The recent global financial crisis changed everything. The housing bubble (sub-prime lending), the credit crush and Lehman's bankruptcy will affect us for the next 4 decades. The Fed will start contracting its total assets (or the money press). The BOJ will be expanding its assets.
Did the money press save the markets? In the short term the answer is yes. The purchase of bonds caused bonds to go up and interest rates to go down. Did the money press create jobs? There are many discouraged workers and worker participation rate is down.
The unemployment rate in US is at 5.9%. Most people who are interested in unemployment talk about the U3 and U6 unemployment rates. The U6 rate includes discouraged workers or the underemployed. Unemployment will improve with time over the next 1 to 1 and one half years. See Mint Press News for a short discussion on this subject.
One of our main problems is debt. There several ways to default on debt.
- One way is like Argentina where they just walked away from their debt that was denominated in US$. Argentina has defaulted 8 times on its debt so far.
- A second way is payment extensions. This is what Greece did. (However, they are not going to pay their debt.)
- A third way is currency devaluation. Canada did this and investments dried up.
- A fourth way is a Bail-in. This occurred in Cyprus where they took money out of the banking system.
- Poland used private pension money to pay off their debt.
Inflation is when prices increase and deflation is when they decrease. No one is talking about deflation. The Bank of Canada says that deflation is under control. An economy needs a bit of inflation to keep it afloat. Inflation is running at around 4% in the developing world. Wage inflation in China is at around 25% per year currently.
Milton Friedman has a model with two phrases. In phrase A, stock prices go up and gold prices go down. This can continue until inflation rises. In phrase B, GDP and employment improve. These are inflationary effects. In the US since 2000 inflation is up 33.7%, but wages have no gone up.
There is a cycle of emotion. If you bought dividend stocks since 2000 you are ahead and more. Since 1881, normal P/E is 10 plus inflation. Currently the P&P 500 is the highest valuation against treasury bills. He says that stocks prices might look attractive, but he doesn't think that they are. He believes oil will go to $80 or even $75.
He feels that the Saudi's can produce oil at $75 a barrel, but Canada cannot. Some startups in Alberta are already shutting down.
He believes that the real risk of deflation is in the EU.
He thinks Harper is going to produce a budget surplus and then call an election in the spring.
On my other blog I am today writing about Pason Systems Inc. (TSX-PSI, OTC-PSYTF) ... continue ...
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