Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Minyan Mailbag - "Pricing In" Perception vs Reality



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

Prof. Succo,

Mr. Greenspan's admission that the inflation that we have been experiencing is not entirely a figment of our imagination seems to have changed investor's perceptions.

Investors are now "pricing in"

1) That Greenspan is awake and on-the-job to fight inflation. Gold prices have declined significantly since his revelation.

2) Higher interest rates will make the dollar more attractive to foreigners. The dollar has stabilized and shown some strength since the Fed pondered aloud.

3) Higher interest rates will weaken the economy and ultimately bring longer-term interest rates down. Every piece of news about economic weakness is greeted as good news by the bond market.

It seems to me that what the markets are "pricing in" is based on historical relationships that aren't likely to work given current economic realities.

The U.S. economy is massively levered to interest rates.

The U.S. economy and the dollar are critically dependant on foreign capital.

The U.S. economy is extensively dependant on cheap foreign goods, (relatively strong dollar), to keep inflation in check.

The Fed as inflation fighter.

The Fed hasn't even raised interest rates to neutral yet. They admit a budding problem, but they are still STIMULATING. If it's a strong economy generating inflation, the Fed should be able to raise interest rates above neutral rapidly. That they are not - suggests that it is the deficits/dollar fueling inflation, not a too-strong economy. Therefore, the economy may not be able to withstand the interest rate hikes needed to combat inflation.

Higher interest rates will make the dollar more attractive to foreigners.

A strong economy trumps higher interest rates in supporting currencies. Since the U.S. economy is so levered to interest rates, if interest rates were to rise too much in order to attract foreigners... the U.S. economy would likely suffer severely, more than offsetting the positive interest rate impact.

Higher interest rates will weaken the economy and ultimately bring longer-term interest rates down.

At the end of the day, the Fed will blink. I agree that the economy will be weakened by higher interest rates. I also agree that higher rates will be demanded by foreigners or the dollar will suffer extensively, but more likely both. I am of the strong opinion that when the Fed hits the point where economic weakness begins to bite, they will quickly choose to retreat from short-term interest rate hikes at the expense of the dollar and long-term interest rates. (Or multiply the dollar impact, and monetize to limit longer-term interest rate damage.)

In my opinion, we are heading into a stagflationary period, but the market is not yet pricing it that way.

Ponder this a bit. The Fed is already jawboning about fighting inflation while the economy is still struggling to get its legs firmly beneath it. When investors finally realize that economic weakness will arrive with inflation still intact, (and that the Fed simply can't raise interest rates enough to extinguish inflationary pressures with a precariously levered economy) ... it will begin pricing things much differently.


Minyan Jeff


This is an excellent synopsis of what I believe the current situation is and how it will likely unfold.


< Previous
  • 1
Next >
No positions in stocks mentioned.

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.

Featured Videos