The American economy was essentially an un-manipulated economy when I came to this country in 1958. It was an economy closest to operating on Adam Smith’s free market principle with an average GDP growth rate of 3.5 percent, an average inflation rate of less than 3 percent and an average nominal interest rate of about 5.5 percent. It was the envy of the world with over 80 percent of the population falling into the middle class.
When India’s Prime Minister Nehru visited UCLA in 1961, he admired the US economy and hoped that India one day would have a huge middle class like in America.
By NAVIN DOSHI
The financial sector of U.S. economy was around 5 % of stock market capitalization compared to 20 % today. I do not consider the banking profession of renting money (loaning money) very productive, it has become more parasitic. The financial sector needs to come down from current 20 % to less than 10 % to make it less parasitic. The dollar was a king currency in the 1960s, and the dollar’s purchasing power measured in gold was: one gram of gold equaled one dollar. Today it takes about $40 to buy a gram of gold. There were adequate checks and balances over every organization including banks and Wall Street, thanks to the Glass-Steagall law enacted in the 1930s; this law was removed during the time of Clinton administration.
There was a gradual decline in economy starting from 1965 with our deeper involvement in the Vietnam War. Hard assets performed well in the 1970s due to a very high rate of inflation. However, FED chairman Volcker kept on increasing interest rates until the inflation came back in control. The prime interest rate had gone up to 20 % and the ten year Treasury bond was yielding 14.6 % in April 1980. There was a severe recession that lasted through 1983. The ratio of the Dow Jones index to the price of gold was close to one as opposed to 14 today. As interest rates fell, the economy started to perform better. The American economy was doing reasonably well until the 1990s when the prime rate was hovering around 7 % and the ten year Treasury bond was yielding around 5.5 %. The tech bubble did get busted, thanks to Fed chairman Greenspan wanting to control the “market exuberance”, starting from March 2000 when the prime rate had peaked earlier to 9.5 %; the ten year Treasury bond rate was 6.7 %.
The S&P 500 went down from above 1500 to around 700 by January 2003. As we can see from this experience, the most important number is the cost of money, the prevailing interest rates. Both, the prime rate controlled by the Fed, and the ten year Treasury bond rate at the end of 2002 had gone down to 4%. The housing bubble was then initiated in 2003 that was busted in 2008 with the prime rate peaking around 8 % and the ten year Treasury around 4.8 %.
The Fed has kept low interest rates and occasional quantitative monetary easing ever since then, to keep away the economic deflation from many factors including demographic changes, globalization and new technology. Deflation implies over supply of goods and services and not having enough demand. Current ten year Treasury rate is around 1.8 %. The influence of the Fed on a long term interest rate is little and is driven by the reality of the market which has been deflationary.
The fed claims that the economy is doing sufficiently well to raise the interest rates this year three to four times; if they do, it cannot be any more than a percent. That is insignificant if they succeed in raising the inflation rate to over 3 %. US government always prefers to pay back the debt with cheaper dollar caused by the higher rate of inflation.
The shockingly low interest rate should have a powerful effect assuming there is sufficient liquidity injected by the Fed. It will drive a mass exodus of investors out of Treasury bonds that earn less than 2% and high grade corporate bonds yielding less than 3 %. Pension funds and insurance companies cannot survive receiving less than 3 % for years in the future. This exodus has taken a while to get going because investors have been slow to adjust to the new reality that low rates are really here to stay – and that they can’t live off 2 to 3 % interest. They are finally realizing that they have to do something else with their money.
Opportunities for us is to invest in assets that includes stocks of hard assets including precious metals. Stock prices of precious metals miners have been beaten down so much that they are a lot closer to the bottom even after an uptrend has been established. I do perceive that there are plenty of opportunities today in the mining sector.
The ten year Treasury interest rate hit record lows in February of this year, and since then, stocks, residential real estate, and gold have all done well since bottoming in 2016. The uptrends are back. If the “up” phase is really here, stocks, houses, and other assets should soar to new highs over the next 12 to 18 months – as investors take advantage of record low interest rates. This is anticipated on the assumption that the economy is slowly gaining the upward momentum in coming months.
