-- Posted Sunday, 17 October 2010 | Digg This Article | | Source: GoldSeek.com

By printing money the US Federal Reserve is devaluing the US dollar and thereby the value of US bonds held by foreigners. If the dollar drops sharply in value as it has over the past few weeks, then the tiny interest payments on bonds make these far from safe assets. The bond holders are losing money.

Pimco, the largest US bond fund, says the bond rally is almost over. The Chinese have cut their US bond holdings by more than 10 per cent over the past year. Yet the buyer of last resort, the Fed itself has kept the bond market aloft. This will not work for much longer. Even old Alan Greenspan warned as much a week ago.

Tipping point

Soon the cost of servicing these debts is going to reach a tipping point. For beyond a certain point any debtor is in trouble as they have to borrow bigger and bigger amounts to pay their interest until the loan starts to mushroom in size.

At the same time the excess liquidity created by money printing or quantitative easing as it is called, is blowing up a bubble in global stock markets. Nothing in the global economic outlook justifies these price rises nor the low volumes of shares being traded.

The money just has to be a carry trade from cheap dollars being driven into stock markets more or less directly by the Fed. For if you inflate equity then you depress the debt burden. For debts, in theory, remain static in nominal terms while equity rises creating wealth.

That is the basic principle of house price inflation too, and we all know how that ended. The trouble is a little thing called fundamentals. House prices, for example, can only rise so far out of line with rentals. Share prices can only rise so far out of line with profits. But these things get forgotten when a bubble is blowing up.

QEII failure?

Perhaps the achilles heel is the QE process itself, and the ability of the Fed to hoodwink the markets. For money printing only works – and it is arguably not working because it is not delivering growth in the US – for a short period before it trips up over itself into a nasty inflationary mess.

Is that not now what we are starting to see with rising oil and commodity prices? Investors are selling the dollar and buying gold and silver. Share prices by comparison are more vulnerable because they are only paper representations of a company’s worth. Real assets have a more direct relationship to the volume of money in circulation than stocks.

Stocks will rise until there are no more buyers and then they have to find a new level. Might that not be when QEII is announced very early next month? A case of buy on the rumor, sell on the announcement? Certainly by then every buyer that can be pulled into the market will be there, leaving only one way to go and that is down.

Ironically that also answers the question about the bond market. For this stock market correction would give bonds a last spike higher, as some delusional fools would still see them as a safe haven. Others would use an accompanying correction in commodities to advantage as a buying opportunity and buy gold and silver.

-- Posted Sunday, 17 October 2010 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

© 1995 - 2019

Live GoldSeek Visitor Map | Disclaimer