Jim Grant likes cash now

[Ed_The_Gypsy]

Once bullish, contrarian Jim Grant likes cash now - Yahoo! Finance

The famous curmudgeon, Jim Grant, now thinks that EVERYTHING is overvalued, blaming the Fed. He expects 10% inflation soon, but earnings will remain the same, reducing yield.

If he is right, I think that the implication is that one should pay off all debts and buy what one wants now and keep everything in cash. Another implication is to keep working longer.

What do you think?

Ed

[frank]

I think everthing is overpriced and we are going into an inflationary period. but to put all your assets in cash makes no sense. if the dollar is going down daily and everything else is going up, why hold onto them? I would be looking for any kind of investment that would build assets to keep up with inflation.

[Webzter]

In light of high inflation, wouldn't it make more sense to not pay off any fixed rate obligations? That mortgage or car payment starts to look cheap quick in the face of 10% inflation.

Personally, I'm adding to my emergency fund and emergency food store... but it seems I'd want to be putting every penny into assets that'll inflate.

[devans0]

Keeping everything in cash with a 10% inflation is a guarantee to lose 10%! That doesn't seem too smart. I do see the value of paying off all debts. However, any debt paid off later with inflated money is using cheaper money to pay it. And of course for any curmudgeon, blaming everything on the Fed is always a good idea.

IF and I emphasize if inflation was to be 10%, then multinationals and internationals would do better, as would gold and silver, and commodities. The already inflated prices on commodities isn't contrary investing. It's chasing the pack.

[Gone4Good]

Quote:

Originally Posted by Ed_The_Gypsy He expects 10% inflation soon, but earnings will remain the same, reducing yield. What do you think? Ed

I think I'll write Jim and see how much he's willing to pay me for an inflation swap with a 10% strike. My guess is nothing.

[brewer12345]

I am extremely leery of any guru who advocates doing anything 100%.

Industrial capacity utilization is still well below 80%. We are nowhere near inflation.

[Rustic23]

I am not an economist, but even if industrial capacity utilization is well below 80%, food and energy are inflating, and I do drive, heat/cool my home and eat. So for me inflation is hear now, not 'nowhere near'.

[brewer12345]

Quote:

Originally Posted by Rustic23 I am not an economist, but even if industrial capacity utilization is well below 80%, food and energy are inflating, and I do drive, heat/cool my home and eat. So for me inflation is hear now, not 'nowhere near'.

True, but I am talking about signs that the US economy is in an overheating inflation spiral, not some fluctuations in commodity prices.

[Gone4Good]

Quote:

Originally Posted by Rustic23 I am not an economist, but even if industrial capacity utilization is well below 80%, food and energy are inflating, and I do drive, heat/cool my home and eat. So for me inflation is hear now, not 'nowhere near'.

That's true as long as you ignore all of the other prices you pay.

[Webzter]

Quote:

Originally Posted by devans0 Keeping everything in cash with a 10% inflation is a guarantee to lose 10%!

On the other hand... if you "knew" there was going to be a huge, huge huge crash sometime between now and summer 2012, you'd probably go all-cash now and then go on a shopping spree post-crash (or as post crash as you felt to time).

[Rustic23]

Ok, it may be just perception, but everything I have bought recently appears to have gone up. I can't replace my three year old Honda for a like new model for what I paid for it. Clothes at my local discount store cost more. The guy who cuts grass in our neighborhood is charging more. Life guards in CA are making a whole lot more than I ever made just had to throw that in. The only thing I can find that isn't going up is wages. So I guess it just depends on what you call inflation.

[haha]

Quote:

Originally Posted by devans0 Keeping everything in cash with a 10% inflation is a guarantee to lose 10%! That doesn't seem too smart. I do see the value of paying off all debts. However, any debt paid off later with inflated money is using cheaper money to pay it. And of course for any curmudgeon, blaming everything on the Fed is always a good idea. IF and I emphasize if inflation was to be 10%, then multinationals and internationals would do better, as would gold and silver, and commodities. The already inflated prices on commodities isn't contrary investing. It's chasing the pack.

Your assertions are contrafactual, with respect to our last strong inflationary period. In the 70s gold, commodities and cash were by far the best asset classes. This is not to say that I would recommend or invest in commodities or gold now, but I also would not have the certainty to short them.

People look to stocks to protect against inflation, and if we get to Weimar levels very likely stocks would be better than cash. But during the 70s s.t. interest rates went right up along with inflation rates, and kept you even or close to it. Bonds and stocks got you killed, as even though earnings and dividends continued to advance, PE ratios collapsed. PE10 of S&P500 was approximately 7 at the bottom.

Of course today interest rates are 100% manipulated by 'Lil Ben and Icky Timmie, so it is an open question whether he could keep this rate adjustment from happening if we should go back in that direction.

Ha

[clifp]

Quote:

Originally Posted by brewer12345 I am extremely leery of any guru who advocates doing anything 100%. Industrial capacity utilization is still well below 80%. We are nowhere near inflation.