Even when the Fed starts to raise rates in an increment of a quarter percent from such a low level...stocks, house prices, and gold perform surprisingly well, based upon historical data. This happens because the inflation rate is significantly higher than the cost of money. Stocks of hard assets are not overpriced yet, and the sentiment is not at an extreme level yet. It feels like a “Goldilocks Moment.” Current economic climate seems to be not too hot, and not too cold. Spot gold price bottomed around $1050 at the beginning of 2016 and peaked around $1300 in April. The gold spot price corrected from April high closing at $1205 on May 30th. It could go down to $1150 during the softer period of summer months. Statistically August, September, and October are stronger months due to a higher demand.
I was wrong and lost money when I held my gold position after it had peaked in 2012. Then I was fighting the Fed and China; the Fed succeeded keeping the impression of low inflation, and China was accumulating gold cheaply replacing the dollar holdings. Lower gold price implies low or no inflation. A trader of London gold market, Andrew Maguire, believes that People’s Bank of China will protect current gold buyers by not letting the price go down substantially, since the Chinese government wants Chinese to buy gold for their savings and retirement as they do in India.
There are many potential “Black Swans” floating around that could create a situation worse than the 2008 market crash. However the Fed will do whatever it takes including quantitative easing, (stated by EU Central bank president Mario Draghi) to keep the stock market levitating. S&P 500 currently close to the peak may stay there or go little higher or lower, however the risk to reward ratio is not as favorable as holding the stocks of hard assets which are closer to the bottom than the top.
If a black Swan (financial tsunami) materializes, then one needs to hold sufficient cash in $20, $50 and $100 notes (over and above the DEPOSIT in the bank) to survive at least three to six months. Lately it is not easy to get much cash out of the bank. Government has essentially won the war on cash to control the black economy. One should also hold five to ten percent of their net worth in form of gold and silver as an insurance for current and future generations; the jewelry is included in this asset class. Most dangerous tsunami can happen if and when the Fed loses its credibility and control over the dollar, and it loses its status as a world reserve currency. Current market bubble is about eight times larger than the one that occurred in 2008. When future pundits write the history of the financial crisis to come, whether it happens today, tomorrow, or years from now, you can bet they’ll wonder how the entire system failed once again to see something so dangerous... and so obvious. The dollar index, currently around 95, was over 161, highest in 1985 due to the exorbitant interest rate, and lowest around 71 in 2008 when the housing bubble had collapsed.
By NAVIN DOSHI
The financial sector of U.S. economy was around 5 % of stock market capitalization compared to 20 % today. I do not consider the banking profession of renting money (loaning money) very productive, it has become more parasitic. The financial sector needs to come down from current 20 % to less than 10 % to make it less parasitic. The dollar was a king currency in the 1960s, and the dollar’s purchasing power measured in gold was: one gram of gold equaled one dollar. Today it takes about $40 to buy a gram of gold. There were adequate checks and balances over every organization including banks and Wall Street, thanks to the Glass-Steagall law enacted in the 1930s; this law was removed during the time of Clinton administration.
There was a gradual decline in economy starting from 1965 with our deeper involvement in the Vietnam War. Hard assets performed well in the 1970s due to a very high rate of inflation. However, FED chairman Volcker kept on increasing interest rates until the inflation came back in control. The prime interest rate had gone up to 20 % and the ten year Treasury bond was yielding 14.6 % in April 1980. There was a severe recession that lasted through 1983. The ratio of the Dow Jones index to the price of gold was close to one as opposed to 14 today. As interest rates fell, the economy started to perform better. The American economy was doing reasonably well until the 1990s when the prime rate was hovering around 7 % and the ten year Treasury bond was yielding around 5.5 %. The tech bubble did get busted, thanks to Fed chairman Greenspan wanting to control the “market exuberance”, starting from March 2000 when the prime rate had peaked earlier to 9.5 %; the ten year Treasury bond rate was 6.7 %.
The S&P 500 went down from above 1500 to around 700 by January 2003. As we can see from this experience, the most important number is the cost of money, the prevailing interest rates. Both, the prime rate controlled by the Fed, and the ten year Treasury bond rate at the end of 2002 had gone down to 4%. The housing bubble was then initiated in 2003 that was busted in 2008 with the prime rate peaking around 8 % and the ten year Treasury around 4.8 %.
