Registered: Dec 2007
03-05-11 04:50 PM
Quote from ralph00:
The existence of another central bank induced asset bubble cannot be denied. The only question is how much longer it goes on and how it ends. The fed can stay easy a lot longer than most can remain solvent. Be careful out there.
Disclosure: as always, long american equities, long american real estate, long american prosperity, massively long the greenback (by definition), a few insurance policies in the form of OOM puts (bear spreads I think they're called) on nflx, fcx, ewh ewt, xly.
I agree, the problem from a trading perspective IMO is the extreme instability of all this. It's not like housing which ground on slowly for years, and propelled equities higher for two full years after the peak showed up in price data. Now we have pure speculative booms in some asset classes (equities), combined with something approaching panic buying in certain commodities, all against the background of China's investment bubble.
The important thing to realize about the Fed's actions is that simply pumping banks' excess reserves is very unlikely to cause inflation, because the printed cash is not entering the real economy, and in practice the presence or absence of excess reserves does not affect whether banks can make loans (this is affected purely by interest rates, set by the Fed). As long as QE just produces a massive pile of excess reserves, there is not going to be inflation and the "inflation trade" is just a run-of-the-mill speculative bubble, rather than a symptom of enduring dollar debasement. If credit starts expanding again then we can start worrying about currency debasement.
May 6th showed how vulnerable these markets are. Personally I will be looking to take "macro" trades when PE ratios are at 7-10 in the U.S., and once the EM bubble has popped to separate the true winners from the overhyped losers. Real estate is unlikely to be a good investment IMO, unless we see net rental yields getting to 6-7%+, in which case you can buy for the cashflow.