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Jim Rogers : inflation inevitable


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i'm in the inflation camp ... but there's one wildcard where I reserve the right to change my mind. And that's if the Fed aggressively hikes rates.

Who's to say they can't go from 0% to 5%? They can, it's just a question of timing and they health of the economy.

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Guest Broxburnboy

i'm in the inflation camp ... but there's one wildcard where I reserve the right to change my mind. And that's if the Fed aggressively hikes rates.

Who's to say they can't go from 0% to 5%? They can, it's just a question of timing and they health of the economy.

 

The current low interest rates are a subsidy to the banking industry. The effective spread between the fed rate and the rate of new loans issued by the banks, has widened.. the banks needing the windfall profit to attempt to "earn their way out" of their de facto insolvency.

The die has been cast... the fed rate will remain low until the losses can be absorbed....the health of the broader economy is not the priority. Inflation (and continuing devaluation) is inevitable.

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For inflation, aggregate demand, spending, in nominal terms has to go up.  So either people who have jobs have to spend more, or the unemployed need to be re-employed.  I've yet to seen anyone who's worried about inflation explain how the low rates or increased money supply has so far built up a pent up, waiting to burst, surge in spending on the part of the consumer.  Because ultimately, inflation will only come when nominal spending by households goes up. . . 

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For inflation, aggregate demand, spending, in nominal terms has to go up.  So either people who have jobs have to spend more, or the unemployed need to be re-employed.  I've yet to seen anyone who's worried about inflation explain how the low rates or increased money supply has so far built up a pent up, waiting to burst, surge in spending on the part of the consumer.  Because ultimately, inflation will only come when nominal spending by households goes up. . . 

 

Yup, they're trying to keep supply artificially low (ie Opec) so that some form of inflation takes hold..but its far from the certainty a lot of people seem to believe it to be.  Truth is Oil could sell for 20$ a barrel..and the people that claim the dollar is worthless haven't learned enough about Chinese workers that would work 6 1/2 days a week for less than 200/month.  I wish we could get these guys to come here and work for those wages!

 

  I think that for the most part macro should be ignored...its just noise keeping you away from solid bottom up analysis.  The best way to make sure you don't fall behind the 8 ball is to always be getting ahead, the current look through value growth of my portfolio will range between 20-35% a year which might not be enough but how much is enough really?

 

The ultimate indicator that these guys are nuts is that one of their biggest proponents wears a bowtie in public!

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For inflation, aggregate demand, spending, in nominal terms has to go up.  So either people who have jobs have to spend more, or the unemployed need to be re-employed.  I've yet to seen anyone who's worried about inflation explain how the low rates or increased money supply has so far built up a pent up, waiting to burst, surge in spending on the part of the consumer.  Because ultimately, inflation will only come when nominal spending by households goes up. . . 

 

Well inflation could also go up if the dollar is dramatically devalued. And why would the dollar be devalued? How about the fact that the current total debt of $14 trillion will be around $24 trillion in about 10 years time. Then factor in the "off-balance sheet liabilities" of another $50+ trillion for social security and medicare. Any idea how this is going to be paid for without inflating the debt away? And no, I don't wear a bow-tie...... ;)

 

 

cheers

Zorro

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Guest kawikaho

The Quantum Fund is one of the best all time performing funds.  Jim Rogers and Soros worked on it together.  Although, I think quite a bit of their performance came from great traders they employed.  At one time, Trader Vic used to work for Soros, and that guy was a trading machine.

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For inflation, aggregate demand, spending, in nominal terms has to go up.  So either people who have jobs have to spend more, or the unemployed need to be re-employed.  I've yet to seen anyone who's worried about inflation explain how the low rates or increased money supply has so far built up a pent up, waiting to burst, surge in spending on the part of the consumer.  Because ultimately, inflation will only come when nominal spending by households goes up. . .  

 

Well inflation could also go up if the dollar is dramatically devalued. And why would the dollar be devalued? How about the fact that the current total debt of $14 trillion will be around $24 trillion in about 10 years time. Then factor in the "off-balance sheet liabilities" of another $50+ trillion for social security and medicare. Any idea how this is going to be paid for without inflating the debt away? And no, I don't wear a bow-tie...... ;)

 

 

cheers

Zorro

 

Ok so take the 4 million babies born each year in the U.S and say the lifetime earning power of each baby discounted to today is 3 million dollars...(According to Mohnish the FAA uses 3 million as the amount each of its passengers are worth...coupled with long life and inflation you're probably being conservative).

Next:

4,000,000*3,000,000= 12,000,000,000,000 x 10 years = 120 trillion dollars in intrinsic value added to our economy each decade...1/3 of which pretty much belongs to the U.S government.  Big numbers are scary but we have some very favorable demographic conditions and about 1/4 of the world's commerce split amongst 3% of its population.  The coolest thing is that you don't have to go into the future to find value...my generation born in the mid 80's is just starting to enter the workforce...the 2 generations born after mine (the Lebron Generation) have yet to start contributing their est. 240 trillion of value to the economy.  Very few will be trained in manufacturing...

