A Conversation on Innovation

(Not intended as investment advice)

1) If there is fear of inflation, why are long-term treasury rates lower than say even the 90′s?

2) If the equity and commodity market was inflated because of Quantative Easing, now that fed has announced the decision, more or less, to stop it what is supporting the bubble.

3) With the big run-up in oil and commodity and inflation creeping up world-wide leading to monetary tigthening, why is the CPI still so low.

On 2, here is a theses which needs to be looked into in historical context. Low interest rates leads to asset inflation. But the money was mostly coming in from professional investors. Of course, the retail investor was shell-shocked and stood on the sidelines. Now because of all this buzz, money is beginning to flow in mutual funds from retail investors even as the professional support starts backing off. If you are fed you are hoping that equities will get support long enough to spur investment and jump start the economy. But what about commodities? Of course, precious metal are following their own logic which has to be some combination of money chasing returns away from fixed income and inflation fears.

Thanks to Abhijit Sahay for posting it on faceboook

http://www.youtube.com/watch?v=GTQnarzmTOc&feature=share

(For three people who are reading this, this is not intended to be investment advice. )

Because of weak growth, Federal Reserve wants money to go towards riskier investments to jump-start the economy. Since it doesn’t directly buy equities or given loans to people to start their small businesses, it tries to significantly reduce the incentive to put money in fixed income. It directly controls short-term rates but when that was not enough, it started buying long-term bonds to reduce long-term rates.

Wall-Street dutifully pushes money towards stuff like equities and commodities and is really afraid of bonds because their primary purpose is to show improvement on total return. And that is going fine. You could make the case that valley beginning to see signs of growth is a consequence of the loose monetary policy.

 Size of government debt has created another under-current of fear of massive inflation, not just what you would expect in normal recovery but people are worried that governments would lose ability to do something about it because of the size of debt. Or because since the employment is so weak, political pressure would keep fed from tigthening at the right time.

I’m not sure about this point but maybe what is different about this cycle is the inflation-hawks have an ability to do something easily, i.e. put money in precious metals through ETF which was not available in earlier.

I am going to start diving into inflation a bit more to learn how the big (hyper) inflationary cycles had happened. I believe Argentina had pegged its currency to the dollar when it went through its big crisis. Need to learn how the oil-shock caused that big inflation here in US.

What do we do as investors who should be more on the conservative side because principal protection is way more important than generating return? On a side note you have to really feel bad for people who are faced with this choice for their retirement savings.