The Right Assets at the Right Time

Besides the direction of the oil price and worries about possible contagion from a distressed Russia, the big question of 2015 is when will the US Fed raise interest rates? However, today’s Weekend Markets and Money tackles the underlying assumption of whether the Fed will raise them at all.

Investors take note.

On Thursday The Wall Street Journal reported Eric Rosengren, the President of the Boston Federal Reserve Bank, as suggesting that ‘with inflation at very low levels, the Fed faces little urgency to begin the process of lifting borrowing costs.’

Jim Rickards, author of Currency Wars and The Death of Money,says the expectation of rising rates in the US is one reason behind the surge in the US dollar of late. However, the US Fed doesn’t want a strong dollar because it’s deflationary. One of the Fed’s primary policy objectives is to hit 2% inflation. It’s not getting it.

Neither is the European Central Bank. The Financial Times reported yesterday that there are now 1.2 trillion euros in Eurozone debt that have a negative yield. Investors are effectively paying to hold short term government debt.

The problem for the Federal Reserve is, if it raises interest rates now, it makes the US an even more attractive target for capital. Investors get a higher return than in European debt and a strengthening dollar as well. Rickards conclusion is that the Fed will therefore not raise rates in 2015. This goes against the idea that the Fed is set to return them to ‘normal’ levels.

The question, of course, is what’s ‘normal’ in the first place? Bloomberg reported back in December that interest rates right now are actually closer to their historic norm than any time in the last half a century.

From Bloomberg:

For David Jones, the former vice chairman at Aubrey G. Lanston & Co. and a 51-year bond veteran, the notion that Treasury yields are too low is being shaped by traders, money managers and economists who began their careers in the wake of runaway inflation surpassing 10 percent in the 1970s and 1980s.

With U.S. consumer prices rising at the slowest pace in five decades and economic growth weakening around the world, today’s bond market may now be reverting back to form, he said.’

Those that bet on higher inflation are now nursing losses. One of those men is a man called Michael Aronstein, who runs the MainStay Marketfield fund. The Financial Times reported the day after Christmas that, ‘One of the hottest mutual fund managers of recent years crashed to earth in 2014, after his bets on rising inflation turned sour because of the sluggish global economy.’

Aronstein’s fund, according to the Times, took in more money than any other US mutual fund in in 2013. That tells us which way the crowd was thinking. Aronstein, as is my understanding, is a student of Austrian economics.

This model of the economy led him to the conclusion that the prodigious money printing since 2008 would see higher inflation. He took positions such as natural resource stocks like BHP and Rio Tinto.

The credit analysis of the Austrians is an essential thing to know. But it needs to be combined with understanding the land market. At the end of real estate cycles, when we get a credit induced land market crash, it is deflation that usually rules.

That’s because all the money printing so far still does not make up for all the credit destroyed or written off in the downturn from the banking system. New bank lending is yet to be replace it. Most commentators focus on the global financial crisis as a crisis of debt. But first and foremost it was a land crisis, which few people study.

Professor Fred Folvary calls this combination of land and credit analysis his ‘Geo-Austrian’ synthesis. You’ve probably never heard of him. He predicted a collapse in the US real estate market and subsequent bear market — long before it happened. This is the model of the economy you want to use so you’re in the right assets at the right time.

The good professor is a keynote speaker at this year’s Freedom Fest, an event held in Las Vegas every year to celebrate liberty, ideas and open thinking. It usually hosts some of the biggest names in economics and finance. When the times comes, hopefully we can tune in to what he has to say.

Do yourself and favour and Google the booklet he wrote in 2007, The Depression of 2008. Here’s a taste to whet your appetite:

Most investors and speculators do not know about the real estate cycle, and most who are introduced to it are too skeptical to act on it, probably including most who are reading this booklet. One can profit greatly if one has an insight missed by the masses…

As the economy head towards the coming waterfall, we can’t stop it. Some will profit from it, many will suffer losses, some great losses, from the coming real estate collapse and economic depression, but at least, if this analysis correctly explains economic reality, since we now understand the real estate cycle, we will have the satisfaction of knowing why we are suffering from the crash, and just maybe, next time around, we will be better prepared to handle it.

One thing I can predict with high confidence is that government chiefs, and even most economists will not learn the right lessons from the collapse, and history will repeat itself, as it always has.’

If you want to understand what Fred’s talking about, and how it affects your wealth, start here.


Callum Newman
for Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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