The Oracle, you an I have a common fan in the Economic world. Harry Dent has put this well into perspective in "The Demographic Cliff", I agree with most of what he says. Some say this is a pessimistic approach to spending or investing in current markets, but what he has predicted is making it's way here although slower than anticipated. Think QE. Good points, the under 100hp market has maintained a good industry this year due to cattle and milk prices.
Dent's last book is fascinating, but clearly his timing is off for a pullback. Even so, at this moment only one major bank (French monster So-Gen) thinks that 2015 will see a major pullback in our markets and their reason is that Wall Street has never seen an eight-year bull run. That said, the trouble with being a bear is that it becomes silly expensive rolling over non-performing options if one is too early, not to mention the missed opportunity costs of remaining long! For me I look at trajectories and value while actively managing those assets, and so Dent's line of thinking becomes very interesting. One thing that most bears don't get is the ability of a large trading country that uses fractional reserve currency, is their central banks ability to manage interest rates well below expectations. Japan's interest rates have yet to pop. Our interest rates where supposed to pop, yet they did not which caused precious metals to crash in the last quarter of 2011.
Business Insider published Minack's work noting that it is increasingly hard to allow higher interest rates without the market crashing forcing the Fed to ease. While Deutsche bank has noted over the last few years everybody has over-estimated the interest rate.
Anyway, the crowd thinks we'll see increasing interest rates, but I don't think we will see anything very high. Which is too bad because I own banks and REITs that would benefit from higher interest rates (counter-intuitively, banks make more money the higher the interest rate goes).
At this point I need to explain something that is not taught in schools, namely that the trajectory of markets is largely set by bond pricing which in turn effects the value of currency which is what everything gets priced in. Stick with me because I'm diving into the deep end:
1) Interest rates are a way of measuring the demand for money.
Low interest rates mean demand for money is low and demand for debt is high.
High interest rates mean that demand for money is high and demand for debt is low. For example: If my demand for your debt is low, you will need to pay me more to hold your debt in the form of higher interest rates. And why would you be willing to do so? Because demand for my money is high.
Hence,
High interest rates mean that demand for money is high and demand for debt is low.
In other words, raising interest rates means that a currency is becoming more valuable and falling interest rates mean that a currency is becoming less valuable.
2) Devaluing a currency makes domestic goods and services produced or offered less expensive relative to other currencies.
We know a currency is devaluing when interest rates trend downward.
When currency is cheap relative to foreign currencies, our local economy tends to strengthen on increased exports and bolster domestic employment.
In other words, during periods of economic weakness, a central bank will try to devalue its currency as a way to increase employment and increase domestic commerce.
3) When interest rates are zero, central bankers have few tools to effectively lower interest rates.
They can print money. Printing money can be literal printing of money which isn稚 very effective because less than 5% of our currency is in paper form.
They can lower the reserve capital requirements of banks, thereby multiplying the money supply available for lending.
Or they can devalue to money by purchasing debt in the currency they issue thereby effectively diluting money.
Those central banks that have the ability to do so have all sought to devalue their currency. But devaluation is relative and as one central bank devalued its currency, that provided motivation for another central bank to devalue its currency. This has resulted in seven year boom of increased costs of commodities which are often priced in dollars. But the increased price in commodities isn't true inflation because people's incomes have not inflated. As a result, when commodity prices increased, there was demand destruction and commodities pricing was expected to fall unless demand remains elevated. Central bankers realized this and for this reason they never grew concerned about the increase in commodity pricing because they expected demand destruction and they were right.
