Henry,
The economy in Japan does not seem to be getting any better, interest rates are near zero now, and yet the economy does not seem to be reacting. Their banks are not in the best of shapes, and the Nikkei, is not about to be going up any time soon. Same with the Yen.
The above, plus the fact that for the rest of the Asian economies, which will require patience, (and lot of exports to set these economies back into decent form).
These events tell me that the Fed, as much as they may be tempted from time to time, to "scare" the US equity market by suggesting that they would increase rates, are in no real position to do anything.
Assuming the Fed were to increase rates, investors in Asia, would be ready to send funds to the US Bond Market, since they would become more attractive, which it would also give continued strength to the US dollar.
If such were the case, the Asian imports would become even LESS expensive, (same thing with labor costs in Asia, for those US companies that have manufacturing facilities in Asia).
Further, the continued strength of the US dollar would attract funds from other regions, example Latin America.
As it is, the above scenario seems to be taking place today, without the US increasing interest rates.
Now, after an initial "shock" (and considerable sell-off in the equities market), after a while, (once the appropriate level of prices, and "sanity") would be re-established, investors would realize, that even after an interest rate hike, (assume, worst case, of 1/2 %), they would determine that the potential profitability of US companies would not be significantly eroded. Remember that the interest rate level today, is not nearly as high as in 1987.
Therefore, even in such unlikely scenario, the US equity market would quickly resume the uptrend.
To what levels? Who knows... The new valuations would be a function of the liquidity going into the market. Current valuations based in p/e potential growth of earnings, and any other measure that is based on PAST standards, would have to be reviewed. including the relationship between bond yields and S&P dividend yields.
Why...
When in past history, has the US economy looked so attractive in terms of:
1. New technology available.
2. Better productivity, obtained by # 1 and inexpensive labor available off-shore.
3. Amount of funds being invested from domestic sources.
4. Amount of funds coming in from off shore.
5. Fiscal policies that are yielding balanced budgets, (as questionable as they may be, they are better than running deficits).
6. The probability that the social security system MAY be "privatized", (if not 100%, a good part of it).
7. The opening of considerable sized [new] markets, with both, potential new consumers, and at the same time, new sources of inexpensive labor. (Russia, CIS, Africa, Latin America).
8. General Peace around the globe, with specific minor exceptions.
9. The commercialization of the Internet, creating brand new industries that they did not exist in the past. (Internet Telephony, to name one).
10. Said Internet being an important source of information, and in so doing, precluding (for the most part), tyrant leaders to oppress entire countries, precluding their respective populations of participating in this global economy. A few exceptions here, and that is due to such leaders being in power prior to this new information age. (i.e. Castro, Saddam Hussein...)
Not a single event is important on its own, but the combination of the above elements, is what in my eyes is making the difference.
In short... I do not see the US interest rates going up any time soon...in fact a case could be made to say, they are too high right now...
The above would cast certain influence to commodity prices overall, in a similar time frame. Further dampening the possibilities for an increase in the inflation rate.
My opinion only.
Z. |