 

 

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Rogers commodity thesis is probably valid for a few more years. 

 

I disagree completely with him regarding the state of the US and the state of China.

 

Remembering that I am not an American:

 

Part of what I see from outside is a country that tends to be very public about its dirty laundry.  Part of the virtue of the US is its ability to change in response to these very public concerns.  Democracies tend to work that way.  So the present government has a mandate to get certain things done regardless of what happens in Congress.  Obama was elected to fix the problems left behind by the neglect of several administrations.  This includes health care reform, social service reform etc.  In process there will be deficits run temporarily that appear to be horrendous but really aren't.

 

 

The deficits that are being run right now will shrink dramatically during an economic runup.  The increase in the stock markets from 750 to 1300 or 1400 S&P alone will generate trillion or three in tax revenue.

 

Companies returning to profitability will further fill the coffers.  The risk taking culture of the US in terms of entrepreneurism will persist.  That will generate future tax revenues.

 

One irony that seems to lost on Jim Rogers is that he lives in Singapore!  Singapore is not China.  That alone should raise my hackles.  Jim has acknowledged himself that the administration in China did not appreciate some of the things he has said.  China still has an unelected Government.  This is a long term encumbrance. 

 

In a country with 3 times the population of North America I cannot even begin to imagine the corruption that goes on by unelected government officials.  In Canada it takes an elected government about 5 years to start having spending scandals and 8 years for everyone to become annoyed enough to turf them.  IN China this never happens.  Periodically they hang (figuratively0 some bureaucrat to make it look like they are clampling down but are they really.

 

If I were a betting man I might want to teach my daughter Portuguese or Spanish rather than Mandarin. 

 

 

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Guest Broxburnboy

The other consideration is that of a value investor.  When I seek value in a company I look for something in reasonably good shape at bargain prices.  Would the US not qualify right now?

 

The problem is that the value oriented "bottom up" analysis for the past several decades,  assumes that "macro" considerations... as the strength of the USD buck, the continued growth of the national economy, the rate of inflation (or its opposite, deflation) are a given, or at least relatively constant, and not taken into the value analysis.

 

Over the last several months, major US stock indexes have been relatively flat, while the US buck has taken a beating.. the end result that measured in other currencies or basket of commodities, or whatever you want to use as a value constant. The value of all USD investments has decreased:

 

These macro considerations are no longer constant... and the trends volatile... this increases risk into all USD investments.. and impacts the margin of safety. Diversification out of a sector and into others is usually the value investor's response to these conditions:

 

http://www.fxstreet.com/technical/forex-strategy/currency-trading-majors-pairs/2009-09-10.html

 

 

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Keep in mind

 

The US ‘attractiveness’ is because post-devaluation, the US will be forced to buy more of its own versus foreign goods – meaning more US jobs, GDP, tax revenue, & a cost push inflation that will help increase selling prices. The USD share price of a US coy selling in the US should do well.

 

But what is not understood ……is that you could substitute ‘Mexico’ for the US in the above, & get the same effect. But as a foreign (ie: US) buyer of Mexican stock – would you really buy anything other than perhaps Petromax & a few very select others? And is it not more likely that too many $ chase the select 20% & inflate those valuations, at the expense of deflating the valuations of the other 80%? 

 

What is also not understood … is that it is the economic activity that is ‘attractive’, & that the activity will not stay within the US border. To make more you need more materials, energy, etc - & those additional resources will come first from the US (if available), & then from the existing supply chain. Buy America.   

 

You don’t have to invest in a US coy to get USD exposure. A CDN coy doing most of its business in the USD, is a far better bet - & your profit is in hard currency.

 

SD

 

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The problem is that the value oriented "bottom up" analysis for the past several decades,  assumes that "macro" considerations... as the strength of the USD buck, the continued growth of the national economy, the rate of inflation (or its opposite, deflation) are a given, or at least relatively constant, and not taken into the value analysis.

 

 

IMHO I do not think bottom up value investing in the style of Graham/Buffett ignores macro. It ignores macro in the sense of basing investments on macro calls as in - avoiding US stocks because USD is expected to go down, avoiding stocks because of expected economic problems, buying chinese stocks because of expectations of rapid economic growth, avoiding Japanese stocks because of poor demographics, etc. It considers macro as in not assuming profit margins to return back to peak of 2007 for consumer sensitive stocks, not assuming sales to show rapid increase due to likely poor GDP growth, etc. I do not think Buffett/Graham ever ignore this kind of Macro input into their stock valuation.

