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Old 05-22-2011, 09:54 AM   #21
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I suggest reading a very thought provoking piece from Mark Lapolla. While long, it is worth your while if you want to think about the various forces at play. His basic conclusion is that the world is going to hell in a hand basket (like Grant), but disagrees that inflation will be a long term problem. Deflation is still the name of the game.

His investment advice is to look to US companies with strong cash flow that supports dividends.

2011 05 Game Over _China__
Thanks for posting this article.
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Old 05-22-2011, 10:25 AM   #22
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Another vote for dividend growth investing, buying on weakness and capture rates on long bonds. (By the way, did the US ever stop issuing 30 year bonds? The government was talking about this several years ago.)
Yeah, but I think he's also saying equity nominal market returns of 5% annually, which is well below what most folks will likely need if they're talking about drawing 4% real. His bigger point is even though 5% is low, it will still outperform the developing world on a 'relative' basis, which is cold comfort.

And yes, we did stop issuing 30 year bonds. That was back in 2001 when we had a surplus. At the time Greenspan worried loudly about running out of outstanding treasury bonds - reason enough to return all of those 'surpluses' to taxpayers. File those sentiments under 'be careful what you wish for.'
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Old 05-22-2011, 10:35 AM   #23
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Yeah, but I think he's also saying nominal market returns of 5% annually, which is well below what most folks will likely need if they're talking about drawing 4% real. His bigger point is even though 5% is low, it will still outperform the developing world on a 'relative' basis, which is cold comfort.
5% nominal returns might not be a disaster if, as he predicts, we have very low inflation or even deflation in our future.
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Old 05-22-2011, 10:48 AM   #24
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The Fed loses control over monetary policy (and it's ability to finance deficits) the moment the market loses faith in the government's ability or willingness to repay in dollars that actually still buy things. At that moment, default becomes not only possible, but likely.
The concept of default is impossible for the US as long as its debt is denominated in US currency. The concern becomes not default, but as the author points out either i) rising out of control interest rates or ii) precipitously falling value of US dollar.

Both of these issues are addressed in the research piece.

It is here where I am not convinced the author is correct. First, he states that the FED can’t lose control of the long end of the curve by a significant widening to the yield curve and ii) other central banks will not allow the dollar to fall to “zero” because there will then be no US consumer to purchase their exports.

The first point (yield curve) I’ve not convinced myself on, but the second ($ value) rings true.

But as to US default… total nonsense.
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Old 05-22-2011, 11:18 AM   #25
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It is here where I am not convinced the author is correct. First, he states that the FED can’t lose control of the long end of the curve by a significant widening to the yield curve < >
The first point (yield curve) I’ve not convinced myself on,
But as to US default… total nonsense.
This is a puzzle to me also, It may come down to what Jim Grant says-who do you love, Bernanke or history?

One thing that in my mind suggests that maybe he can't really nail long term rates by market manipulation is what happened when QE2 came along. Although risk assets rose strongly, long term rates also rose, thus depressing T bond quotes.

However, it does seem to me that given the time for rolloff, there would seem to be no real reason why the treasury can't do all its borrowing with bills, as long as federal reserve is confident that it can keep short term rates near zero. Who cares how big the debt is, if it bears 0% interest? We can have all the wars, all the entitlements, all the bloated federal wages and pensions, all the welfare for illegals, all the goodies that we could possibly imagine on the Big Rock Candy Mountain. This should really give asset prices a kick in the pants.

This sounds like the devil whispering in our ears, but I think Bernanke already may have tuned into his channel.

Ha
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Old 05-22-2011, 11:52 AM   #26
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Who cares how big the debt is, if it bears 0% interest? We can have all the wars, all the entitlements, all the bloated federal wages and pensions, all the welfare for illegals, all the goodies that we could possibly imagine on the Big Rock Candy Mountain. This shouhld really give asset prices a kick in the pants.
In theory, yes, and maybe in practice, but only if the Government "states" that CPI is zero. Otherwise, the pesky cola-ed expenses of the government will eat its lunch overtime.

The unintended consequences of actions at this point in our centrally controlled financial system (yes, we are the old Central Planning Committee of the USSR at this point from a financial management sense) are so far reaching and complicated as to make them nearly unknowable.
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Old 07-01-2011, 09:17 PM   #27
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Who cares how big the debt is, if it bears 0% interest? We can have all the wars, all the entitlements, all the bloated federal wages and pensions, all the welfare for illegals, all the goodies that we could possibly imagine on the Big Rock Candy Mountain. This should really give asset prices a kick in the pants.
I think you put your finger on it Ha, near 0% financing sure is handy

Below is a quote from Wikipedia:

Bernanke is particularly interested in the economic and political causes of the Great Depression, on which he has published numerous academic journal articles. Before Bernanke's work, the dominant monetarist theory of the Great Depression was Milton Friedman's view that it had been largely caused by the Federal Reserve's having reduced the money supply. ....Bernanke has cited Milton Friedman and Anna Schwartz in his decision to lower interest rates to zero.
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