Recently, I had the opportunity to hear economist Ken Rogoff, author of “This Time is Different” along with Ian Bremmer of Eurasia group and author of “The J Curve” speak. I even exchanged books with Ken and gave Ian one of my own. Though these guys have very different styles, what was important to realize is that both men are NOT optimistic about the future of the developed world’s economies. For instance, recently we read in the WSJ that Portugal estimates they need $99 billion (U.S. equivalent) to keep from defaulting, while simultaneously their prime minister failed to get a key austerity budget passed. It appears the Portuguese politicians really are ignorant of their situation. The continued cries from Greece public employee unions to avoid budget cuts at all costs also shows the severity of the misunderstanding the populace about the situation in Greece and Portugal, two of the PIIGS states. You have to be mindful that “bailing” out the Eurozone can only be a drag on the world’s largest market (yes the Eurozone is larger than the U.S.) and France is willing to spend as much of the German GDP as possible to quiet the countries of the PIIGS fall.
Meanwhile, at home the U.S. Treasury led by “banana Ben” refuses to acknowledge the cost increases of most commodities, major goods, oil and that inflation is not a threat, but is already here. A nail in this coffin is a quote from Ken Powell CEO of General Mills, makers of my favorite cereal Cheerios, where he says, “we don’t pass on pricing anywhere near the full level of inflation” but General Mills are raising prices and state expectations of rising costs of grains to be between 4% to 5% by 2012. How long can we put off the costs of foodstuffs, when grains, sugar, corn, soybean, wheat and other commodities are rising like hot air balloons besides oil, and not call it inflation! Oh by the way, General Mills did have 3rd qtr earnings rise by 18% due to global demand, not U.S. demand. Kudos for the Emerged Markets!
It’s not without trepidation we invest in the U.S. and Europe these days (unless we see mis-pricing anomalies like in 2008). The inflation threat is real. Bill Gross is avoiding U.S. treasuries because he sees yields only rising due to inflation while Warren Buffet has recently stated, “I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said today in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”
Other highly rated practitioners offer similar views. The U.S. dollar is a short in the long run. Be prepared.