musings on inflation, gold, the dollar, and TIPs:
1.gold prices, in the short term, are subject to much secret manipulation: central banks sell their hoards, or don't, or hint they will; mining companies sell forward, or don't. Hard for an individual investor to win a game like that. Long-term, however, gold prices follow:
2. Inflation. Gold is in a 21-year bear market, because inflation has been in a 21-year downtrend. So, going long gold (as a LT holding), is essentially a bet that inflation will be a lot worse than current expectations. But......
3. No one has a track record of predicting future inflation. But.......
4. If you believe in ReversionToTheMean, you should expect higher inflation. The difference between 10Y TIPS and regular 10Y Treasuries, is only 1.5% (3.5% vs. 5%), implying that current expectations are for inflation to average 1.5% over the next decade. The downside risk is that inflation actually is zero (=max 1.5% downside). The upside potential is infinite, since inflation could, theoretically, be infinite. Seems like a good risk/reward situation.
5. Walk down the aisle at Walmart, remembering what prices were last year, and you conclude there is no inflation. However, there are other measures. Asset inflation, in stocks like CSCO and NTAP and AMAT. Housing inflation. Inflation, defined as, "too much money chasing.......".
6. The Fed has been solving all problems for years with lower interest rates and more liquidity. It worked to "fix" LTCM and Russia in 1998. It "fixed" Y2K (and produced the high-water mark for Exuberance in stock prices 3 months later). And it seems to have "fixed" 9/11 and Enron and Argentina. But, we are reaching the point of diminishing returns. The liquidity gusher in Y2K brought the Nas to 5000. The current "fix" has only got us back to 2000. A "fix" is what every addict craves. We are addicted to easy money, ever-lower interest rates, ever-higher debt. Each new fix returns us to a state of Euphoria. But it doesn't last. And requires ever-higher doses for each successive fix.
7. with an addict, it's impossible to predict when, and after what drug dose, there is a Crash, and the DTs start. The exact precipitating event is always obscure. But it is easy to say what the final outcome is; easy to say that the current trend is not sustainable.
8. Liquidity injections and Easy Money will work, until they produce intolerable side effects: inflation and a falling dollar. As the one-and-only Global Currency, the dollar has been forgiven many sins, like low interest rates and an endless trade deficit. But, at some point, all this money sloshing around, and all those consumers doing cash-out refis so they can buy the world's entire production of consumer goods, this has to result in inflation and a falling dollar.
9. When? Not now. Not yet. My best guess (which isn't saying much) is that the recession ends sometime next year, and unemployment peaks late next year, and the Fed is forced to start raising interest rates by end-2002 or early 2003. At that point, the economic recovery will still be very fragile, no robust recovery. And the Fed will be caught between a rock (second leg down of a W-shaped recession) and a hard place (inflation). And that's when stocks bottom, and gold (or TIPS) are the best assets to hold. Sometime in 2003.
10. In the meantime, I'm going to ride the roller-coaster with the out-of-the-money NTAP LEAPs I bought in early October. |
