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Is the U.S. headed for a period of Argentine-like stagflation?

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October 27, 2009 – Comments (7)

Yesterday's WSJ contained an interesting Op-Ed piece on Argentina.  The bulk of the article talks about how the country's government is cracking down on the press, reigning in their freedom in a weak attempt to keep the current regime’s popularity.

However, that's not what I found interesting about the piece.  It actually got me thinking about the similarities between what is happening in that country and what is happening in the United States right now. 

Argentina's leaders have boosted their poll numbers in a bad economy by "encouraging" the country's central bank to print lots of money (hmmmm that sounds awfully familiar).  As the article goes on to say:

There's nothing like cheap financing to restore the market's enthusiasm for buying all sorts of stuff—from stocks to houses—already on sale at fire sale prices.  The great reflation will make people feel rich again. A weak currency will also be a short-term boon to exporters, whose profits can then be taxed at ever higher rates.

All of this cheap money is working...for now.  Argentina's stock market hit an all-time high yesterday (see article: Argentina stocks fall after touching all-time high).

This story made me chuckle to myself about all of the people on CAPS who are screaming to high heaven about how the U.S. dollar is doomed and yet have a huge portfolio filled to the gills with red thumbs on companies.  If you think that the dollar will continue to fall, it makes absolutely no sense to be short the stock market right now.  A falling dollar makes asset prices appear to rise.

Not surprisingly, the printing of money in Argentina has come at a cost.  It didn't really fix any of the country's woes, it only temporarily masked them.  Now once again its economy is stalling, but this time it is experiencing massive inflation at the same time...the dreaded stagflation.

I'm not saying that the United States is definitely headed for a prolonged period of stagflation, however I do strongly believe that our economy will grow at a much slower pace than we have become accustomed to over the next decade and that there is a very good chance that the value of the U.S. dollar will continue to fall in an orderly manner pushing the price of many assets, such as oil, higher.  I suppose that one should call that stagflation, I just don't expect it to be as severe as some people do.

Argentina's Kirchner Targets the Press

Deej

7 Comments – Post Your Own

#1) On October 27, 2009 at 2:05 PM, goldminingXpert (29.52) wrote:

Strange isn't it, the curious dollar bears. I'm a dollar bull, market bear, and stagflation bear. Deflation is much more probable, as it is already underway in many sectors despite the abundance of cheap money.

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#2) On October 27, 2009 at 2:35 PM, Harold71 (22.11) wrote:

Yes, GMX, we're just so curious.

What isn't curious is the facts.  Since '07, the stock market crashed, and it is STILL down 4,000 points.  Gold, on the other hand, launched from $650, never breaching that level again, and is now over $1,000.  Silver is up as well since '07.  As is oil.  The stock market, no, still not recovered.

 

Is the U.S. headed for a period of Argentine-like stagflation?

The answer to your question is yes.  And the US Dollar, more appropriately called the Federal Reserve Note, will be as "orderly" in 2010 as stocks were in 2008.  If that's orderly, well good, you've got your boots strapped pretty tight.

 

Deej you're a smart dude, you'd do well to at least recognize some similar periods in history.  History doesn't repeat, but it does rhyme.

The 1973–1974 stock market crash was a stock market crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom,[1] it was one of the worst stock market downturns in modern history.[2] The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated 'Nixon Shock' and United States dollar devaluation under the Smithsonian Agreement.

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#3) On October 27, 2009 at 3:00 PM, alstry (36.08) wrote:

Could you imagine if you were borrowing and shorting dollars and going long inverse etfs with the proceeds????

Whooops...

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#4) On October 27, 2009 at 4:04 PM, amoldov (31.69) wrote:

Is it possible that both the USD and the stock market do poorly in the next few years?

If I am a foreign investor and think the S&P500 will not beat inflation by a significant margin, why would I buy any stocks? And if I am a US investor who thinks that foreign stocks will do about the same (or better), but without the currency deterioration, why would I buy any domestic stocks? OK, many S&P500 companies have foreign exposure, but the idea is that many people may avoid investments priced in dollars.

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#5) On October 27, 2009 at 4:34 PM, goldminingXpert (29.52) wrote:

amoldov... short answer, no. They are inversely correlated to a statistically significant degree.

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#6) On October 27, 2009 at 10:47 PM, Harold71 (22.11) wrote:

amoldov

The short answer is that GMX doesn't know.  While they have been statistically correlated for some time recently, they can and do travel in the same direction.

 

I agree with you amoldov, that there is a snowball's chance in hell of the S&P beating inflation (Gold, Silver, Oil) over the next 5 years.  There are a variety of factors here, but the main one will be the eventual bankruptcy of the US gov't and, therefore, the obvious worthlessness of the Federal Reserve Note. 

Clearly, there will be a lot of uncertainty, possibly panic, during the currency crisis.  A new international monetary system will be ready to move into place at that time.

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#7) On October 28, 2009 at 11:45 AM, goldminingXpert (29.52) wrote:

I agree with you amoldov, that there is a snowball's chance in hell of the S&P beating inflation (Gold, Silver, Oil) over the next 5 years.

I agree with this, what followed, not so much...

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