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Old 11-04-2010, 11:30 AM   #21
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I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars
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Old 11-04-2010, 11:39 AM   #22
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From the WSJ:

"The Federal Reserve, in a dramatic effort to rev up a "disappointingly slow" economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth."

Fed to Buy $600 Billion of Treasurys - WSJ.com

How much lower can rates go? Current averages from Bankrate dot com:
30 year fixed rate mortgage 4.24%
1 year CD 1.12%

Rates are already at historically low levels and it hasn't jumpstarted the economy yet.
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Old 11-04-2010, 11:41 AM   #23
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I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars
Hope the new allocation doesn't cost you more money. But I admit, I know nothing about nothing.
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Old 11-04-2010, 11:44 AM   #24
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Nova, I feel your pain, having been down that road a few years ahead of you. I suppose each of us has to learn that painful and expensive lesson the hard way: no one, and I mean absolutely no one, can consistently know the direction the market will take, when it will take it, or how long it will head that way.

Finding an AA you can live with and rebalancing when it gets out of whack is far from perfect but it sure beats guessing wrong.
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Old 11-04-2010, 11:51 AM   #25
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The Euro is not predominately the issue. It is not been pegged to the $. Moreover, imports from China, Japan and the Pacific Rim (where central banks are pegging to the dollar for now) dwarf Euro imports, especially for the bottom two thirds, or more, of consumers who are not benefiting at all from the FED induced melt up in the stock market.

The hell of what I speak for the US consumer will come IF China (and a lesser extent Japan) throws in the towel and worries about domestic inflation over domestic employment. Will it happen, I don’t know. God knows the Chinese have been willing to manipulate their currency (and by doing so invest trillions in depreciating $s) far longer than I would have expected. Still, at some point I suspect a forced policy change due to domestic issues.

And there is still the issue of oil…
I am not exactly sure what you are saying. Precisely because the Euro trades freely, its movements against the dollar are meaningful. Up another cent this morning, to $1.44
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Old 11-04-2010, 11:52 AM   #26
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I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars

Yes, and the lesson may not be over yet.

Ha
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Old 11-04-2010, 12:05 PM   #27
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I am not exactly sure what you are saying. Precisely because the Euro trades freely, its movements against the dollar are meaningful. Up another cent this morning, to $1.44
What I'm saying is that if the Yuan, Yen, etc. were allowed to appreciate the way the Euro, Pound, Aus $, etc have, the impact on the US consumer, and thus the economy, would be very negative (and more than offset any improvement by way of exports).
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Old 11-04-2010, 12:07 PM   #28
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What I'm saying is that if the Yuan, Yen, etc. were allowed to appreciate the way the Euro, Pound, Aus $, etc have, the impact on the US consumer, and thus the economy, would be very negative (and more than offset any improvement by way of exports).
So Yuan appreciation is bad for the U.S? That's news.

The idea that Yuan appreciation would create U.S. inflation assumes the Chinese would have the ability to raise prices. Producer pricing power is not something in evidence in the U.S. economy today.
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Old 11-04-2010, 12:09 PM   #29
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I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.
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Old 11-04-2010, 12:13 PM   #30
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And as to oil, the other potential shock from a falling dollar (the first being rising import costs if Yuan, etc. freely floats), it (oil) hits six month peak on Fed moves.

Oil hits six-month peaks on falling dollar, Fed move
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Old 11-04-2010, 12:18 PM   #31
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I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.
According to the FOMC Statement:

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The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
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Old 11-04-2010, 12:24 PM   #32
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Given the political realities and the GDP gap forecasts without further stimulus, are there other options?

Is having exports equal to 5 or 8 or even 15 % of GDP acceptable? Do we want jobs or cheaper consumer goods?

Oil is likely a tougher one. Lots of folks in rural areas will be hit hardest by higher prices.
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Old 11-04-2010, 12:24 PM   #33
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I'm curious. If the economy all of a sudden appeared to take off stronger than anticipated, would the Fed stop or slow the planned $75 billion per month purchases of Treasury debt? I know this is probably not going to happen given the current poor state of the economy, but has anyone read anything that indicates that the purchases could be slowed or stopped depending on how well the economy responds.
The FED has placed themselves squarely between a very large rock and a very large hardplace. It will take very significant, mulitple quarters of positive results before the FED will even consider tapping lightly on the monetary brakes for fear they will snub out any "green shoots".

I continue to be skeptical of the FEDs policy responses of dealing with a solvency problem with ever more liquidity. We are IMHO in a classic liquidity trap and so the FED current policies are only adding to distortion of markets/asset prices and delaying the necessary rebalancing the economy needs for future sustainable growth.

But time will eventually tell if Bernanke is correct...
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Old 11-04-2010, 12:25 PM   #34
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US$ devaluation is without question positive for the economy, as long as it is orderly.

