By Chris Becker
Where do the markets stand now that Super Mario has unleashed the demons of inflation – or is that deflation – with the unlimited bond buying program?
Let’s look at some charts from overnight, and some interesting words from probably one of the best macro hedge funds on the planet – I’ll use candlesticks to show you the size of the moves.
First, the Stoxx50 aggregate index, up 3.4%:
The Italian FTSE MIB index, up 4.3%:
The French CAC40 – even a bad unemployment print didn’t slow this one down – up 3%:
And of course, the German DAX30 – up 2.9%:
What does this all mean? Are we going to see another LTRO type post-Christmas 2011 move where stocks rallied around 25%? Well, they’re almost there already – so the question is this all priced in?
And looking at the DAX30 going back four years, the obvious target in this rally is almost overhead – do we all really think that with the entire Euro economy slipping into recession, with increased fiscal Greek-style austerity for those nations who put their hands up for the ECB to buy their bonds will translate into increased corporate profits and P/E ratios? Stranger things have happened (like a 25% rally during the GFC) which is why putting long medium term trades on right now is a no brainer…
What maybe more certain is the direction of our shiny little friend – gold – which leads me to the post by Cullen Roche over at Pragmatic Capitalism this morning covering Ray Dalio of Bridgewater fame/notoriety, with my emphasis added:
Gold is primarily an alternative to fiat currency and a storehold of wealth. The main advantage that gold has over other currencies is that it can’t be printed. While we have just gone through a period in which the degree of monetary stimulation has ebbed, the ongoing deleveraging means that developed economic will remain highly reliably on continued stimulation for years.
By the end of the quarter, central banks were starting to shift back toward renewed stimulation. In addition, one of the primary disadvantages of gold relative to fiat currencies, that it doesn’t pay interest, is mitigated by low rates in the current environment. Real interest rates are likely to remain very low and below real growth rates as a means of combating deleveraging and improving debt sustainability (as described in our “beautiful deleveraging” work). As such, deleveragings strongly favor shifts from financial assets into gold and other tangible assets.
You’ve all seen charts of gold priced in AUD or USD – here ’tis in Euro – from a risk/return point of view and given the increasing proclivity for the printing press, what would Europeans be better off going into right now?
Chris Becker is an investment strategist at Macro Investor, Australia’s leading independent investment newsletter covering stocks, trades, property and fixed interest.
You can follow Chris on Twitter.
Disclaimer: The content on this blog should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The authors have no position in any company or advertiser reference unless explicitly specified. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult someone who claims to have a qualification before making any investment decisions.