BEYOND THE ZIRP ZONE

John Authers in the FT's weekend edition writes in his "The Long View" column: "The dollar has us all entrapped. There is simply nothing that is better, and nothing that is safer." 

Authers is quoting a Cornell University economics professor who, surprise of surprises, has a new book on the subject. What Authers suggests is the dollar despite all the hand wringing will not soon lose its world status as the currency of economic exchange, a terrific and some might say a privileged advantage.

Nor are we suggesting anything different. But there is a consideration here, one that Authers to his credit acknowledges.

At the beginning of 2014 most expected bond interest rates to rise and bond prices to fall. Now as just about everyone on the planet including my gardener knows, it didn't happen. Once again bettors are lined up including the ECB crowd to see the dollar rise along with U.S. interest rates and the euro decline.

You can bet a lot of  EU bureaucrats and politicians are praying for such especially given the recent voting results there. And we're not here to suggest it won't. We've said before and in print that the euro could fall to around 120, probably were it belongs.

But this is really just another example of a "Beggar thy neighbor" stunt to help pull the EU out of its economic doldrums. It does little or nothing to correct structural faults and cracks. It's just another form of putting direct pressure on the wound until the surgeon arrives. But in this case none is coming.

At the start of the year emerging markets were touted as the place not to be. Except for a brief interlude, that appears to be false as investors are once again throwing money there. Emerging market stock funds have shown an increase of money flows for the last three months.

Emerging market shares based on the MSCI are up 3.1% so far in 2014 versus 3.8% for the S&P 500. On a valuation level the MSCI offers the better value trading at a forward p/e ratio around 10 compared to the S&P 500 at 15. The 10 year average for the MSCI is 10.8 versus 13.8 for the S&P 500.

None of this is to suggest you should be piling into emerging markets. The time to get in was back in February when the index was hovering near its lows and investors were following the January touts. The take home here is the unexpected frequently catches people with their drawers down.

To be sure, many will counter that we didn't know that was the bottom. We didn't say we did. Nor do we pretend to possess the skill to devine such. We just take what the market gives us and often times that means fading popular opinion.


With nearly every single solitary interplanetary soul apparently looking for interest rates to go up gradually and orderly, what happens if they surprise by bypassing ZIRP on their way to much higher ground?