The Fed is still more concerned with disinflation/deflation arising from the
liquidity crisis in the finance and real estate sectors, thus the 2.0% Fed funds
rate. Perhaps that's prudent, perhaps not. Either way, it doesn't change the
fact that the cyclical slowdown has yet to tame the pricing pressures, as the
Fed has continually said it would.
Adding to the inflationary woes is the bubbling of prices in overseas
markets, starting with China. That's doubly troubling because in China's
reaction to fighting rising inflation is less than encouraging. As
the Wall Street Journal today reports, "China Falters on Inflation
Fight."
Some of the problems are related to the dollar, which continues to weaken.
Indeed, the buck hit a
new record low against the euro today. China long ago hitched its currency
to the greenback, which means that U.S. monetary policy is exported to China.
Breaking free of the relationship, which effectively gives China a looser
monetary policy than its domestic economy warrants, is proving difficult, in
part because to do so threatens to materially slow the Chinese economy. Having
grown used to 10% economic growth, China's in no mood to tighten their belts,
especially right before the high-profile summer Olympic games. But as the U.S.
learned in the 1970s, printing money as a tool for boosting economic growth is,
at best, a short-term fix, and one with a hefty price tag once the party's
over.
Meantime, oil and many other commodities are priced globally in dollars. No
wonder, then, that as the dollar falls, commodity prices rise. Or is it vice
versa?
In any case, all eyes will be on Fed Chairman Ben Bernanke in his testimony
to Congress today and tomorrow. It's not clear that he can say anything to wipe
away the worries, although there's the possibility that he could make things
worse if he's not careful with his chatter.
As such, strategic-minded investors should stand ready to start nibbling at
asset classes, particularly if they spike down in the coming days and weeks.
U.S. stocks, junk bonds and REITs have been particularly hard hit of late.
Meanwhile, we're not inclined to chase commodities at these levels, although
fully selling out previously established positions isn't recommended either.
Nonetheless, if you've owned commodities for some time, it's a good time to
start thinking about rebalancing from winners to losers on an asset class level.
No, we're not sure that bottoms in stocks, junk and REITs are imminent, but if
you have a long-term horizon you could do a lot worse by starting to buy, albeit
cautiously and with an eye on time diversifying purchases over the coming months
and perhaps even years.
More generally, a fully diversified global portfolio across all the major
asset classes is still the only game in town. The good news is that some
portions of the global asset allocation pie look more attractive on a long-term
basis than others. That's always true, but it's been quite a while since the
differences have been so stark. In short, this is no time to be blinded by the
volatility. Opportunities like this don't come along every day. Even so, no one
said this is going to be easy. Tapping risk premia takes a lot more discipline
than it used to. Inflation, it seems, really is everywhere in 2008.
