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With 8 straight years of failure – we must be on the right track!

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I've written another blog post.


What will be good investments in today’s environment?


To answer this question it is worth looking at how the US economy has been going since the Global Financial Crisis. For eight years the US Federal Reserve and other central banks around the world have embarked on quantitative easing (i.e. printing money) and governments have tried fiscal stimulus (i.e. spending wildly on credit).


Ok, ok… quantitative easing is more about changing the yield curve of bonds, but that is a bit too technical to discuss here.

US mainstream media and the incumbent Obama administration seem to argue that everything is going great!


But is it really?


There is an interesting macroeconomic metric called Velocity of Money. Basically, the more often money changes hands, the more economic activity (GDP) there is. Economists state this relationship as MxV = PxQ, which means total stock of money x velocity = price level x quantity of goods and services consumed.


So a higher Velocity of Money should mean increased GDP and price inflation, in simple terms.


Here is a chart of the US Velocity of Money in recent years:



Do you see a trend there since the GFC in 2008? Actually, the downward trend seems to have started around 9/11 2001 with an acceleration during the GFC. If this trend continues then there will be further deflationary pressures on the US economy, which will probably keep spilling over to the rest of the world.


But what has happened to all the Quantitative Easing money that was supposed to stimulate the economy? Glad you asked! Here is a chart of how much banks have deposited funds back to the US Fed:



There was over $1.8 trillion deposited with the US central bank back in 2013. Curiously, the US Fed has stopped publishing this statistic.


To make matters worse, US corporations hoard cash and keep $2.5 trillion overseas. That is a lot of cash that could be used for investments.


So banks don’t lend and companies don’t invest as much as they could. Clearly, the trickle down economy is not working. Main Street does not see much of the monetary stimulus. No wonder the average worker feels squeezed.


What will happen now, and how should one invest in this deflationary climate?


I think the $2.5 trillion of US corporate cash overseas is too juicy for politicians to leave alone. There will be some policy change that will penalise keeping money overseas. That will create a currency flow towards the US dollar.


Second, the EU seems unable to make effective policy decisions, evidenced by recent examples of their inability to establish free trade agreements. The EU zone dysfunction will get worse with changing political winds for national elections in 2017. This will also cause capital flight to the USA.


Third, there will be an increased realisation that the endless zero or negative interest rate policies do not work. This will commence an environment of rising interest rates, which will further strengthen the US dollar but cause bond prices to go down.


My conclusion is that US dollar cash would be a good position to have for an international investor.


For a bit more risk, bond like US equity investments with steady dividends, such as utilities, would ride the US currency appreciation without the downside of bonds.


For a bit more risk still, US equities in general may be the only asset class available for all the capital flowing into the country, which will boost share prices.


I am just waiting for the US election to be over with first.

Edited by AndersB

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