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Unconventional becomes Unbelievable

2 May

We read with astonishment a recent Bloomberg article which pointed out that in a recent survey of 60 Central Bankers, “23% said they own shares or plan to buy them”. Combine this with the recent comments by Mario Draghi in which he commented that policy makers had ” an open mind on negative deposit rates”.  Is it just me, or are Central Bank actions starting to strain any level of credulity at all. In our minds, both are very targeted attempts on all forms of stranded liquidity. These actions are being taken against a backdrop of perceived dis-inflation, which is driving short term asset allocation decisions away from commodities/hard assets and towards fixed income and quasi fixed income. However, we re-emphasize that the seemingly contradictory behavior between global central bank actions and the price movements in various commodity sectors is laying the groundwork for the long term outperformance of said sectors. In short, actions speak louder than words, thus pay more attention to what Central Bankers are attempting to do, than what they are expressly stating they are attempting to do.

Mis-Inflation

10 Apr

The recent proposal by the Obama administration to change the inflation index component from a simple CPI to a chain weighted CPI has caused some degree of consternation and concern. This concern comes not only from seniors but also from those involved in the TIPS markets. While the amount of the difference is relatively small, the point is that this move represents a significant step towards the active management of price data. TIPS buyers were initially drawn to this market as a hedge against core inflation.  If TIPS owners begin to feel like the Government is haircutting them for their own budgetary needs, then that market will struggle to maintain its integrity and thus its liquidity.  The more important takeaway from this latest sleight of hand, is that that we have a Central Bank desperately trying to create inflation, while at the same time we have its own Government trying to dampen its ultimate effects. While we have maintained that the timing of the unfolding inflation story is uncertain, the anecdotal evidence surrounding its emergence continues to build.

Paper Lion?

11 Feb

A recent study by Bain& Co. forecasts a “superabundance of capital” between now and 2020. Bain projects that there might be up to ten times the level of global financial assets relative to global GDP within the next several years. This divergence, driven by surpluses in Asia and the Middle East, should exacerbate bubble like behavior over the next 6-7 years the study reports. While we would normally ignore such drivel, it does make one think about all of the existing excess liquidity that exists today, and will most likely continue to exist going forward. The study assumes however, quite naively we might add, that this liquidity will flow mainly to public capital markets/financial assets. We maintain that smart capital seeking a home does not necessarily look only to traditional conduits of investment such as stocks and bonds but rather seeks out where it will be treated the best (return and safety). We highly doubt that the conditions which would warrant a sustained divergence between the real economy and the paper economy would be sustainable over any extended period of time.  Very recent history would suggest that negative real rates of interest have oftentimes caused excess liquidity to bleed over into areas of the real economy, sometimes in highly unpredictable and highly disruptive manners.