Here's some food for thought from my usual source. It might not be what it seems. It's getting very tricky. UB
If you had stocks in 2000, and held them until now,... guess how much you would have lost?
60% - in real terms.
If you went all the way back to 1966...how much would have made if you held stocks all the time until today? Zero!
How about stocks for the long run? Well, maybe...but actual performance depends on WHEN you buy and WHEN you sell. If you're lucky, you'll get out when the getting's good...and back in when it pays.
And right now?
"Everybody I know is getting back in...cautiously," says a rich friend here in London. "But I'm not so sure...I don't think there's any hurry."
Nope. No hurry. There's a storm passing over the world's financial markets. We'd let it blow itself out before we made any major investments.
"But what do you do in the meantime? I'm in cash...and I guess I'll stay in cash after reading your report yesterday. Inflation seemed like a sure thing. But as you say, maybe it's not as sure as we think."
Yesterday, the Fed made history. It made a little step for man, and a big step for mankind, down the road to Hell. The monetary base of the U.S.A. is to be increased 500% over the next few months. More than a trillion dollars' worth of debt is to be monetized.
Doesn't this guarantee imminent inflation at much higher levels? Yes...in theory. But there's a many a slip twixt the cup of theory and the lip of actual financial experience. As our friend James Ferguson pointed out, the Japanese had their cup running over for 10 years. Still, no consumer price inflation arrived to quench their recession- parched lips.
What we take from this experience is that inflation is like a temperamental mistress. Sometimes she will be smooth and serviceable...and at other times, she will be as cold and stiff as brass.
If the world is in the grip of a major correction - which it certainly is - commodity prices should be going down. Instead, they're going up. Copper is up 40% since it hit bottom in December of last year. Oil has gained more than 50%. In dollar terms, the commodity index, the CRB, has increased 14% from its bottom a few weeks ago. Are these dead cats just bouncing? Or, is this inflation?
And take a look at what has happened in England. Even in the midst of the biggest deflationary meltdown in asset prices in all of history, consumer prices still rose.
Bread is up 11.2%. Meat is 15% more expensive than it was 12 months ago. Fruit is 13% higher. Natural gas up 33% and electricity is at plus 18%
Britain is a special case. Much of the price increases come a result of the falling pound - which makes everything that has to be imported more expensive.
But everything is a special case, isn't it? Japan was a special case. And now...the whole dollar-based world is a very special case.
And when the Fed monetizes debt, it's not as if it buys it directly from mom and pop. Who owns the debt? Well, the biggest holder is China. When the Fed buys U.S. Treasury debt from China, the cash doesn't automatically fall into the U.S. consumer slipstream.
The Chinese could horde the money. Or they could use it to buy U.S. businesses - big business, such as GM and Caterpillar. In effect, what the Fed is really doing is facilitating a massive transfer of real wealth - from America to foreigners. By holding up the price of U.S. Treasuries (by buying them itself) the Fed is funneling cash to the foreign owners. The foreigners then redeem the cash for major U.S. assets (at low prices).
Maybe that was the deal the feds worked out with the Chinese. Or maybe these are just the collateral and unforeseen consequences of a foolish plan. We don't know. But it doesn't necessarily put a lot of extra cash on the street.
And then, even if it were on the street, it may not stay there for long. The feds can put in a lot more money. It doesn't mean it necessarily chases consumer products and drives prices higher. In fact, in a real depression, people tend to hoard money. They save. The more fearful they are, the more they squeeze their coins and clutch their bills. Instead of circulating freely, money disappears into drawers, bank vaults, and billfolds. Let's say the feds add a colossal sum - $10 trillion - to the dollar money supply. Even that could quickly be stashed away...in pockets...bank vaults...business holdings. Remember, most of it is in electronic form. What difference would it make to consumer prices if every account holder added a zero or two?
Our old friend John Mauldin sends this comment:
"On the Fed printing money: there is one small thing to watch. What if they print it, put it in the banks and then the banks instead of lending it to each other at 1.25% in LIBOR decide to deposit it at the Fed for .25% because they are worried about security and counter-party risk, which is a lot of the reason Fed reserves have exploded. They could print $5 trillion and if it all goes back to the Fed then where is the inflation? We need to pay close attention to where the money goes."
The Daily Reckoning