Comments on: Follow the Herd? Or Reason? http://www.sustainablewealth.org/follow-the-herd-or-reason Seek to achieve sustainable wealth through superior insight into the economic universe with a clear focus and commitment to a diversified approach to long-term investing Sat, 06 Mar 2010 18:12:50 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Kieran Osborne http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-110 Kieran Osborne Wed, 08 Jul 2009 21:09:44 +0000 http://www.sustainablewealth.org/?p=634#comment-110 In terms of “safe haven” status, outside of gold, we favor the debt of governments that can actually afford any stimulus spending – such as Norway, for instance, or countries whose central bank is following prudent monetary policy – on a relative basis, we prefer the Eurozone over the U.S.: the ECB is following much more prudent monetary policy than the Fed, however the recent covered bond purchase strategy is somewhat worrisome (though the scale of this program remains well below those seen in the U.S.). That said, the U.S. dollar appears to retain it’s “safe haven” status, at least over the near-term – but we believe the pendulum will increasingly swing away from the U.S. dollar over time, especially if policy makers continue down the present economic road, further deteriorating government finances. Longer term, currencies such as CNY are likely to become more prominent globally, and pressure the USD’s reserve currency status. China presently doesn’t have sophisticated enough financial markets to facilitate the bulk of global trade, but is working hard to develop its financial markets. It has recently initiated bi-lateral currency swap agreements with a number of Asian and Latin American countries to facilitate settlement of cross border trades without USD, and is encouraging banks to offer CNY settlement. While we don’t have a crystal ball, we envision the USD’s reserve currency status to be put under increasing pressure from the likes of CNY over the coming years… It is true that much of the money printed is sitting on the balance sheets of banks as excess reserves, rather than being loaned out, though excess reserves have been dropping over recent weeks. However, the most important factor influencing inflation are <em>inflationary expectations</em> – businesses will try to push through price increases and employees will ask for pay raises if both believe inflation is just around the corner – hence why the Fed spends much of its time talking down inflationary pressures and talking up imaginary exit strategies. Another possible scenario might be if the banks burst (pun intended) and we see a flood of loans into the economy. Don’t forget: banking is a competitive business – once one bank views the lending environment favorably and starts lending, others will likely follow, excess reserves will be drained and we may see a torrent of money come into the economy. If this happens, the Fed will have its hands tied to rein in inflation in our opinion. <a href="http://www.sustainablewealth.org/author/kieran" rel="nofollow">Kieran</a> In terms of “safe haven” status, outside of gold, we favor the debt of governments that can actually afford any stimulus spending – such as Norway, for instance, or countries whose central bank is following prudent monetary policy – on a relative basis, we prefer the Eurozone over the U.S.: the ECB is following much more prudent monetary policy than the Fed, however the recent covered bond purchase strategy is somewhat worrisome (though the scale of this program remains well below those seen in the U.S.).

That said, the U.S. dollar appears to retain it’s “safe haven” status, at least over the near-term – but we believe the pendulum will increasingly swing away from the U.S. dollar over time, especially if policy makers continue down the present economic road, further deteriorating government finances.

Longer term, currencies such as CNY are likely to become more prominent globally, and pressure the USD’s reserve currency status. China presently doesn’t have sophisticated enough financial markets to facilitate the bulk of global trade, but is working hard to develop its financial markets. It has recently initiated bi-lateral currency swap agreements with a number of Asian and Latin American countries to facilitate settlement of cross border trades without USD, and is encouraging banks to offer CNY settlement. While we don’t have a crystal ball, we envision the USD’s reserve currency status to be put under increasing pressure from the likes of CNY over the coming years…

It is true that much of the money printed is sitting on the balance sheets of banks as excess reserves, rather than being loaned out, though excess reserves have been dropping over recent weeks. However, the most important factor influencing inflation are inflationary expectations – businesses will try to push through price increases and employees will ask for pay raises if both believe inflation is just around the corner – hence why the Fed spends much of its time talking down inflationary pressures and talking up imaginary exit strategies.

Another possible scenario might be if the banks burst (pun intended) and we see a flood of loans into the economy. Don’t forget: banking is a competitive business – once one bank views the lending environment favorably and starts lending, others will likely follow, excess reserves will be drained and we may see a torrent of money come into the economy. If this happens, the Fed will have its hands tied to rein in inflation in our opinion.