 

Vinod

 

 

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This is what Graham has to say on Macro

 

Mechanical forecasting systems sound vaguely plausible on the basis of a priori reasoning and rely for its convincingness on the fact that it has worked for a number of years past. The necessary weakness of all these systems lies in the time element. It is safe and easy to prophesy, for example, that a period of high interest rates will lead to a sharp decline in the market. The question is “How soon?” There is no scientific way of answering this question. They are not truly scientific, because there is no convincing reasoning to support them and because, furthermore, really scientific (entirely dependable) forecasting in the economic field is a logical impossibility.

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Oldye

 

If you want to look at future growth solving all of your problems, you need to make some adjustments to your math: you need to subtract deaths from births, and if you look at the value of growth per decade you can not take a person's lifetime earnings and count it into one decade - as in effect you are overestimating the "earnings" for each decade.  Further the $3,000,000 per person figure is IMHO overstated. The fact remains: Federal debt levels are large and growing, yearly deficits will continue for the next ten years at least, there is a huge unfunded liability of $50 - $70 trillion for medicare and social security. Then who is to say the US economy will continue to grow at the same rate as in the past? If peak-oil believers are right, the economy could contract. The government either needs to devalue the dollar (which is what they are doing) or there needs to be some combination of higher taxes/lower spending for these obligations to be met. Governments typically like higher inflation to pay off large debts in devalued dollars and this appears to be the chosen path for the current administration. Even WEB has said that while the US will do well in the future it will not do as well as others - in his selling off the farm analogy I believe.

 

cheers

Zorro

 

 

For inflation, aggregate demand, spending, in nominal terms has to go up.  So either people who have jobs have to spend more, or the unemployed need to be re-employed.  I've yet to seen anyone who's worried about inflation explain how the low rates or increased money supply has so far built up a pent up, waiting to burst, surge in spending on the part of the consumer.  Because ultimately, inflation will only come when nominal spending by households goes up. . .  

 

Well inflation could also go up if the dollar is dramatically devalued. And why would the dollar be devalued? How about the fact that the current total debt of $14 trillion will be around $24 trillion in about 10 years time. Then factor in the "off-balance sheet liabilities" of another $50+ trillion for social security and medicare. Any idea how this is going to be paid for without inflating the debt away? And no, I don't wear a bow-tie...... ;)

 

 

cheers

Zorro

 

Ok so take the 4 million babies born each year in the U.S and say the lifetime earning power of each baby discounted to today is 3 million dollars...(According to Mohnish the FAA uses 3 million as the amount each of its passengers are worth...coupled with long life and inflation you're probably being conservative).

Next:

4,000,000*3,000,000= 12,000,000,000,000 x 10 years = 120 trillion dollars in intrinsic value added to our economy each decade...1/3 of which pretty much belongs to the U.S government.  Big numbers are scary but we have some very favorable demographic conditions and about 1/4 of the world's commerce split amongst 3% of its population.  The coolest thing is that you don't have to go into the future to find value...my generation born in the mid 80's is just starting to enter the workforce...the 2 generations born after mine (the Lebron Generation) have yet to start contributing their est. 240 trillion of value to the economy.  Very few will be trained in manufacturing...

 

 

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Oldye

 

If you want to look at future growth solving all of your problems, you need to make some adjustments to your math: you need to subtract deaths from births, and if you look at the value of growth per decade you can not take a person's lifetime earnings and count it into one decade - as in effect you are overestimating the "earnings" for each decade.  Further the $3,000,000 per person figure is IMHO overstated. The fact remains: Federal debt levels are large and growing, yearly deficits will continue for the next ten years at least, there is a huge unfunded liability of $50 - $70 trillion for medicare and social security. Then who is to say the US economy will continue to grow at the same rate as in the past? If peak-oil believers are right, the economy could contract. The government either needs to devalue the dollar (which is what they are doing) or there needs to be some combination of higher taxes/lower spending for these obligations to be met. Governments typically like higher inflation to pay off large debts in devalued dollars and this appears to be the chosen path for the current administration. Even WEB has said that while the US will do well in the future it will not do as well as others - in his selling off the farm analogy I believe.

 

cheers

Zorro

 

 

Remember intrinsic value takes the future earning power of something and then discounts it to today...We're calculating intrinsic value in hopes of getting an idea of whether or not our future deficits will overwhelm our ability to pay for them. 

 

The 4 generations from 1985-2025 will eventually add in todays dollars 480 trillion in intrinsic value using that 3 million dollar figure thats being pulled from thin air.  The 3 million dollar number is way overstate if all we do is sit and complain about the onerous deficit that has been handed to us, but if Americans don't change, than the number is way understated.  Remember by 2100, they're projecting 1 million dollar gdp /person in the U.S. 

 

I think everyone is right to be skeptical about this type of growth, considering we've had 3 million years of low standard of living its only normal to assume that sooner or later everything will revert to the mean.  People always feel this way, they thought everything that needed to be invented had been by the 1930's. 

 

 

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