Monday, January 5, 2015

Former White House Official Warns Of Terrifying Cyprus-Style Global Endgame

The conflict over equities vs. fixed-income is becoming increasingly precarious.  Stocks offer a decent hedge against currency debasement (there are several bullish factors already mentioned ad nauseum in previous blog entries).  For instance, in the case of extreme hyperinflation, the dollar may collapse in value, even if equities soar nominally (but perversely decline in inflation-adjusted terms).  Traditionally, equities also offer higher returns, even if they come with higher risk than bonds.  So the financial authorities are encouraging investors to chase higher returns by taking on more risk, which is so wrong on many layers it's too daunting to even categorize here.

Stock indices continually reach all-time highs, even if underlying economies are either collapsing or fail to reach escape velocity.  Marketing capitalization has decoupled from economic fundamentals, and surely that gap will close.

On the other hand, bonds offer little upside as zero-interest-rate policies remain firmly in place.  ZIRP is necessary, if destructive longer-term.  They are necessary to keep the over-indebted western economies from imploding, but destructive because they deepen the debt burdens with more debt.  Upon further examination, the risk/return profile of sovereign bonds becomes even more pernicious.  Real (inflation-adjusted) returns on bonds are even less attractive in the context of insolvent governments borrowing funds from investors and offering negative yields.  In other words, investors are risking their funds and being punished with negative yields by taking on that risk.  The numerous bond risks (e.g. inflation, currency, higher interest rates, default, liquidity, etc.) loom ever larger with more money printing.  Yes, QE has ended, but the printing press continues unabated with foreign currency swaps, and ever-expanding US Treasury borrowing.  And should borrowing needs surge, QE will resume.

Lunacy has swept across capital markets, specifically fixed-income.  The Japanese government bond market is a train wreck waiting to happen.  But what are the alternatives, especially with bail-in measures put in place, increasing the likelihood of mandated confiscation of savings accounts--both bank deposits and investment money market funds?

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