The Current Crisis vs. Weimar Republic
Minyanville professors team up to encourage thought and debate among the community...
Editor's Note: We asked some wise folks their thoughts on Toddo's comments in his morning column, The Current Landscape in Four Primary Metrics, when he discussed the possibility that we are entering into a Weimar Republic-style hyperinflationary equity blow-off.
Weimar was a currency crisis. The middle class didn't have huge debt. The U.S. is credit crisis, which is different. It has gotten this way because hyper-inflation has been present for years, hidden in asset price inflation.
I completely agree with John.
The Fed did hyper-inflate. It's just that the fruits of their monetary debauchery were evident (conveniently) in all the stuff that falls outside their definition of inflation. Namely, asset prices.
Meanwhile the silent debasement of paper is clearly evident when you look at gold. While the financial media dons their party-hats...celebrating the stock market's return to its 2000 highs... the S&P has lost 60% of its value in real terms since then.
No one looks at that, of course, which is precisely why policymakers have (and will continue) to take the currency debasement path.
I am particularly interested in Stephanie Pomboy's comment that the S&P has lost 60% of its real value. How is that number being arrived at and over what time period? More importantly, if China's growth engine slows (and I believe it will after the Olympics, if for no other reason it is running out of resources of minor importance… like, water) and the dollar recovers, couldn't that be a net positive for US Equities?
My view in not necessarily opposite but it's not totally aligned with Todd's either.
The semi-short version is:
1) The Fed was behind the curve and raised rates too much, thus creating an unnatural yield curve and dramatically increasing the odds of a major US economic slowdown. Artificially, low US rates on the long end of the yield curve, coupled with underperforming riskier US investment alternatives (versus bonds) and fears of a recession have been a major source of USD weakness.
2) We have little inflation even with continued high energy prices, so maybe the question should be -- is the Fed holding back the printing presses? While somewhat factitious, the point is that the Fed needed to get out from behind the curve and stimulate by cutting rates. If we avoid a recession, this will in time strengthen, not weaken the USD.
2a) Moreover, short rates need to come down further and long rates need to rise. This will happen, unless the Fed (get quickly hawkish), and stifles the Economy too much again. This reversal of the inverted yield curve would be positive for the USD but could provide competition to certain domestic stocks if the long end rises enough.
3) With respect the the deficit, many current arguments are incorrect as they do not properly reflect that larger US companies are increasing US GDP, increasing US based wealth, based on superior cost structures utilizing outsourced labor and manufacturing, thus importing goods from overseas while the profits are domestically based.
4) So I'm not concerned with USD weakness and a stable to strengthening USD may spur the foreign holders of USD based assets to hold those as the negative return differential due to USD currency weakness may invert and become a positive differential.
5) However, USD weakness does help exports, thus corporate revenue growth as well as EPS translation. The reduction of those positive kickers could hurt EPS growth for the major industrials (S&P 500 set), and pressure some stock sectors valuations.
6) With respect to foreign ownership of USD based investments I suspect a high percentage of the large buyers are proactive with currency hedging, thus mitigating some of the losses due to USD weakness.
7) With respect to inflation and the price of Gold, I feel that is much more of a correlation trade with the other commodities that have been in bull mode for the better part of a decade. Much of this was due to the fact that these (commodity) markets got dramatically oversold and undervalued during the heights of the stock market bubble. Oil at $12.50-15 made no sense, yet took some time to recover and resume its own bull market again. Many (if not all), of the other commodities followed suit. Currently, if any markets should be categorized as aging or aged bulls, I would say the commodity markets are.
8) Much of the US markets strength has been fueled by the energy sector and therefore a material weakness in the price of Oil, triggering a large sell-off in energy stocks will weigh on significant parts of the S&P.
9) Likewise, USD weakness has helped fuel sales and EPS for various domestic companies, as mentioned above.
10) Bottom line, I do not view the recent Fed rate cuts as hyper-inflationary, but necessary. However, I am mindful of factors that could hurt various sectors in the stock market. Bifurcated economic conditions persist and valuations are stretched in some sectors. Thus many commodity based stocks, valuation stretched "value stocks", hyper-valued growth stocks, and many emerging growth stocks carry a lot more risk than they have in years.
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