"TIES FORBIDDEN," reads a sign near the main entrance of this weekend’s World Economic Forum in Davos, Switzerland.
Apparently, the dress-down era of central banking has arrived. Gone are the three-piece suits and the silver cufflinks… Gone too is the monetary orthodoxy to which earlier generations of central bankers pledged their allegiance.
Orthodoxy is out; expedience is in.
During what we may now call the "tie era" of central banking, the doctrine of "price stability" was the guiding fashion. But today, price stability is as outmoded as a Half Windsor. The central bankers of the world have decided, en masse, to loosen their collars, sell off their gold reserves, print paper currency and "reflate" their economies.
"With every global precinct reporting," writes James Grant in the latest issue of Grant’s Interest Rate Observer, "the votes are in and counted. The winner is inflation. The world has elected red ink [and] ultra-low interest rates." Ushering inflation to its inaugural ball, says Grant, is the "corruption of the international monetary system, of which the dollar bear market is only one unsightly blemish."
We are sympathetic to Grant’s perspective. But, so far, inflation remains a relatively rare sighting. The U.S. economy, in particular, seems to inhabit a kind of inflationary Eden; a paradise featuring lots of the "good" inflation – rising shares
prices – but very little of the bad inflation – rising beer prices.
Just as Greenspan promised, economic growth is reviving and inflation is, to use the chairman’s term, "quiescent." However, eventually – timing uncertain – America’s massive, accumulated deficits will begin to weigh on economic growth, at which time our quiescent inflation will become a deafening annoyance. But that’s a problem for another day.
In the here and now, investors will continue buying stock and bonds and whatever else they think will make them money, not worrying about the future value of the money they hope to be making. Will a Big Mac cost $3.00 in 2008 or $30.00; they do not care.
Last week, the inflation-indifferent lumpeninvestoriat took a small breather from buying stocks or bonds or dollars. (But they did buy a little gold). The Dow’s eight-week winning streak came to a halt last week, as the blue chip index slipped 32 points to 10,568. The Nasdaq slumped 16 points to 2,123. Meanwhile, the dollar tumbled anew, falling to $1.258 per euro from $1.239 the week before. Gold edged higher to $408.10 from $406.75.
The stock market’s sell-off may be far from over, according to Dan Denning, editor of Strategic Investment. "Keep an eye on the VIX," says Dan. "Judging by the recent action in the Volatility Index (VIX), investors are in a collective coma. The lower the VIX, the more complacent investors are… [Therefore], the lower the VIX, the better the chances that the stock market is about to experience a descent."
Last Thursday, the VIX hit an 8-year low. "At the Chicago Board Options Exchange," Barron’s reports, "the volatility index, or VIX, closed below 15 for the first time since 1996. VIX is a measure of anticipated market volatility, and traders simply aren’t expecting any drama these days — not when the stock gauges move in such small, soothing steps."
The low VIX reading finds ample corroborating evidence in the world at large. Everyone, it seems, is bullish on stocks, while no one, it seems, worries about what might go wrong.
For example, even though the world’s central bankers have turned their backs on the doctrines of their forbears, very few investors worry about inflation. To the contrary, the lumpeninvestoriat – most of whom tossed out their ties in the late 1990s – trust in the policies of this new generation of open-collared central bankers. They trust them to make the economy stronger and to make share prices go up… without rekindling inflation.
Most investors – both those in suits and those in pyjamas – believe the U.S. economy to be on a sustainable growth path and dismiss the dollar bear market as a non-event.
"The mood this year at Davos is vastly improved from a year ago," writes Morgan Stanley economist Stephen Roach. "Time, that great healer, has done its trick again. The war has come and gone, the global economy has reawakened, and financial markets are on a tear… But have we truly learned nothing from the Great Bubble? The US economy is critically dependent on the permanence of asset appreciation. Yet bubbles are, by definition, the antithesis of
such permanence. The Fed, through its extraordinary monetary accommodation, is doing its best to keep the magic alive. Unfortunately, that only underscores the dangerous moral hazard implications of a post-bubble containment strategy — massive liquidity injections and rock-bottom interest rates that ultimately lead from one bubble to the next."
