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Nine Global Macroeconomic Trends: Watching the Currency Speculation, Watching the Inflation Pot Boil
by David Merkel·Comments Off on Nine Global Macroeconomic Trends: Watching the Currency Speculation, Watching the Inflation Pot Boil
This piece is a little dated, but I’m using it to illustrate the nature of consumer surveys in the US. If rates have been rising, those polled extrapolate the current trend. As it was, that particular poll was close to the short-term turning point on inflation expectations. I feel more comfortable trying to tease out inflation expectations by looking at the relative spread of TIPS to nominal bonds. Right now, that’s not moving much.
Inflation is rising in many places. New Zealand is one example. This is one of those temporarily self-reinforcing situations where foreign investors are willing to invest because of high nominal rates, while discounting any possibility of the currency moving against them. In the short run, the more people who believe this, the less likely that an adjustment occurs. But the additional liquidity stimulates the economy, raises inflation, and makes the central bank want to tighten more, leading to higher rates in which foreign investors want to invest. It will only break when the high rates slow the NZ economy to a crawl, or, for some unexpected reason, the currency starts depreciating, and it feeds on itself. Personally, I would not be long the Kiwi.
The Economist has noticed many of the same trends, adding in Latvia and Iceland to NZ. In the short run, so long as foreign investors have confidence in the currencies of these three nations, their central banks are impotent. But in some sort of crisis that would disrupt global capital flows, all of these currencies would be at risk. No telling when that will happen, but once the adjustment happens, like those who borrowed at teaser rates, they will be sorry they invested in high interest rate currencies, and borrowed in low interest rate currencies.
The reported US Government deficit is shrinking. Good as far as that goes. Corporate taxes are filling much of the gap. We still have the Iraq/Afghanistan Wars off-budget, and Social Security on budget, both of which reduce the true size of the deficit. On an accrual basis, counting everything in, we are running deficits at near record levels. Promises are being made for the future the aren’t getting counted today. Corporations would have to accrue them, but the government does not.
What if we try to get away from currencies, and focus on commodities instead? Metal scrap prices are robust. Aluminum beer kegs are getting sold for scrap, among other things. In another place, Historian Niall Ferguson tells us that we should not worry about running out of oil, but out of arable land for farming. Personally, I’m not worried about either. Rising food prices will slow the development on arable land, and in some cases, redevelop land for farming. Further, contrary to the over-estimated Malthus (whose great contribution in life was giving inspiration to Darwin), we have been able to grow agricultural productivity considerably faster than population, in areas where capitalism is allowed to thrive. That said, I am bullish on the prices of food products; in the short run, there will be more excess demand.
About David Merkel
David J. Merkel, CFA, FSA, is a leading commentator at the excellent investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited David to write for the site, and write he does — on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, and more. His specialty is looking at the interlinkages in the markets in order to understand individual markets better.
David is also presently a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. He also manages the internal profit sharing and charitable endowment monies of the firm.
Prior to joining Hovde in 2003, Merkel managed corporate bonds for Dwight Asset Management. In 1998, he joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.
His background as a life actuary has given David a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that David will deal with in this blog.
Merkel holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth. View all posts by David Merkel →