It improves both the trade and current account balances. Our net public debt is US$ positive, so it declines in value along with the $$, and private (business and individuals) ownership of foreign asset exceeds foreign liabilities, so they gain. It also reduces the cost of US labor, making new investments more attractive vs other countries.

Consumers pay higher prices for both imported goods and domestic goods with export markets. Excess capacity in labor and factories should limit increases and, over time, domestic GDP growth should more than compensate.

The biggest losers are holders of debt, especially public debt. This would currently be China and Japan, followed by resource producing countries, mainly petroleum.

Everyone in the world sees and knows this, and expects it as well. If it is orderly, most will not be particularly happy but will suck it up and learn to live with it.
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Old 11-04-2010, 12:28 PM   #35
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US$ devaluation is without question positive for the economy, as long as it is orderly. .
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Old 11-04-2010, 12:38 PM   #36
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US$ devaluation is without question positive for the economy, as long as it is orderly.

It improves both the trade and current account balances. Our net public debt is US$ positive, so it declines in value along with the $$, and private (business and individuals) ownership of foreign asset exceeds foreign liabilities, so they gain. It also reduces the cost of US labor, making new investments more attractive vs other countries.

Consumers pay higher prices for both imported goods and domestic goods with export markets. Excess capacity in labor and factories should limit increases and, over time, domestic GDP growth should more than compensate.

The biggest losers are holders of debt, especially public debt. This would currently be China and Japan, followed by resource producing countries, mainly petroleum.

Everyone in the world sees and knows this, and expects it as well. If it is orderly, most will not be particularly happy but will suck it up and learn to live with it.
What you say is conventional wisdom.

I am suggesting that the due to globalization, and the exporting of our manufacturing base over the last thirty years, and our continued reliance on imported oil, that conventional wisdom is no longer correct as a short term solution to kick start the US economy. And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.


Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.
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Old 11-04-2010, 12:45 PM   #37
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And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.
Chinese policies are exporting deflation, which is of more proximate concern. Maybe if the Chinese stopped buying Treasuries, the Fed could stop buying them too.

The Chinese currency peg is maintained by them buying USD. When the Fed buys Treasuries it injects USD into the system. Maybe the two sides could call a truce with the Fed backing off QE2 and the Chinese backing off their currency peg. I suspect the world financial system would be more stable without this tug of war.
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Old 11-04-2010, 12:54 PM   #38
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What you say is conventional wisdom.
What?

Please, explain what US$ devaluation does to 1) our current account balance, 2) our trade balance, 3) the global value of US obligations held outside the US, 4) The value in US$ of foreign assets and liabilities held in the US.


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I am suggesting that the due to globalization, and the exporting of our manufacturing base over the last thirty years, and our continued reliance on imported oil, that conventional wisdom is no longer correct as a short term solution to kick start the US economy. And if the Chinese suddenly allowed the Yuan to float the repercussion of imported inflation would be devastating to the US economy.
Nobody is talking about a short term solution. We have not “exported our manufacturing base”. We have exported our “low added value” manufacturing and the “high added value” is still quite strong. China is in as much of a bind as we are and they can’t let the Yuan float. Oil is a problem. Higher prices hurt but they also help (by adding cost to imported goods). The US needs an energy policy, but that is not a function of either the Fed or currency.

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Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.
I’ve read and heard this in the media, but it doesn’t really make sense to me. What exactly are you saying?

Lars, it's clear you are unhappy with something but I'm having trouble understanding your arguments.
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Old 11-04-2010, 01:19 PM   #39
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Finally, there is no winner when it comes to a "beggar-thy-neighbor" currency war, which the FED is quasi-pursuing.
Let's look at the facts of the situation to see who is engaging in "beggar-thy-neighbor" policies . . .

1) The Fed is faced with disinflation and is engaging in a loose monetary policy which could also lead to a weaker USD. Both are inflationary, so the policy action is aligned with solving the problem of disinflation / deflation.

2) China is faced with inflation and is engaging in direct foreign currency intervention and capital controls to prevent its currency from appreciating. Weakening the Yuan is an inflationary policy choice and is at odds with solving China's inflation problem.

It's pretty clear here which Central Bank is manipulating its currency for reasons other than achieving price stability.
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Old 11-04-2010, 01:29 PM   #40
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I'm here to eat my humble pie. Last September of 2009 when the DOW was at 9800 I became real uneasy about things and went nearly 100% cash.

While I'm still uneasy about things, I'm concerned about inflation and have concluded that since no one can really predict where all of this is going to end up, the wisest thing for me to do is to hold a very diversified portfolio and just let it ride. So today I went back in with a broad mix at a 65%/35% ratio of stocks to bonds.

I'll consider this a very expensive lesson learned as it has cost me several hundred thousand dollars
It could have gone the other way--who knew? Hang tight in your new allocation.

I remember back then some people said they would pull out of the markets when the Dow hit 10,000 or somesuch recovery point. I wonder if they did.
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