SP index reached new highs this week since 2008 crash. This week the most prominent bearish advisor, David Rosenberg, said that the market may go higher (on a short-term technical basis). Inflation continues to go higher. Precious metals set new records. Oil is very high. So it looks like the bearish case is dead, right? Wrong! Bubbles can last for years. The great mortgage and real estate bubble began in 1997 and continued until mid-2007 and took a year to die when Lehman went bankrupt in 2008.
Today there was an excellent article in the Financial Times about hidden copper bullion stockpiled in China which implied that the price of copper was too high because speculation. Previously I have warned that covert shadow bank margin lending bubbles in China may have aided this speculation. This is important because economists worldwide assume that copper’s price and demand can forecast economic growth. But what if copper has become scarce and expensive only because of covert speculation? Then the world’s economy would not be as robust as it seems. And what if a margin call on these stockpiles of copper caused them to be suddenly sold? Then the shock of the unexpected supply of
The public wants to know about investments for a falling dollar, emerging market funds, hedging against a falling dollar, preparing for the crash of the dollar. More evidence continues to build about risks of a disinflationary crash. Jeremy Grantham writes at gmo.com yesterday that while he sees commodities becoming more valuable over the long run there may be, in the near term, a bad commodities crash, as bad as the stock market crash of 2008-2009, especially if China crashes and the weather improves.
Investors seek answers to the following: will the dollar be devalued, will the dollar collapse; if that happens what are investments for a dollar collapse, is oil a hedge against a dollar collapse, and what foreign investments are a hedge against a possible dollar collapse.
To hedge against a falling dollar one investment technique is to use foreign currency denominated bond actively managed open end mutual funds. Be careful to verify that they are “unhedged”. Some FX bond funds are hedged back into dollars so you get no protection from a falling dollar. Be aware the other major developed countries currencies (Euro and Yen) may perform worse than the dollar.
People enquire about the risk of the dollar collapsing. The WSJ quoted Russia's Putin today: <a title="U.S. Monetary Policy Is ‘Hooliganism’" href="http://blogs.wsj.com/economics/2011/04/20/putin-u-s-monetary-policy-is-hooliganism/?mod=WSJBlog
Apartment rents may weaken, thus reducing CPI. 40% of CPI is calculated from renting a residence. Since most rentals are apartment houses one should examine that as a source of inflation or deflation. I had thought that multifamily apartment houses were more stringently underwritten than single family loans and so I assumed that multifamily properties would be less likely to go into foreclosure. While that is still true, it is also true that failures are occurring in multifamily lending. In 2010 the amount of multifamily foreclosures doubled compared to 2009. See WSJ article “Apartment-Building Foreclosures Piling Up” on 4-20-2011.
Inflation can be created by three methods: 1. An increase in the money supply combined with tight labor markets and minimal excess capacity
House Republicans may succeed in reducing deficit spending when the Treasury runs out of money in July and hits the debt ceiling. They are more determined than Newt Gingrich was in 1995 because the deficit is so huge. This would be bullish for Treasuries in July. It will be deflationary due to budget cuts; this is good for T-bond bulls. Service industries are not directly influenced by rising foreign labor costs (unlike manufactured goods) and are 67% of economy. If the economy slows down in the second half of 2011 and Congress contracts government spending when the economy is still fragile that could cause the economy to fall back into a double dip recession. The combination of better government