Spot the Bubbles
BIG PICTURE – Let the truth be known, the world is being held hostage by powerful bankers. Thanks to the fiat-money fractional reserve system, bankers have become the ruling elite and as a result, entire nations are going bust.
Make no mistake, the world’s most severe recession in decades was caused by excessive debt and in the boom years, bankers provided the narcotic in the form of cheap credit. A few years ago, bankers willingly handed out unserviceable loans and they made fortunes from the interest payments. In those heady days, major banks made obscene amounts of money and their management went home with hundreds of millions of dollars. When the times were good and most debtors were servicing their loans, profits were distributed amongst the banks’ management, shareholders and bondholders. However, when the music stopped and the credit binge turned into a colossal bust, laws were promptly enacted to ‘bail out’ these morally and financially bankrupt institutions.
Instead of letting the insolvent banks fail, the ruling elite orchestrated bail-out packages whereby the (already struggling) citizens of over-indebted nations made whole the losses of the very institutions which had put them in their misery! Look. These bail-out packages were totally unethical and they were designed solely to benefit the banking elite. After all, if the establishment was genuinely concerned about the welfare of the public, its policy measures would have directly benefited the distressed citizens. Instead, the stimulus was geared towards saving the banks and the public paid the bill (Figure 1).
Figure 1: The cost of the ‘bail-outs’
Source: International Monetary Fund
By dropping interest-rates to near zero and creating trillions of dollars in new money, the establishment may have saved its banking cronies. However, there is no such thing as a free lunch and the citizens of the developed world will have to pay for these bail-outs. Unfortunately, over the following decade(s), a large proportion of the output in the developed world will be used to serve this gigantic debt and this will act as a serious drag on economic growth.
More importantly, by pursuing grossly irresponsible monetary policies, the world’s most important central bank is (once again) inflating dangerous asset bubbles. It is noteworthy that by increasing the supply of money like there is no tomorrow and by maintaining negative real interest rates, the Federal Reserve is breeding new asset bubbles.
In our view, the Federal Reserve’s reckless policies have spawned gigantic bubbles in the following asset-classes:
In addition to the above full-blown asset bubbles, we suspect the Federal Reserve’s disastrous policies are creating additional dislocations in the commodities complex and the stock markets of the developing world.
As far as commodities are concerned, they are benefiting as nervous investors look for a ‘safe haven’ to preserve their purchasing power. It is notable that since the Federal Reserve announced the second round of quantitative easing, the US Dollar Index has weakened considerably and the Reuters-CRB Index has inflated (Figure 3).
Figure 3: Commodities love Mr. Bernanke!
Now, if the Federal Reserve continues with its money creation antics, it is conceivable that we may get a run on the US Dollar. Under this scenario, some of the capital will probably flow to commodities, thereby causing price shocks in the global economy.
Last but not least, we are of the view that the Federal Reserve is spawning a historic bubble in the stock markets of the developing world. Over the following months, as growth and yield-hungry investors search for returns on their capital, it is likely that they will look for investment opportunities in the fast-growing developing markets.
After all, the developing world is growing at a much faster clip than the developed world and it is this growth differential which will prompt people in the West to invest in these exciting markets. Even though the stock markets of the developing nations are currently reasonably valued, we believe that in the future, they will trade at a premium to the stock markets of the developed world.
Given the fact that we believe that commodities and the stock markets of the developing world will be the prime beneficiaries of the ongoing monetary debauchery, we are maintaining our investment exposure to these assets.
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.
Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
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