RE:Dangerous Game - Sorta Off TopicFantome, Thanks for sharing.
According to point #1 - US banks are making money regardless what scenario is playing. They have excess capital, and can't get any lower. They are pushing higher and higher ... with record capital, great trade desks they are still under temp regulations that restrict them from generating max profits. This in a low rate environment, imagine what will happen when rates go up and restrictions are lifted.
Inflation is no good for the market overall. However, there are inflationary resistant options ... it's a topic that perhaps we should have a conversation about.
My recent post "All over the place" was about a series of topics related to the market overall, ENB and my direct exposure to the market, and COVID implications. I am grateful for the portfolio growth, however I have to wonder how realistic the growth is. I think that there is exuberance in the market, that lead to over valuation. Therefore I too plan to do some selling and increase my cash position. However my core positions - I think they are undervalued about 15% therefore the dilema.
Have two questions for the audience:
- has anyone here hedged their ENB position?
- non-ENB question: what defensive plays (if any) do you suggest and why?
Fantome wrote: This post is intended to give people some things to think about...it will most likely be boring to most people....but nonetheless has a significant impact on how people invest going forward and what they should look for to make decisions....
1....The US Federal Reserve and the need for a Biden tax hike
Over the past year or so...essentially all of the US budgetary deficit has been funded by The Fed printing money out of thin air. Historically Governments funded budgetary deficits through primarily borrowing money in financial markets. So what we are seeing is a big change from what was done in the past.
Under the Federal Reserve Act....the money The Fed makes from charging interest goes to paying its operational costs and paying a 6% dividend to its shareholders....ie...the US banks...the "Big Six" in the US actually own about 70% of the shares....not the people of the US as most people think.
The rest of profits left over are then returned to the US Treasury. So this means that in effect...most of the recent borrowings to fund the US budgetary deficit are paid back to the US Government by The Fed and this means that the Government cost of funding the new borrowing to pay for the COVID stimulus packages is essentially zero.
In this situation..one could argue that the need for a tax hike to pay for the deficit is also about zero...
This begs the question..."Why increase taxes at all?
The answer lies in a policy decision to try to redistribute wealth in the US since the income distribution in the US is heavy skewed to the very rich. Since close to half the people in the US pay no tax at all...this creates an incentive for them to vote for people who can promise all kinds of handouts and someone else has to pay for them.
2.....Can we have low interest rates in the US for a long time?
Great question!!
The answer lies in whether one sees the potential for inflation in the future. Monetary theory has a basic premise that inflation is directly influenced by the rate of increase in the money supply. Money supply in its simplest terms is the amount cash available X the velocity of money (ie how quickly money changes hands which in turn is related to economic growth)
We are now seeing nuggets of inflation creeping up...look at energy prices over the past year as just one example. The Government lockdowns have had an effect to slow economic activity and hence keep inflationary pressures somewhat under control. These days could end soon once the majority of people are vaccinated and there is little or no need to keep the economy locked down. It is at this point that we could start to see the unprecedented increase in the money supply stimulating inflationary pressures.
OK Fine....So why should I care about that?
There is an instrinsic relationship between the interest rates and the P/E ratio for the whole market. In its simplest terms...as inflation rises...so will interest rates....higher interest rates mean a lower P/E ratio for the stock market and hence lower stock prices.
About a year ago...I posted a number of times that I saw a storm coming on the horizon and that we could see that storm hitting us towards the end of this year...perhaps as early as 3Q of this year.
The concordance of increased deficit based stimulus packages such as the one just passed in the US and the talk of an even bigger infrastructure packages as large as 4 trillion...combined with a Biden tax hike package and the end of lockdowns make this prediction that I made many months ago a virtual slam dunk..
I have already taken some defensive moves in my own portfolio....in the Fall of 2019...I posted that I was moving to overweight cash and in January 2020...I posted that i had increased my cash position....in late March and April with the decimation of the stock market with the COVID scare...I moved to an underweight in cash. Over the past month I have increased my cash position to slightly overweight and anticipate increasing this cash position going foward taking advantage of peridoic market euphoria.