September 17, 2012 at 2:13 pm #17621
Rob tells us that bond yields are at a lower level than at any time since George Washington delivered the very first “State of the Union” address in the US, and Mozart’s opera Cosi Fan Tutte premiered in Vienna.
With bond yields this low, why is so much money going into bonds? Is it because investors anticipate even lower rates? A drop from 1.6% to 0.8% could be quite profitable. The risk of course is that interest rates could rise to say just 2% in the short term and that could be expensive if the cash is needed to buy something else at the bargain counter.
Can the Feds push the interest rates down further, to even nominally negative yields? It would help out the banks, and particularly the US Govt which has some rather large obligations to both Defense and Social commitments. It also allows a more palatable hidden tax against savers so Congress probably puts some pressure on the Fed to reduce interest rates through monetary policy. Or, is the Fed just following the inexorable force of the market in which bond holders will buy US bonds even at negative rates rather than risk buying Spanish bonds, stocks, gold, land or collectibles where prices could deflate, costing investors much more than negative yield bonds?
Central bankers have their reassuring fingers poised on the computer keys, ready to do whatever it takes (OMT) to help out anyone in need, their friends, the connected, the rent seekers and parasites… in addition to what has already been digitized. The grinches who save can pay.
Most economists and financial advisors believe that all this monetizing will be followed by massive price inflation, so advise investors to buy gold, real assets, things they can stub their toes on, in anticipation… very logical.
Or… could it be that the bond holders are right and that the trillions of monetized $ and € are a drop in the bucket compared to the bucket full of debt, many more trillions of debt and obligations still to be resolved by deflation in all its forms (write offs, lower prices, crashes and so on)? What is $5 trillion of new money compared with say $50 trillion of worldwide deflation? The monetizing is just a distraction, something to annoy gold bugs, something to complain about, pocket change.
Prices are still high in the developed world stock markets. People still don’t feel sooooo bad, at least the VIX says so. Gold is high because many investors fear inflation from all the monetizing by central bankers, thank you Mario and Ben (both insane, vain and deeply dishonest). The Chinese have their own version of fiddling with their credit using bank cash reserves. Oil too is priced high. It is the “cheap” energy that has allowed the massive growth of populations and economies over the last century, and credit, especially during the last forty years. Now we face a “fiscal cliff”, a Wiley Coyote moment of suspension before the fall. Looming bankruptcy may focus the minds of Socialists and this may be the end of that bubble. It seems obvious that we can no longer afford it. Watching the galoots in politics… hmmmm?
Over the last ten years some prices have come down, like some FL real estate, by 80%, but there is still a lot of over priced stuff, particularly stocks and most other assets in the developed world. Bankers are doing all they can to hide the debt with fancy accounting tricks, even at the expense of letting fine properties in Ireland disintegrate (true moral hazard).
It seems to me that there are many more days of reckoning to go, maybe even a few days of “catastrophic losses” in the stock markets, a CDO black swan, something expected or unexpected, before there can be any enthusiasm for new investments. Even emerging economies could take a loooong time before they rise from the “deeply depressed” position. The volume of stock market transactions in the US is down by 80% from ten years ago. We still face the “price follows volume” problem.
Even populations need to decline. A Japanese style quiet, orderly reduction of population would be preferable to a Chinese war with the US and Europe, Iran as the focal point. Resources, the need of populations, may be unlimited in the Universe, but they are limited on this mortal coil, particularly cheap energy. There is lots of expensive energy, gas (petrol) from coal or natural gas, but that changes our lifestyles, makes many people hungry and angry, makes government meddlers worry.
Losing money in “catastrophic market downturns”, lowering commodity prices, impossible to sell artwork, unproductive houses and so on is easy to do. It is easy to buy, hard to sell, and tax authorities like those hard to hide assets such as immovable houses and land, the assets of the “rich”.
Soooo, what to do? There’s no place to hide.
Some people regard gold as a cash equivalent but I have found that it is difficult to pay tax, rent or bills, or even buy an iPhone with it. I prefer cash, and particularly US $ cash because Mario and the Germans seem determined to make the €uro into $0.80 in four years. Cash hides in plain view. A briefcase holds a $million, easy enough to hide (tell the next generation where it is and if they steal it, they can pay the bills) and while it is there, the banks can’t play with it or close their doors on it. It may not have a yield, but that means it does not need to be taxed either. Bonds are for the connected, the sovereign nations which can be bailed out, not us individual investors.
Having the cash to make new investments at the bargain counter, when the time comes, makes it a lot easier. That’s one of the Family Office principles for long term investing.
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