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How long can the Fed pump up the US bond bubble? Time to shift into hard assets?

By: Peter Cooper, Arabian Money

-- Posted Thursday, 26 January 2012 | | Disqus

The most obvious bubble in the global financial system is the US bond market and by far the biggest today. Holding interest rates until late 2014 as the Fed announced yesterday should hold it stable for another three years.

In theory holding rates low ought to encourage bond holders to exit this market. The return on this investment is negative after inflation, a guaranteed loser for capital holdings not a preserver of wealth unless you think the other options have even more downside.

Fear trade

It is a fear trade. Equities rallied very modestly on this news. In previous years stocks might have surged as the yield on equities is far higher than the yield on bonds, or at least still in positive territory.

But then stock markets around the world have lost their momentum and volumes. Famous market timer Jo Granville thinks the game is up and the Dow Jones will plunge 4,000 points this year (click here).

It is an extreme forecast but these are extreme times with the eurozone on the brink of tipping the world into a second global financial crisis and the Iranian dispute threatening $140 oil this summer according to the IMF.

Reason enough to be cautious. But as Dr Marc Faber continues to warn investors the US T-bond just has to be a long-term loser at these levels of interest rates. How long is the long-term? Is it beyond three years or within that timetable?

Certainly the Fed is preparing the market for QE3, a second round of electronic money printing which it is desperately keen to keep as a policy response to the imminent eurozone crisis.

But investors must surely scratch their heads. How much money can be pumped into the global economy before you get much higher inflation? Which asset classes will benefit from inflation and which lose? Bonds definitely look a loser, for how long can the Fed actually keep rates at these levels?

The Central Bank of Italy would love to keep its rates near zero but the market has long taken over, and low ECB rates mean nothing for Italian bonds. The ECB still has Germany as its benchmark and financial bulwark. The Fed has the heavily indebted United States.

Owning things

One thing is for certain, investors who own things will be OK. Inflation will be reflected in an increase in the value of things. Paper assets like money and stocks are another matter entirely. Money we know will be debased eventually and when it happens very quickly.

Share prices must reflect the profitability of the companies they represent. A world in recession will be a world of low profits and low share prices. That is most likely why easy money is starting to have less of an impact on stock markets. Investors are beginning to wake up and see it as a sign of bad times ahead, not a bed of roses.

It will be hard assets, things like real estate and precious metals that go up with and even beat inflation. Bonds will ultimately be a disaster and stock markets will likely collapse before them. Paper money will fare worst of all and that includes bonds.

The ArabianMoney monthly investment newsletter continues this commentary with actionable investment ideas that cannot be published on this website for legal reasons (subscribe here). The time to sort out your personal investment portfolio is now and not when disaster strikes but only you can take this responsibility.

-- Posted Thursday, 26 January 2012 | Digg This Article | Source:

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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, 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 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 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


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