HISTORY - THE GREAT TEACHER!
by Puru Saxena
At present, there is a lot of noise about a "commodities bubble." The
majority of "experts" are convinced that commodity prices have risen too
much and they'll collapse. On the other hand, stocks and bonds are being
touted as bargains - or as the foolproof road to riches and financial
freedom! These days, the mainstream media is awash with analysts who are
claiming that commodities will suffer due to rising interest rates.
Frankly, I find their argument totally absurd.
History has shown that commodity prices are positively correlated to the
direction of interest rates. On the other hand, financial assets such as
stocks and bonds are negatively correlated to interest rates.
During the 1970's, interest rates soared and this period coincided with a
gigantic bull-market in commodities. Despite sky-high interest rates, all
the commodities went up several-fold! It is interesting to note that the
1970's saw a vicious bear market in stocks and bonds. Back then, the
United States underwent a huge recession and Britain had to be bailed out
by the IMF. Interest rates peaked in the early 1980's and this coincided
with the end of the commodities boom. In the following two decades, both
interest rates and commodities declined whilst stocks and bonds witnessed
a huge boom.
There is no doubt that the previous commodities boom took place amidst
rising interest rates and a severe recession. So, next time when the
"experts" claim that commodities are about to collapse because of rising
interest rates and a slowing economy, perhaps you can direct them to a
good history teacher!
I'll let you in on a secret, which is essential to your success as an
investor. You must understand that the central banks don't raise interest
rates to fight inflation. After all, the modern-day central banking system
is inflation! Central banks raise or lower interest rates in order to
manage the public's inflation fears or expectations. During such times
when the public wakes up to the inflation problem and starts losing faith
in the world's paper currencies (present scenario), central banks raise
interest rates to show that they're fighting inflation. Interest rates are
pulled up in an effort to restore confidence in the world's currencies as
a higher yield makes currencies more attractive. On the other hand, when
the public's inflation fears are under control and confidence in the
monetary system is high, central banks lower interest rates to create even
more inflation!
During cycles of monetary easing, the rate of inflation (money-supply and
credit growth) accelerates, thereby creating an economic boom. During
periods of monetary tightening (such as now), the rate of inflation
(money-supply and credit growth) slows down temporarily, causing financial
accidents in a highly leveraged global economy. Make no mistake though,
the response or cure offered by the central banks to every financial
accident is always more inflation and credit.
At present, every central bank has assumed the role of an
"inflation-fighter!" Interest rates are being increased in the majority of
countries under the pretence of controlling inflation. However, it is
worth noting that despite rising interest rates, our world is still awash
in liquidity. Recently, the non-gold foreign exchange reserves held by the
central banks rose to a record $4.4 trillion U.S., up nearly 10%
year-on-year! Emerging nations held a record $3.07 trillion U.S. and the
developed nations held a near-record $1.33 trillion U.S.
Opinion is divided as to whether interest rates will continue to rise. The
majority seems to think that the Federal Reserve won't raise interest
rates much further for the fear of seriously hurting the housing boom.
However, I feel that the U.S. interest rates will have to continue to rise
or else the U.S. dollar may stage a dramatic decline. Given a choice
between protecting either the housing boom or an outright collapse in the
U.S. dollar, I can assure you that the Federal Reserve will choose the
latter. The truth is that the Federal Reserve exports U.S. dollars to the
entire world and it'll do everything in its power to delay the destruction
of its merchandise. In summary, I concede that the Federal Reserve may
pause during the second half of this year to offer some respite before the
U.S. mid-term election in November. However, the major trend is now up and
interest rates may well be in double-digits within five years.
If my above assessment is correct, you can bet your bottom dollar that
stocks, bonds and property are going to come under serious pressure.
Already, the real-estate market in the United States is showing signs of a
slowdown as the establishment tries to engineer a soft landing. In my
opinion, we now amidst a global housing bubble, which will eventually
deflate due to rising borrowing costs. It is interesting to note that the
bond yields fell between 1981 and 2003. As the cost of borrowing declined,
housing as well as bond prices went through the roof! However, in June
2003, bond-yields bottomed out and have been rising ever since. Over the
past three years, the cost of borrowing has become more expensive and
we're beginning to see its impact on the slowing real-estate markets
worldwide. The U.S. 10-year Treasury yield has now broken out of its
20-year downtrend and this is an ominous development. This breakout points
to much higher interest rates in the future, so I'd have to advise you to
sell your leveraged properties and bonds without further delay. The great
bull market in bonds ended in June 2003 and this is not a good time to be
invested in fixed-income assets.
In the past, I've stated that in a highly inflationary environment,
stocks, commodities and real estate can all rise at the same time.
Basically, an over-supply of paper money causes its purchasing power to
diminish. I still maintain that over the coming decade, even if all assets
(with the exception of bonds) continue to rise, I expect commodities to
outperform all other asset classes on a relative basis.
Regards,
Puru Saxena
Note: Puru Saxena is the editor and publisher of Money Matters,
an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, Saxena is a regular guest on
CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3, and he
also writes for several newspapers and financial journals.
The above is an excerpt from Money Matters, a monthly economic
publication, which highlights extraordinary investment opportunities in
all major markets. In addition to the monthly reports, subscribers also
benefit from timely and concise "E-mail Updates," which are sent out when
an important development in the capital markets warrants immediate
attention. Click here to subscribe:
Money Matters
http://www.purusaxena.com/
At present, there is a lot of noise about a "commodities bubble." The
majority of "experts" are convinced that commodity prices have risen too
much and they'll collapse. On the other hand, stocks and bonds are being
touted as bargains - or as the foolproof road to riches and financial
freedom! These days, the mainstream media is awash with analysts who are
claiming that commodities will suffer due to rising interest rates.
