Minyan Mailbag - Buzz Banter
Question for my fellow professors:
If Elmer is intent on inflating his (our) way out of debt, the dollar will clearly devalue and relative values of equities will decrease in kind. But does that neccesarily mean that stock prices "need" to go lower?
I ask this as a devil's advocate with hopes of poking holes in my own bearish bent.
The nominal value of stocks do not have to go down, and may even continue to rise as long as the credit markets accept this scenario: an ever decreasing relative value of a dollar, that "thing" in which they will recieve their debt payments, both interest and principal.
At some level any rational entity would begin to refuse payment as such and would demand a higher rate of interest. It is these higher interest rates that would cause a decline in equity prices.
If the Fed undertakes an aggressively inflationary policy to explicitly lower the 'real' debt load of U.S. consumers (remember that corporations are sitting on a huge $600 billion in capital that, for whatever reason, they are not spending) that excess money will most likely make its way into ALL goods: commodities, asset prices, consumer goods, etc. eventually. What has been remarkable over the last 10 years or so is that the aggressive liquidity expansion the Fed has undertaken has only manifested itself in higher (steeply higher) asset prices but not (at least not yet anyway) steeply higher consumer goods or even commodities. After all, the SPX is still up a whopping 75% from 1996 while the CRB index is only up 10%.
The point is, the Fed has been inflating for a long, long time, but for reasons that are hotly debated among economists (well, Austrian economists anyway), that inflation has only really affected asset prices and not commodities, producer goods or consumer goods (again, as yet).
If the Fed attempts to increase their inflationary efforts even more, it remains an open question whether that 'new' credit will make its way primarily into the real economy or the financial markets or both. Past may or may not be prologue.
But understand that such an effort, whether it leads to higher asset prices (that is higher stock prices which are just another manifestation of monetary inflation) or higher consumer goods prices will eventually lead to economic ruin. On that there is simply no debate; as it is just a matter of time.
The laws of economics can only be ignored for so long.
Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter