We previously looked at some comments from Bridgewater Co-Chief Investment Officer Bob Prince, in which he explained why the current U.S. policy of zero level interest rates and deficit spending makes it difficult for value investors to determine the proper intrinsic value of assets. If the hurdle rate for investment is zero, and financing is easy and cheap to secure, how do you sort the good companies from the bad ones? We will now turn to Prince's comments regarding the status of gold and the U.S. dollar and how these might change as the Federal Reserve and U.S. Treasury continue down their current path.
Storeholds of wealth
One of the most significant economic developments of the last 30 years has been the evolving relationship between the United States and China. As most people no doubt know, the U.S. and other Western nations have outsourced important supply chains to China and other parts of Southeast Asia. However, there is another important component to this relationship - China is a major buyer of U.S. Treasury bonds. In effect, China has become the U.S.'s main creditor.
This relationship seemed to work fine for several decades, but has begun to deteriorate over the last few years. It is in the interests of U.S. borrowers for the government to simply print more paper, but at a certain point that will start to undermine the value of the dollar as the premier reserve currency. As Prince noted:
"The weaponization of the dollar is a powerful tool. But it`s also a disincentive for the dollar as a reserve currency, and it's a disincentive to hold dollars by foreign investors - China holds a substantial portion of our debt. If you`re holding dollars that are getting printed every day that are making you 50 basis points (0.5%), you might look for something other than dollars. You need a storehold of wealth."
Prince thinks that a possible consequence of the huge liquidity injections that the world`s central banks have organized is that stores of wealth will see their prices rise - that money has to go somewhere, after all. This might explain the recent bull markets in precious metals like gold and silver - the former is up 35% year over year, while the latter is up more than 70%.
Most interestingly, Prince thinks that some stocks might also become storeholds of wealth, in the sense that the newly created liquidity is likely to flow into big-name companies. This isn't exactly a value investor's analysis - if anything, it is more of a trading mentality. Nonetheless, it may prove to be accurate in the short term - after all, the lion's share of the gains of the S&P 500 have been driven by increases in the largest companies in the index - Amazon (AMZN, Financial), Apple (AAPL, Financial), Microsoft (MSFT, Financial), Google (GOOG, Financial) and Facebook (FB, Financial). Whether this can continue in the long term is another question altogether.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Bridgewater Co-CIO Bob Prince Explains What Investors Should Do in a Zero-Rate World, Part 1
- Howard Marks: The Long-Term Consequences of Government Stimulus
- David Einhorn's Greenlight Is Still Short Tesla
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