Frankly, I find their argument totally absurd.
History has shown that commodity prices are positively correlated to the
direction of interest rates. On the other hand, financial assets such as
stocks and bonds are negatively correlated to interest rates.
During the 1970's, interest rates soared and this period coincided with a
gigantic bull-market in commodities. Despite sky-high interest rates, all
the commodities went up several-fold! It is interesting to note that the
1970's saw a vicious bear market in stocks and bonds. Back then, the
United States underwent a huge recession and Britain had to be bailed out
by the IMF. Interest rates peaked in the early 1980's and this coincided
with the end of the commodities boom. In the following two decades, both
interest rates and commodities declined whilst stocks and bonds witnessed
a huge boom.
There is no doubt that the previous commodities boom took place amidst
rising interest rates and a severe recession. So, next time when the
"experts" claim that commodities are about to collapse because of rising
interest rates and a slowing economy, perhaps you can direct them to a
good history teacher!
I'll let you in on a secret, which is essential to your success as an
investor. You must understand that the central banks don't raise interest
rates to fight inflation. After all, the modern-day central banking system
is inflation! Central banks raise or lower interest rates in order to
manage the public's inflation fears or expectations. During such times
when the public wakes up to the inflation problem and starts losing faith
in the world's paper currencies (present scenario), central banks raise
interest rates to show that they're fighting inflation. Interest rates are
pulled up in an effort to restore confidence in the world's currencies as
a higher yield makes currencies more attractive. On the other hand, when
the public's inflation fears are under control and confidence in the
monetary system is high, central banks lower interest rates to create even
more inflation!
During cycles of monetary easing, the rate of inflation (money-supply and
credit growth) accelerates, thereby creating an economic boom. During
periods of monetary tightening (such as now), the rate of inflation
(money-supply and credit growth) slows down temporarily, causing financial
accidents in a highly leveraged global economy. Make no mistake though,
the response or cure offered by the central banks to every financial
accident is always more inflation and credit.
At present, every central bank has assumed the role of an
"inflation-fighter!" Interest rates are being increased in the majority of
countries under the pretence of controlling inflation. However, it is
worth noting that despite rising interest rates, our world is still awash
in liquidity. Recently, the non-gold foreign exchange reserves held by the
central banks rose to a record $4.4 trillion U.S., up nearly 10%
year-on-year! Emerging nations held a record $3.07 trillion U.S. and the
developed nations held a near-record $1.33 trillion U.S.
Opinion is divided as to whether interest rates will continue to rise. The
majority seems to think that the Federal Reserve won't raise interest
rates much further for the fear of seriously hurting the housing boom.
However, I feel that the U.S. interest rates will have to continue to rise
or else the U.S. dollar may stage a dramatic decline. Given a choice
between protecting either the housing boom or an outright collapse in the
U.S. dollar, I can assure you that the Federal Reserve will choose the
latter. The truth is that the Federal Reserve exports U.S. dollars to the
entire world and it'll do everything in its power to delay the destruction
of its merchandise. In summary, I concede that the Federal Reserve may
pause during the second half of this year to offer some respite before the
U.S. mid-term election in November. However, the major trend is now up and
interest rates may well be in double-digits within five years.
If my above assessment is correct, you can bet your bottom dollar that
stocks, bonds and property are going to come under serious pressure.
Already, the real-estate market in the United States is showing signs of a
slowdown as the establishment tries to engineer a soft landing. In my
opinion, we now amidst a global housing bubble, which will eventually
deflate due to rising borrowing costs. It is interesting to note that the
bond yields fell between 1981 and 2003. As the cost of borrowing declined,
housing as well as bond prices went through the roof! However, in June
2003, bond-yields bottomed out and have been rising ever since. Over the
past three years, the cost of borrowing has become more expensive and
we're beginning to see its impact on the slowing real-estate markets
worldwide. The U.S. 10-year Treasury yield has now broken out of its
20-year downtrend and this is an ominous development. This breakout points
to much higher interest rates in the future, so I'd have to advise you to
sell your leveraged properties and bonds without further delay. The great
bull market in bonds ended in June 2003 and this is not a good time to be
invested in fixed-income assets.
In the past, I've stated that in a highly inflationary environment,
stocks, commodities and real estate can all rise at the same time.
Basically, an over-supply of paper money causes its purchasing power to
diminish. I still maintain that over the coming decade, even if all assets
(with the exception of bonds) continue to rise, I expect commodities to
outperform all other asset classes on a relative basis.
Regards,
Puru Saxena
Note: Puru Saxena is the editor and publisher of Money Matters,
an economic and financial publication available at www.purusaxena.com
An investment adviser based in Hong Kong, Saxena is a regular guest on
CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3, and he
also writes for several newspapers and financial journals.
The above is an excerpt from Money Matters, a monthly economic
publication, which highlights extraordinary investment opportunities in
all major markets. In addition to the monthly reports, subscribers also
benefit from timely and concise "E-mail Updates," which are sent out when
an important development in the capital markets warrants immediate
attention. Click here to subscribe:
Money Matters
http://www.purusaxena.com/
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