How long can the Fed pump up the US bond bubble? Time to shift into hard assets?
By: Peter Cooper
Thursday, 26 January 2012
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.
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.