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How's the 600 billion going to affect the market and inflation?
Old 11-03-2010, 04:39 PM   #1
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How's the 600 billion going to affect the market and inflation?

Now that the Fed is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy, what should we expect in the markets over the next few years and how should we be positioning our portfolios?
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Old 11-03-2010, 05:44 PM   #2
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Devaluation of the US$?
Invest abroad?
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Old 11-03-2010, 05:53 PM   #3
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Buy an RV an plan to travel in the USA. Foreign travel will be expensive.
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Old 11-03-2010, 05:56 PM   #4
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Bonds will be happy for a while longer. Maybe another year. Until CPI inflation shows up, anyway.

Agree with dollar continuing to drop. That is actually positive for the US economy. But as far as investments are concerned you might want to have a healthy allocation to foreign equities.

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Old 11-03-2010, 05:58 PM   #5
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Now that the Fed is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy, what should we expect in the markets over the next few years and how should we be positioning our portfolios?
Broadly diversified, low cost index funds and stay the course. Oh wait. That's no different than yesterday .

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Old 11-03-2010, 06:41 PM   #6
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Agree with dollar continuing to drop. That is actually positive for the US economy.
I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

Now, a good portion of our imports are from China who, at least for now, appear committed to pegging the Yuan to the $. To a lesser extent, the same could be said for Japan. So that's okay, but not all goods are from countries determined to devalue with the dollar and then of course there is the elephant in the room: oil.

The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.
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Old 11-03-2010, 06:59 PM   #7
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I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.

Now, a good portion of our imports are from China who, at least for now, appear committed to pegging the Yuan to the $. To a lesser extent, the same could be said for Japan. So that's okay, but not all goods are from countries determined to devalue with the dollar and then of course there is the elephant in the room: oil.

The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.

Certainly a correlation between the dollar and oil prices. It's been pretty obvious at the pump lately. In my view higher oil prices are a mixed bag.

The markets are up 3% over the past month and car sales are up as well. I've been hearing that QE2 is providing a weath effect. Whether it has legs remains to be seen
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Old 11-03-2010, 07:56 PM   #8
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Broadly diversified, low cost index funds and stay the course. Oh wait. That's no different than yesterday .

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And don't miss football season.

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Old 11-03-2010, 08:04 PM   #9
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I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.
What I think you're forgetting is that imports subtract from GDP, just as exports add to GDP. If the dollar declines in value, not only do our products become more competitive overseas, but domestic producers become more competitive with their international counterparts at home as well.
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Old 11-03-2010, 08:08 PM   #10
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And our oil imports, making up 2/3 of our trade defict, puts pressure on the dollar.
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Old 11-03-2010, 10:25 PM   #11
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I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

....


The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.
The historical evidence for the impact of currency devaluation is mixed. There will be winners and losers when a country's currency depreciates.

The latter point is highly topical here in Hong Kong where our currency is pegged to the USD. The currency peg combined with totally free capital movements has resulted in ultra low interest rates (I pay less than 1% on my mortgage), a flood of hot money, rising property prices (there is some talk of a bubble) and rising inflation generally. Unless they change the peg to the USD there is very little that can be done to prevent these problems. (Of course, in the short term they are very nice problems to have.....)
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Old 11-03-2010, 11:57 PM   #12
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The other issue is at some point foreign central banks are going to have to allow their currencies to appreciate against the $ or risk out of control inflation. When/if that happens, imports will get very expensive.
At some point? Have you noticed where the Euro is lately? $1.43. Last summer it was about $1.20. I think we have reached and passed that point whereof you speak. The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

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Old 11-04-2010, 01:22 AM   #13
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I agree with Ha on this.

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The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

Ha
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Old 11-04-2010, 06:26 AM   #14
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how should we be positioning our portfolios?
For what it's worth we're now up to almost 40% precious metals. DCAing in since 2004. Biased to silver. DCAing out of bonds and broad indexes more recently. Another 30% cash and balance in emerging equity/currency, other commodities including energy, a few short bonds, solid dividend payers, etc. BTW, no mre's, shotguns or oil barrels. Have studied Berstein and precious metals fundamentals. No intent to cost average out of the metals until those fundamentals change, but I'm sure the time will eventually come. Just our take on things. Good luck to all in these unusual tmes!
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Old 11-04-2010, 06:42 AM   #15
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I question this standard response to dollar devalutation. So little of the economy is driven by exports as we've exported manufacturing overseas.

I believe that exports are no more than 5% of GDP and of course the offset to decreased costs of exports is the increased costs of imports, which are far more substantial and have the potential to be far more damaging to the economy than any offsetting benefit from exports.
Per Wikipedia..

The United States is the world's largest manufacturer, with a 2007 industrial output of US$2.69 trillion. In 2008, its manufacturing output was greater than that of the manufacturing output of China, India, and Brazil combined, despite manufacturing being a very small portion of the entire US economy as compared to most other countries.[90]
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Old 11-04-2010, 06:45 AM   #16
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And our oil imports, making up 2/3 of our trade deficit, puts pressure on the dollar.

I agree. If one is for a strong dollar than we have to find a solution to our addiction to foreign oil.
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Old 11-04-2010, 07:40 AM   #17
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I never understood how loaning yourself money solves anything.

Looks like just an excuse to print more money ... short sighted IMO (but what do you expect from the feds).
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Old 11-04-2010, 07:47 AM   #18
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I never understood how loaning yourself money solves anything.

Looks like just an excuse to print more money ... short sighted IMO (but what do you expect from the feds).
It's not an excuse to print money. It is the process by which they attempt to print more money.

It didn't really work in Japan, though, the cash just sat in the banks.
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Old 11-04-2010, 11:25 AM   #19
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At some point? Have you noticed where the Euro is lately? $1.43. Last summer it was about $1.20. I think we have reached and passed that point whereof you speak. The US dollar index also has fallen from 88+ to 76- just since last June. And there is no sign that the deterioration is likely to end anytime soon.

Ha

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…
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Old 11-04-2010, 11:27 AM   #20
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The latter point is highly topical here in Hong Kong where our currency is pegged to the USD. The currency peg combined with totally free capital movements has resulted in ultra low interest rates (I pay less than 1% on my mortgage), a flood of hot money, rising property prices (there is some talk of a bubble) and rising inflation generally. Unless they change the peg to the USD there is very little that can be done to prevent these problems. (Of course, in the short term they are very nice problems to have.....)
Exactly the point. The investment question of the century is if and when this occurs... Get this correct and you will be able to coin money.
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