Posts filed under “Currency”
Lee Quaintance and Paul Brodsky of QB Partners are concerned about runaway monetary inflation and the decline of the U.S.
In this week’s Barron’s Up and Down Wall Street, they address the question "Where to invest when the financial markets seem unduly risky and the risk/reward ratio generally unfavorable?"
"The answer, they believe, is that hard assets will provide more profits and carry less risk than most financial assets. And that since most "hard-asset derivatives (equity) remain unpopular among financial-market investors," they provide intriguing investment potential.
To illustrate, even with oil at record high prices above $80 a barrel, "energy-related public equities continue to be valued on implied assumptions of long-term crude prices of no more than $45 a barrel."
In like vein, they note that the equity-market valuations of certain global agricultural, precious and industrial metals, and mineral concerns are trading at a fraction of their future production/reserve values. Lee and Paul allow as there are valid reasons why such shares sell below their optimum value, but the discounting is typically much too severe.
Basically, their view is that "investors have not begun to allocate to these sectors en masse because we think they have yet to recognize the relationship linking money creation (and fiat currency declines) to the intrinsic value of natural resources."
They go on to explain that "most stocks that derive their value from natural resources are cheap because most investors that could sponsor such plays haven’t done so in 30 years." But the pros will be forced to change that stance when economic fundamentals give them no choice. And, in due course, they’ll be followed by the investment masses, who, as always, will be late to the party." (emphasis added)
I couldn’t agree more.
One last item of concern: Moral Hazard. Quaintance and Brodsky note that "financial-asset markets are not set up to
anticipate economic downturns, since it seems that Big Brother is always there to
bail them out."
I suspect Ben Bernanke is all too aware of this, and was part of his calculus last month, despite the 50 bp cut. Indeed, it may be part of what’s weighing against a cut in the October meeting . . .
Rudy in a Burka?
UP AND DOWN WALL STREET
Barron’s, October 15, 2007
Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.
Today, we look at a few
printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.
This is simply a measure of how much cash the Fed is injecting into the system.
The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:
Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.
This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.
As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?" I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless.
Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less.
Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!
For gold, the process is not all that dissimilar.
Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.
Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices: Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.
Its easy to understand why inflation has been called The Cruelest Tax.
BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.
There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.
Federal Reserve Bank of St. Louis’
Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1
Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6