Don’t Fight the Central Banks

It may never be a worse time to be a discerning investor–one that Ben Graham would call an “Intelligent Investor”–thanks in large part to another Ben. One can be diligent, do everything correctly, and make accurate assessments of a company’s value, only to see all of that hard work become worthless at the drop of a hat because of the decisions of government officials.

A trader/investor maxim used to be “don’t fight the Fed.” With the European Central Bank entering the fray, it has become “don’t fight the central banks.” With central banks flooding the world economy with cash to monetize humongous government debt loads, all asset prices will rise, which will soon be followed by wages. And, because central banks can do little about productivity, we will likely see inflation like we last saw in the Jimmy Carter years.

The argument against a high inflation scenario is that Ben Bernanke will turn off the spigots before we reach that point. So, essentially the argument is that although government officials have not been able to anticipate most of the economic disasters of the last twenty years, this time it’s different.

Update 9/19/12: The Bank of Japan announced that it is expanding its version of Quantitative Easing (QE) by ten-trillion Yen. It seems all countries are racing to the bottom in an effort to depreciate their currencies in order to pay back large fixed debt service with currencies that will be worth a lot less tomorrow than they are today. That does not bode well for any economy, but especially not a US economy that has largely borrowed short term. If the dollar is expected to depreciate, foreign investors will demand higher yields when that short-term debt is rolled over in order to compensate for expected currency losses. Deterioration in the US economy could cascade rapidly.

This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *


You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>