Kieran

]]> By: Jim Dunn http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-109 Jim Dunn Wed, 08 Jul 2009 20:08:17 +0000 http://www.sustainablewealth.org/?p=634#comment-109 I keep looking at Brasil -0f course I have a Brasilian Fiancee and have been there many times, also did extremely well on a house lot near the beach which I held four years and only sold because the next-door neighbor literally made me an "offer I couldn't refuse" - 20% more than nearby lots were selling for. But, as Bill Clinton pointed out, the majority of cars and trucks run on ethanol mix(gas hovers around $US5.00/gal), so that giant new oil field can represent pure exportable profit. They have about 3700 miles of coastline - from tropical rainforest to desert-like to temperate in the South and, yes, Vern, you can own beachfront property there. With an investment(in almost anything) of $50,000US, you can get a permanent Resident visa. I am invested in Embraer - they have orders for all the planes they can build this year, and Petrobras the government petroleum company, and am looking at building beachfront houses to sell to Americans - or Swiss -or Argentinians. Brasil has always been known as "the U.S. of South America" - and may pass us yet. I keep looking at Brasil -0f course I have a Brasilian Fiancee and have been there many times, also did extremely well on a house lot near the beach which I held four years and only sold because the next-door neighbor literally made me an “offer I couldn’t refuse” – 20% more than nearby lots were selling for.
But, as Bill Clinton pointed out, the majority of cars and trucks run on ethanol mix(gas hovers around $US5.00/gal), so that giant new oil field can represent pure exportable profit. They have about 3700 miles of coastline – from tropical rainforest to desert-like to temperate in the South and, yes, Vern, you can own beachfront property there. With an investment(in almost anything) of $50,000US, you can get a permanent Resident visa. I am invested in Embraer – they have orders for all the planes they can build this year, and Petrobras the government petroleum company, and am looking at building beachfront houses to sell to Americans – or Swiss -or Argentinians. Brasil has always been known as “the U.S. of South America” – and may pass us yet.

]]> By: Ryan http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-108 Ryan Wed, 08 Jul 2009 19:06:41 +0000 http://www.sustainablewealth.org/?p=634#comment-108 Even with the printing of money (2 trillion to date) does the destruction of credit offset that if it is occuring at a faster pace than the printing? Either way the dollar will have it's problems, but does the destruction of credit offset teh printing from an infltionary standpoint? Even with the printing of money (2 trillion to date) does the destruction of credit offset that if it is occuring at a faster pace than the printing? Either way the dollar will have it’s problems, but does the destruction of credit offset teh printing from an infltionary standpoint?

]]> By: Buck http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-107 Buck Wed, 08 Jul 2009 18:08:38 +0000 http://www.sustainablewealth.org/?p=634#comment-107 Good article but no guidance on alternative cash investments. The fact that the former correlation numbers were all wrong in light of the 'new' market [e.g., hedgfunds and other institutions selling the baby with the bath to stay liquid] proves once again that investing is not as much science as it is risk managment and preparing for the worst. I have a novel idea, why not lobby the Government to return to all of the New Deal reforms like giving savers an increntive by a reasonable fixed and guaranteed return of 5% on all passbook savings [we had it for fifty years before the Republican Contract with America (Bank bosses) came in with the repeal of USURY laws that were with us since the Old Testiment. Since they claimed to be such religious puritans, how can they see any morality in taking our savings in at zero percent and lending it back to us on credit cards at 25%? What we need is a concerted effort to indict politicians for fraud. They are the ones who were supposed to be watching the fort. Good article but no guidance on alternative cash investments. The fact that the former correlation numbers were all wrong in light of the ‘new’ market [e.g., hedgfunds and other institutions selling the baby with the bath to stay liquid] proves once again that investing is not as much science as it is risk managment and preparing for the worst. I have a novel idea, why not lobby the Government to return to all of the New Deal reforms like giving savers an increntive by a reasonable fixed and guaranteed return of 5% on all passbook savings [we had it for fifty years before the Republican Contract with America (Bank bosses) came in with the repeal of USURY laws that were with us since the Old Testiment. Since they claimed to be such religious puritans, how can they see any morality in taking our savings in at zero percent and lending it back to us on credit cards at 25%? What we need is a concerted effort to indict politicians for fraud. They are the ones who were supposed to be watching the fort.

]]> By: James M. Kearns http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-106 James M. Kearns Wed, 08 Jul 2009 15:59:54 +0000 http://www.sustainablewealth.org/?p=634#comment-106 I agree with your concern for a weakening dollar and it's inflationary effect on US consumers, especially since we are so dependent on imports, and not just energy. However, I am reading increased comments that the vast amounts of money the government is printing will not generate inflation because it is sitting on the balance sheets of banks and other financial institutions instead of in circulation through loans. Do you consider this kind of commentary valid? I agree with your concern for a weakening dollar and it’s inflationary effect on US consumers, especially since we are so dependent on imports, and not just energy.

However, I am reading increased comments that the vast amounts of money the government is printing will not generate inflation because it is sitting on the balance sheets of banks and other financial institutions instead of in circulation through loans. Do you consider this kind of commentary valid?

]]> By: Clemens Kownatzki http://www.sustainablewealth.org/follow-the-herd-or-reason/comment-page-1#comment-105 Clemens Kownatzki Wed, 08 Jul 2009 15:56:41 +0000 http://www.sustainablewealth.org/?p=634#comment-105 Very good article! What would you say are alternatives to the US$ in terms of safe haven status or as as second reserve currency? Euro, CNY, or SDRs? What are the possible scenarios we see some of these developments in the next 10 years? Very good article! What would you say are alternatives to the US$ in terms of safe haven status or as as second reserve currency? Euro, CNY, or SDRs? What are the possible scenarios we see some of these developments in the next 10 years?

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