Monday, January 22, 2007

The Economy: some thoughts

The world (Asia in particular) is producing far too much in the way of goods and merchandise. In turn, US stores are piled up to their ying-yang with merchandise. Really? Then why isn't this production of "too much" merchandise deflationary?

The reason it isn't deflationary is because there's even more money than merchandise being created. The ocean of fiat money is overcoming the river of production. It's a situation that's never been seen before. And it's the product of two phenomena -- the rapid entrance of one-third of the world into the global economy. And the fact that every nation (again, the Asians in particular) wants a "cheap" competitive currency. And the way to make your currency cheap is to print "too much" of it.

The net result is that the price of everything -- real estate, stocks, bonds, commodities -- is floated higher. The result of all this "levitation" is that yields are ridiculously and synthetically low. Stocks are overpriced and provide micro-yields. Bonds are overpriced and provide unnaturally low yields.

Low returns mean that projected income for insurance companies, annuities, pensions plans, are all going to run short of needed or promised money. Everybody is forced to speculate in order to make up the difference. Unless, of course, the whole inflationary balloon collapses and securities return to known or historical values.

Since value investing is so difficult today (lack of great values), investors of necessity are speculating on growth. The result -- who cares about values or dividends, just find me stocks that are going to grow.

What's the scariest phrase in the economic world today? I'll tell you what it is -- it's regression to the mean. They can't let this happen. But how do you hold it off? You continue to inflate.

Following are some of Pyford's, a UK economist, conclusions --

"Corporate profit margins are at or close to record highs and will mean-revert. The process is likely to start this year. Share-markets are unprepared for this outcome.

"Property is in a bubble in many countries. It will not remain so.

"Bond prices make no allowance for any inflationary increase. This is overly optimistic.

"Credit spreads are around record lows. This is overly optimistic.

"Geopolitical problems have gone away.

"China will never stumble.

"Private equity financiers know something the rest of don't.

"Americans, Australians, Canadians, New Zealanders and the British don't really need to save anything out of current income. This is not just overly optimistic but delusional.

"The world has changed, and we simply don't 'get it.' Or to put it another familiar way, 'this time it's different.' We'll let you decide on this one."


Anonymous Anonymous said...

Please would you give more information on where to read Pyford's complete article.

9:58 AM  

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