Let’s see… we’ve got inflationary monetary policies, lofty stock valuations and widespread investor complacency… We’ll keep wearing our ties.
The Daily Reckoning
P.S. Given the Fed’s stance, and the fact that inflation is already showing up in the commodities markets, you won’t want to miss this week’s special report: 18 WAYS TO INVEST IN GOLD.
A massive 104-pages, the report includes insights from Richard Russell, Jim Rogers, Bill Bonner and a host of the gold industry’s leading experts. You can get a copy of the report free, with a subscription to Steve Sjuggerud’s True Wealth.
THIS WEEK in THE DAILY RECKONING
LOST IN SPACE (1/23/04)
By Bill Bonner
"… Here we have what must be the new-Republican manifesto. Gone is any trace of republican virtue… laissez-faire deference, humility, modesty, probity and thrift. Instead, we are expected not just to get along with our fellow man, but to dominate him politically… to outdo him in science… and to outspend him. What words can stand up against this grandiose vision, dear reader? it is arrogant. It is audacious. It is proud and confident. It is loony… "
AT LEAST DON’T BUY BONDS… (1/22/04)
By Porter Stansberry
"… Mr. Greenspan sees no inflation in the United States economy. He will continue to say he sees no inflation, too… because in fact it is his policies that are causing the new inflation – in commodities and assets. But sooner or later, rising commodity prices and the falling exchange rate will filter into rear-looking measures like the Consumer Price Index (CPI). When the Fed is forced to raise interest rates to preserve the purchasing power of the dollar, long-term interest rates will soar, causing bond prices to plummet… "
DEFLATION HAS ARRIVED (1/21/04)
By Bob Prechter
"… The few articles mentioning deflation in recent months have declared the prospect for it ‘dead.’ This consensus is not merely overwhelming but reflects a belief as vast and deeply held as a religion. Against this backdrop of opinion, M3 since September has fallen over two percent, its largest decline in 60 years. This is different from a lack of inflation. It is real, actual, deflation. And a persistent decline in the money supply will have consequences… "
THE VALUE OF CATASTROPHE (1/20/04)
By Dan Ferris
"… The 9/11 catastrophe wrecked a bunch of [insurance] companies. And insurance and reinsurance are just crappy,
unprofitable businesses fraught with peril. But forgive me if this sounds crass… Disasters like Hurricane Andrew and 9/11 are exactly the type of big, ugly misfortune that creates excellent investment opportunities. And industries that appear to be universally reviled are often where the biggest profits lie… "
A NEW ERA OF PROFLIGACY (1/19/04)
By the Mogambo Guru
"… Here in the good old USA, interest rates have been pounded down and down and down for year after year after year, to levels seen only a few times in the last century and always then in response to emergency situations, to little effect, except to 1) make debt levels monstrously bigger to prevent 2) the debt bubble from imploding until some later date. Ugh. And the result is that the national debt has now officially soared over $7 gazillion, I mean trillion… "
HEADLINE, NEWS And INSIGHT: Buying physical gold? Here’s how and
where to store it… long-term balance sheet deterioration – get
used to it!… and more!
The Best Ways to Buy and Store Gold
by Mark Nestmann
"… You should definitely keep a nest egg of small-denomination gold coins at home or in a safe place for use in a financial emergency. Beyond that, you may wish to keep a portion of your gold holdings outside your domestic jurisdiction. The benefits of holding gold offshore are the same as holding any other asset offshore: the gold disappears from the domestic radar screen. If someone tries to find your assets to determine if you’re ‘worth suing,’ offshore assets won’t show up in the search… "
The Supercycle of Debt – America’s Growing Burden
by John Mauldin
"… The Supercycle is a description of the long-term decline in balance sheet liquidity and rise in indebtedness during the post-WWII period… Government policies to smooth out the business cycle were successful in preventing the frequent depressions that plagued the pre-WWII economy, but the downside was that the balance sheet imbalances and financial excesses built up during each expansion phase were never fully unwound… "