Industrial capacity utilization is just one component of inflation. I suspect that one of the primary reasons we see inflation in commodities is that Fed and other bankers have injected trillions of dollars into the world money supply. The velocity of money is still pretty sluggish which is why many measure of M haven't increased dramatically. However, at the end of the day more dollars chasing roughly the same number of goods = inflation.

[Gone4Good]

Quote:

Originally Posted by clifp I suspect that one of the primary reasons we see inflation in commodities is that Fed and other bankers have injected trillions of dollars into the world money supply.

An alternative explanation is that developing economies are growing quite rapidly and increasing their demand for global resources that have an inelastic supply.

If, instead, we want to blame the Fed, we should be prepared to explain why all of the theorized money we've created is only chasing prices higher for products priced on global markets. Why, for example, an expanded monetary base would cause oil prices to rise dramatically but not sneaker prices?

[clifp]

Quote:

Originally Posted by Gone4Good An alternative explanation is that developing economies are growing quite rapidly and increasing their demand for global resources that have an inelastic supply. If, instead, we want to blame the Fed, we should be prepared to explain why all of the theorized money we've created is only chasing prices higher for products priced on global markets. Why, for example, an expanded monetary base would cause oil prices to rise dramatically but not sneaker prices?

An interesting theory, not particularly well supported by the data. For instance between 2007 and Q1 2011 total demand for oil rose from 86.7 million barrels/day to 88.8 MBD, while the supply rose even faster from 85.5 to 88.7 MBD. You'll note that back in 2007 there was significant shortage of oil 1.2 million MBD while today demand and supply are in balance . Logically one would expect prices to be lower in 2011 than in 2007 since supply and demand are now in balance. Unless the commodity that was traded for the oil (namely US $) was in even greater over supply. Back in 2007 oil prices were in the $50-60 vs today $100 price.

The reason that prices for sneaker haven't risen is as Brewer side there is still a lot of underutilized capacity. The great recession probably forced the closure of a lot inefficient factories increasing productivity. Many other components of sneaker production such as capital, and the salaries of US workers have fallen. So while the wages of the Chinese/Vietnamese factory workers making Nike's are probably higher than 2007, roughly 7% of US Nike employees were laid off during the recession and I bet the remaining ones worked harder for the same pay.

[LARS]

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__

[haha]

Quote:

Originally Posted by LARS 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__

Very intersting article. I strongly recommend that we should read at least the first part, and we will have a much better understanding of what has happened to employment in the US, and why the barbell distribution of wages does not indicate that the rich are being taxed too little, but that in today's real world that what the average joe is capable of doing really isn't worth a whole lot, unless he is careful to stay away from the area of tradable goods. IOW, can an American run a stamping machine markedly better than a Chinese or a Bangladeshi?

OTOH, very highly skilled and educated knowledge workers leverage their skills by working in internationally tradeable areas.

Ha

[Ed_The_Gypsy]

Quote:

Originally Posted by LARS 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__

He doesn't exactly say US companies. A little more detail here:

"The longer term outlook is for global franchise businesses that generate cash, that are not valued on a cyclically adjusted basis but are valued reasonably, to be anchors of value."

and

"...pare or hedge exposure to emerging markets and concentrate on cash generating stocks."

and

"...buy US long bonds as rates rise towards 5%."

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.)

He talks about deflation, but not a depression, so it seems to be limited to commodities and real estate, which everyone (now) knows both go up and down.

I can listen to long-winded explanations of what someone thinks is going to happen, but I really want to see what steps they recommend in the end for the individual investor.

[Gone4Good]

Quote:

Originally Posted by clifp An interesting theory, not particularly well supported by the data. . . .

I don't know where you get your data, but mine comes from EIA's Short-term Energy Outlook (tables here). And if I calculate the percentage that world oil supply exceeds demand from 1997-2011 the chart looks like this . . .

Quote:

Originally Posted by clifp Many other components of sneaker production such as capital, and the salaries of US workers have fallen.

That's the entire point.

There is a reason we look at prices from a basket of goods to calculate inflation. Some prices rise, some prices fall. If we define inflation (as many people want to do) to include only the prices of things that rise, then of course we'll always have high inflation - by definition.

But there is a more important concept at work here. It goes like this: If the money supply is appropriate for stable prices, rising prices in some areas (like oil) force consumers to cut back in other areas. Oil prices can rise, but they don't cause generalized inflation if they're putting downward pressure on other prices. There are thousands of offsets and inter-dependencies, which is why we can't look at a single price and say 'Ah-Ha, inflation!"

[Gone4Good]

Quote:

Originally Posted by LARS I suggest reading a very thought provoking piece from Mark Lapolla. His investment advice is to look to US companies with strong cash flow that supports dividends. 2011 05 Game Over _China__

Great article. One that mirrors my own thinking on many fronts. He does overstate some points and takes some short-cuts on others, although I imagine part of that is due to an attempt to keep his already 'wonkish' comments somewhat accessible.

Where he goes off the rails, I think, is when he says "the notion of creditworthiness and default ratings [for governments who retain the right to issue currency by fiat] is frankly preposterous." His position here is provisionally true, not absolutely true - as is his statements about the Fed's ability to control the term structure of interest rates.

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.