Gregor,
You are of course correct - currently there is only minimal inflation. Monetary theory (which I believe in) says that inflation is related to money supply. If money supply grows too fast, then there is an oversupply of money for the amount of goods/commodities available, so the price of these goods rises accordingly. Economists such as Milton Friedman have shown this to be so. Central banks control the money supply by adjusting interest rates. Increasing rates decreases the money supply and vice versa. A change in interest rates takes about 6 months to a year to affect the money supply. If the money supply gets out of hand and grows too fast, there will be high inflation. Slamming on the brakes at this point by raising interest rates significantly will lower inflation at the risk of a recession. This is the classic boom/bust business cycle. Monetarists believe that the Fed should keep money supply growth uniform to avoid this cycle.
At the end of last year, the Fed and central bankers around the world lowered interest rates significantly because there was a risk of deflation and depression. At the same time, the IMF was pouring billions of dollars into failing economies. Japan, Korea and other countries are spending billions more to get their economies going. My belief is that this will result in a money supply growth that is too high and, as a result, the inflation rate in the second half of this year will be much higher than it currently is. Indications of this may already be appearing. For example, the strong dollar has meant that Americans can purchase relatively cheap foreign goods. Producers could not easily raise prices because of the lower priced foreign goods competing with them (in spite of wage increases). Recently, the dollar has weakened considerably against the yen. This means that US producers competing principally with Japanese goods can now raise prices and still be competitive. An excess supply of dollars in the world leads to a weaker dollar.
The current super low inflation rate is the underpinning of the historically high PE multiples in the stock market. Last December, it appeared that the stock market sectors that I was invested in, mainly technology stocks and Asia (ex-Japan) mutual funds moved too far, too fast considering the risk of higher inflation and lower than anticipated earnings. On the other hand, there was extreme pessism in the OSX sector and many fine OSX companies were beaten down by 50% to 80% or more from their 52 week highs. They appeared way undervalued as indicated by the very low price to sales ratios. I always form an investment hypothesis as a basis for making any changes to my portfolio. My investment hypothesis is that the price of oil will rise significantly over the next two years due to a reduced supply (e.g., through reduced capex spending, shut-ins), rising demand from recovering Asian economies, and rapid money supply growth. As a result, I sold my investments, took my profits, and invested 100% in OSX companies with solid balance sheets and low price to sales ratios. My hypothesis may be completely incorrect, but being a long-term investor I'm confident of earning an excellent return over the next two to five years due to the wonderful risk/reward of these companies.
Sorry for the long-winded response. The people posting to this excellent thread have shared so much helpful information and analysis so I wanted to share my thoughts for whatever it's worth.
|
