Making plans in light of Group of Five's policy
How can you make money out of last month's Group of Five meeting? J. Anthony Boekh, a widely followed Montreal economist, has some advice.
One suggestion is to stay liquid. Put your money into money market funds or short-term bonds (under three years to maturity), he says. Avoid long-term bonds, which are likely to fall in price.
In today's integrated world economy, the decisions of the top leaders of the five largest democratic industrial powers can have a decided impact on investors.
At that Plaza Hotel meeting in New York, Treasury Secretary James A. Baker III, Federal Reserve Board chairman Paul A. Volcker, and their counterparts from France, West Germany, Japan, and the United Kingdom decided that ``exchange rates should better reflect fundamental economic conditions than has been the case.''
This was interpreted as indicating a greater willingness on the part of the United States to weaken the dollar by intervening on the foreign-exchange markets.
And that has proved to be the case.
Mr. Boekh, editor in chief of the Bank Credit Analyst, figures that the Reagan administration ``has taken a significant philosophical step toward junking its free-market approach to economic policy and has substituted direct intervention.''
Since, he says, the Fed will have to pursue what economists call ``unsterilized intervention'' -- that is, buying foreign currencies with dollars without taking countermeasures on the domestic money market -- it will automatically expand the nation's money supply, easing monetary policy further.
``And if that doesn't work, [the Fed] will have to cut the discount rate to further affect expectations that the Fed will print whatever number of dollars foreigners want, plus some.''
All this means faster economic growth and more inflation ahead.
He's not talking about a dramatic surge in inflation, as in the late 1970s. Rather, he's thinking about a 6.5 percent inflation rate by the end of next year, up from below 4 percent this year.
Even that, though, should cause investors to rethink their strategies.
Mr. Boekh, a Canadian with a PhD from the Wharton School at the University of Pennsylvania and four years in a top research job at the Bank of Canada, sells thousands of subscriptions (at $475 each) to his three rather scholarly monthly financial journals. The subscribers are financial institutions, governments, central bankers, and wealthy private investors, mostly in the US but also in 40 other nations.
Here are some of his other investment forecasts and tips:
Because the dollar is falling, foreign-currency bonds could provide a modest interest yield plus a generous foreign-ex- change profit. Boekh recommends West German deutsche mark bonds.
``Swiss franc bonds are OK, but they have a lower coupon,'' he says. ``British gilts [government securities] are OK, but a little racier.'' The British pound tends to be more volatile than the German mark or Swiss franc.
Investment in stocks is ``dangerous.'' There could be a rally, but stock prices have probably made a major top, he says.
This prediction assumes that interest rates are going up.
This pushes down the value of outstanding bonds. But it also raises bond yields, making them more competitive with stocks.
Looking at various technical factors in the stock market, Mr. Boekh says: ``A major warning flag has been raised for the first time in about two years.'' He argues that the ``correction'' in the stock market of the past few weeks is likely to last a number of months further.
Gold is in a long-term bear market. However, there may be a short-term ``mini-bull market'' in the yellow metal, he says.
This is because the risk of rising US inflation and the downtrend in the dollar could make gold temporarily attractive for investors using US dollars to buy it.
With the prospect of a more vigorous American economy and more inflation, commodity prices should pick up. This could offer an opportunity for those able to risk buying commodity futures, a highly leveraged investment.
``During the past few weeks,'' notes Boekh, ``commodity prices have begun to exhibit signs that a sizable rebound may be developing.''
Because of the falling dollar, however, Boekh expects commodity prices to be flat for those buying them in German marks, Japanese yen, or other foreign currencies.
Boekh was among the few economists in the early 1970s warning that inflation was going to get out of hand, and he anticipated early the period of disinflation in the 1980s.
Looking further ahead now, he believes the Fed will eventually have to tighten monetary policy to fight higher inflation and, possibly, stop the dollar from falling further and more rapidly than it desires.
That, he says, could produce a recession in 1987.
From an investment standpoint, however, that's a long way off. Still, ``it's a volatile world,'' notes Warren C. Smith, a colleague of Mr. Boekh.
The name of the subject of an article on Page 20 of Friday's Monitor was misspelled. The proper name of the editor in chief of the Montreal-based Bank Credit Analyst is J. Anthony Boeckh. The Monitor regrets the error.