Market observers can be forgiven for hedging their bets or keeping quiet this month. The rise in the US stock market is consistent with an economic recovery while the fall in bond yields points to a deep recession.
Of course we have the epic manipulation of the Fed to thank for this confusing scenario. It is artificially depressing bond yields to support the stock market, and yet that is not the whole story.
Foreign support
Foreign buyers do presently see dollar-denominated assets as something of a safe haven and are prepared to tolerate historically low returns on bonds for that percieved safety, or for that matter take a risk on US equities.
However, sooner or maybe later this conundrum has to be resolved. The stock market will not carry on rising indefinitely if a recession threatens to thump corporate profits hard. Those selling equities would then buy bonds and push the yield still lower.
Or is that what will happen? If you look at Spain and Italy you have pretty low stock markets with very high bond yields. Bond holders demand and get high yields because there is a rising risk of default as debt levels are so high.
Could the United States go the same way in a recession with stocks on the floor and bond prices decimated by very high yields? That tipping point in bonds could come very suddenly if history is any guide, and stocks would actually be the better investment in that scenario.
Or look at the United Arab Emirates. Majid Al Futtaim is about to issue bonds with a 5.8 per cent coupon, very low for a UAE private sector company, while at the same time the local stock markets are trading close to seven-year lows.
So both the UAE stock markets and bond markets are consistent in pointing to recessionary business conditions. Strange that really because business revived quite strongly in 2012, and both stocks and yields ought to be rising.
Let us stick to the US conundrum first. Transport data for January suggests the bond market is telling the correct story and that the US stock market is topping out for 2012.
Eurozone disaster
That is consistent with the horror stories from the eurozone about the return of the world’s largest economic bloc to recession in the fourth quarter. It is consistent with a Greek default and second global financial crisis.
And it would be consistent with UAE stock and bond markets indicating a renewed downturn in business activity this year.
Could it be that US stock market optimists are simply wrong and the bond market is correctly judging the future? Perhaps. But if so the US bond market is also in mortal danger and is no safe haven.
The ArabianMoney investment newsletter (click here) is advising its subscribers how to buy silver, gold, oil, even real estate to achieve maximum capital returns. These are hard assets, not paper like currency, stocks or bonds.
-- Posted Wednesday, 1 February 2012 | Digg This Article | Source: GoldSeek.com
comments powered by DisqusPrevious Articles by Peter Cooper 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.
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