets at the right time. --The good professor is a keynote speaker at this year’s Freedom Fest, an event held in Las Vegas every year to celebrate liberty, ideas and open thinking. It usually hosts some of the biggest names in economics and finance. When the time comes, hopefully we can tune in to what he has to say. --Do yourself a favour and Google the booklet he wrote in 2007, The Depression of 2008. Here’s a taste to whet your appetite:
--If you want to understand what Fred’s talking about, and how it affects your wealth, start here. Regards, Callum Newman |