The Fed has kept low interest rates and occasional quantitative monetary easing ever since then, to keep away the economic deflation from many factors including demographic changes, globalization and new technology. Deflation implies over supply of goods and services and not having enough demand. Current ten year Treasury rate is around 1.8 %. The influence of the Fed on a long term interest rate is little and is driven by the reality of the market which has been deflationary.
The fed claims that the economy is doing sufficiently well to raise the interest rates this year three to four times; if they do, it cannot be any more than a percent. That is insignificant if they succeed in raising the inflation rate to over 3 %. US government always prefers to pay back the debt with cheaper dollar caused by the higher rate of inflation.
The shockingly low interest rate should have a powerful effect assuming there is sufficient liquidity injected by the Fed. It will drive a mass exodus of investors out of Treasury bonds that earn less than 2% and high grade corporate bonds yielding less than 3 %. Pension funds and insurance companies cannot survive receiving less than 3 % for years in the future. This exodus has taken a while to get going because investors have been slow to adjust to the new reality that low rates are really here to stay – and that they can’t live off 2 to 3 % interest. They are finally realizing that they have to do something else with their money.
Opportunities for us is to invest in assets that includes stocks of hard assets including precious metals. Stock prices of precious metals miners have been beaten down so much that they are a lot closer to the bottom even after an uptrend has been established. I do perceive that there are plenty of opportunities today in the mining sector.
The ten year Treasury interest rate hit record lows in February of this year, and since then, stocks, residential real estate, and gold have all done well since bottoming in 2016. The uptrends are back. If the “up” phase is really here, stocks, houses, and other assets should soar to new highs over the next 12 to 18 months – as investors take advantage of record low interest rates. This is anticipated on the assumption that the economy is slowly gaining the upward momentum in coming months.
Even when the Fed starts to raise rates in an increment of a quarter percent from such a low level...stocks, house prices, and gold perform surprisingly well, based upon historical data. This happens because the inflation rate is significantly higher than the cost of money. Stocks of hard assets are not overpriced yet, and the sentiment is not at an extreme level yet. It feels like a “Goldilocks Moment.” Current economic climate seems to be not too hot, and not too cold. Spot gold price bottomed around $1050 at the beginning of 2016 and peaked around $1300 in April. The gold spot price corrected from April high closing at $1205 on May 30th. It could go down to $1150 during the softer period of summer months. Statistically August, September, and October are stronger months due to a higher demand.
I was wrong and lost money when I held my gold position after it had peaked in 2012. Then I was fighting the Fed and China; the Fed succeeded keeping the impression of low inflation, and China was accumulating gold cheaply replacing the dollar holdings. Lower gold price implies low or no inflation. A trader of London gold market, Andrew Maguire, believes that People’s Bank of China will protect current gold buyers by not letting the price go down substantially, since the Chinese government wants Chinese to buy gold for their savings and retirement as they do in India.
There are many potential “Black Swans” floating around that could create a situation worse than the 2008 market crash. However the Fed will do whatever it takes including quantitative easing, (stated by EU Central bank president Mario Draghi) to keep the stock market levitating. S&P 500 currently close to the peak may stay there or go little higher or lower, however the risk to reward ratio is not as favorable as holding the stocks of hard assets which are closer to the bottom than the top.
If a black Swan (financial tsunami) materializes, then one needs to hold sufficient cash in $20, $50 and $100 notes (over and above the DEPOSIT in the bank) to survive at least three to six months. Lately it is not easy to get much cash out of the bank. Government has essentially won the war on cash to control the black economy. One should also hold five to ten percent of their net worth in form of gold and silver as an insurance for current and future generations; the jewelry is included in this asset class. Most dangerous tsunami can happen if and when the Fed loses its credibility and control over the dollar, and it loses its status as a world reserve currency. Current market bubble is about eight times larger than the one that occurred in 2008. When future pundits write the history of the financial crisis to come, whether it happens today, tomorrow, or years from now, you can bet they’ll wonder how the entire system failed once again to see something so dangerous... and so obvious. The dollar index, currently around 95, was over 161, highest in 1985 due to the exorbitant interest rate, and lowest around 71 in 2008 when the housing bubble had collapsed.
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