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Prices of assets and securities lie very much on expectations for the future. Indeed, when optimism is present, it’s only natural to expect:
• Confidence in the market place …
• Long-lasting spending sprees …
• And rising prices for durable goods and services.
What the market has recently reminded us about expectations can be found in this excerpt from Henry Hazlitt’s book, The Failure of the “New Economics”:
“It is true, of course … that with regard to the future we can never act on the basis of certainty. We are not certain that an earthquake will not destroy our house next week. We are not even certain that the sun will rise tomorrow. We are forced to act on the basis of probabilities.“
And currently, there seem to be …
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Two Competing Expectations
For the Future
They are:
- Uncontrollable money-printing and excess spending on bailouts and stimulus are breeding a new, super-inflationary environment.
- The change in capital flow as evidenced by shifting consumer attitudes is ushering in a period of deleveraging and deflation that will force a global economic rebalance.
My expectations happen to fall in the latter. I’m of the feeling that expectations for an inflationary environment are a bit premature.
So what about my expectations for an ongoing bull market in the U.S. dollar?
For the Answer, Look Beyond the
Rotten Fundamentals …
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| Consumers are abandoning stores. Instead, they’re saving their extra money. |
If you’re looking solely at the U.S. economy’s fundamentals and refuse to compare them to the expectations for competing economies, then my expectations for the U.S. dollar are way out-of-whack.
After all:
- The U.S. government is running up its budget deficit to historic levels …
- The Treasury is printing money like it was newspaper …
- Unemployment has soared to a 16-year high …
- Consumers are spending far less …
- And Americans’ wealth in housing and stocks has been smashed to smithereens!
But if you’re looking at the U.S. on a relative basis, versus competing economies and currencies as I am, then my story for an ongoing bull market for the dollar begins to make a lot of sense.
Heck, the British pound just hit a new 23-year low against the dollar!
As I’ve explained in past Money and Markets columns, a sharp pull-back in U.S. consumer expenditures means any extra money is now being saved.
And here lies another point of contention:
Does Money Saved Automatically Mean
An Equivalent Amount of Money Is Invested?
It depends …
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| Banks and institutions that are not willing to lend are hoarding their cash. |
You can argue that consumers simply placing money in a checking or savings account are investing, even though they aren’t making a direct investment in, for example, stocks or real estate. That’s because the bank loans out most of those funds to individuals and businesses.
However, we are experiencing an environment of bearish sentiment. This is an environment when consumers’ expectations of future prices and outlook for their own employment are uncertain.
Consumption is obviously on the decline. Investment is likely heading in the same direction. The result of uncertainty in expectations has created hoarding of cash; not just by individuals, but also by banks and institutions that are not willing to lend.
With a growing proportion of money under the mattress, I find it hard to believe we need to batten down the hatches for the coming “Inflation Armageddon.”
Right now cash is reflecting the expectations of a rise in the purchasing power of money … or in other words, falling prices.
To paraphrase an example Hazlitt uses:
Consumers are making sure they have enough for dinner tonight and tomorrow; they’re securing future dinners. The idea of two dinners tonight is a thing of the past; they’re learning the dangers of over-eating.
Investment will return and consumption will eventually follow. But not until both are functioning normally should we expect the world economy and the investing environment to function normally.
In the meantime, I believe that inflation is not an immediate concern, which is a good sign for the U.S. dollar.
Best wishes,
Jack
P.S. Are you hungry for the latest on what’s going on in the currency markets? Then be sure to check out my blog.
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