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Buenaventura won''t hedge more but pushes past hedges deep into future
By Peter Brimelow and Edwin S. Rubenstein
CBSMarketWatch.com
Monday, January 17, 2005
http://cbs.marketwatch.com/news/story.asp?guid=%7B703E313D%2DB53A%
2D46D7%2DB8CF%2D76EB20297031%7D&siteid=mktw&dist=
NEW YORK -- The good news on inflation may be bad
news -- especially in the long term.
The market liked Friday's decline in the producer price
index, which doesn't always translate into lower
consumer prices.
It didn't like last week's Federal Reserve minutes,
showing some members are now taking inflation
seriously.
The good news about inflation is bad news because
it is news. Inflation has now, again, become an issue.
A whole new generation of Wall Streeters has never
had to think much about inflation at all. We think
about it because of ... well, age and experience.
And because of data on historic financial asset
performance developed by Jeremy Siegel of the
University of Pennsylvania's Wharton School of
Business. Siegel is the author of the book, "Stocks
For the Long Run" (2002, McGraw-Hill).
We recently looked at Siegel's post-1801 data on the
cumulative (dividend and capital gains) real (adjusted
for inflation) returns on stocks. We concluded that, if
historic patterns held, the excesses of the 1990s
boom had not yet been worked off.
Our chart looks at what the value of a dollar would be if
you'd held it since 1801. Obviously, a dollar bill doesn't
pay dividends or show capital gains. Its value reflects
inflation or deflation.
As of the end of 2004, the purchasing power of a paper
dollar held since 1801 would be only six 1801 cents.
There was a lot of moaning and groaning about alternating
inflation and deflation in the 19th century -- the eras of
greenbacks, free silver, the cross of gold. And the value of
the dollar did fluctuate widely -- but roughly within a range of
70 cents to $1.40.
In the early years of the 20th century, the dollar was roughly
where it had been a hundred years earlier. Then it collapsed.
It is hard to avoid the conclusion that the advent of the
Federal Reserve in 1913 brought about a sea change in
financial history. Inflation was the central reality of the 20th
century.
So complete was its triumph that even the much-trumpeted
deflation of the Great Depression shows up as a mere eddy
in the otherwise relentless dollar decline.
We assume this trend will continue (why wouldn't it?) at
least as long as the Federal Reserve is around.
Inflation never actually died by historic standards. Even in
the 1990s, the value of the dollar continued to decline. But,
sooner or later, it will revive in full force.
It won't be the end of the world. Economic growth has been
robust in the 20th century. But it might mean that, as in the
1970s, financial assets are in for a squeeze.
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