I wanted to open the comments up here for a Q&A since I haven’t done one in a while. With the markets so volatile and the global economy looking shaky again I figured people might have some questions. So fire away if you want. Anything goes….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Your book says commodities aren’t good investments as a core piece of a portfolio because of their poor real, real returns. But what about MLPs?
I only have four questions this time
1. How will you know if we are in a bear market?
2. Where do you see the US dollar in one year – higher, lower or about the same?
3. Asness mentions four market inefficiencies in his work (value, momentum, carry and risk parity). If it is fair for me to ask, what other strategies if any do you see mispriced by market (inefficiencies)?
4. As I understand from the Kalecki equation, if the government cuts back on its spending then the private sector increases its level of debt to maintain growth levels. And since 2008, developed countries have slowed their accumulation of debt (and some have improved their trade deficit as well) whereas emerging have largely increased their debt levels. Does the world observe a global Kalecki equation of sorts influenced by the imports/exports or is each country a stand alone entity and in a closed system. That is, is this increase of emerging market debt the result of the slower debt accumulation in developed market?
My question concerns the question of QE in the EU. I keep reading articles that suggest that the threat of deflation clearly implies the need for QE on a massive scale (or at least more larger than has been promised to date). Yet another strain of literature questions whether QE has been/can be effective in stimulating faster price inflation in the US and Japan where it has been tried on a large scale. The arguments that imply that QE has not/will not overly stimulate inflation (that it primarily adds to bank reserves that are not being lent out) seem to imply that it simply has not been very effective in doing anything except driving asset prices upwards. Why is it presented as a foregone conclusion that this is a wise strategy (resisted only by the selfishness of Germany) that is necessary to prevent deflation, if it has actually had little impact on inflation at all?
A question on inflation: What is it that is driving inflation in markets such as Indonesia or Kazakhstan – why is it so much higher than in say Singapore?
An expanding monetary base leads to more money chasing the same amount of goods – that I get. But why is the monetary base expanding in the first place? If the narrow money supply can be divided into reserves and currency in circulation, what is it that is driving the growth of each?
If wage earners in a country such as Indonesia don’t trust the banking system or the currency, they might take out a large part of their salary in physical currency and maybe exchange it for US Dollars. This would lead to an increase in currency in ciculation, as banks demand more physical currency to be produced via the central bank?
How about the growth in reserves? Can you generalize and say that countries whose banking systems require recurring bailouts from the central banks end up with larger reserves due to recurring injections? Or that high-inflation countries tend to have governments with large budget deficits that require their central banks to monetize debt to support large spending programs.
If this thinking is correct, then what is needed for lower inflation and stable currencies in these countries are: 1) low NPLs in the banking system 2) high degree of trust in the banking system among deposits 3) high trust in the currency/low dollarization 4) no government budget deficit.
Would love to hear your view, and see if the above thinking is flawed in any way
1. You recently posted 3 macro charts that show a strong US economy. Do you analyse more forward looking indicators? If so, what are they telling you given recent movements in financial markets?
2. In a previous Q&A (https://pragcap.com/qa-answers-part-2) you said that the current monetary system has not failed. If the developed world ends up like Japan, unable to escape deflation and implementing perpetual QE, would this constitute failure? If not, what outcome would?
3. Related to the last question is what can the central bank do to cause real economic activity? Or is monetary policy now impotent?
4. Hypothetical question now: Why can’t an economy have competing private sector Fed-like clearing-houses (similar to the ones used to settle future contracts etc.) instead of one public central bank? Before you answer, just imagine the current global competing currencies but instead of spread out around the world, those currencies were all used within the US with competition eventually leading to the best currency system (essentially introducing FULL market forces to the monetary system).
Speaking of QE in the EU, it appears that Covered Bonds are the ECB’s current vehicle of choice (as opposed to, say, sovereign bonds in the USA). Covered Bonds are issued by banks. So the ECB is effectively buying bank bonds.
What do you make of this Cullen? Will the ECB purchase of Covered Bonds be any more effective than the Fed purchase of Treasuries?
How are you currently positioned?
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