The Gold Standard | Priceless

In the April 2012 investment newsletter that I wrote for one of my clients, I wrote the following on the bond market:

The reaction of government bonds will be interesting to watch. Will they respond to ample liquidity and promise of record-low short rates by rallying or will they begin to price in an appropriate risk premium for inflation and for fiscal debt and deficit burdens? (This was in the context of my earlier remarks in the letter that QE3 in the US was on the cards in the second half)

In a world where risk mispricing is more the norm than the exception and where bond markets are dominated by global central banks and sovereign wealth funds, it is hard to see bonds signalling risks appropriately as they once did. Therefore, on balance, government bond yields would remain depressed. Premature obituaries will continue to be written for the bond bull markets. Central banks must be chuckling quietly. The day bonds begin to sell off and yields begin to rise will be the beginning of the return to normalcy in the world of finance. It is hard to predict its arrival.

I was pleased to find Tim Price echoing my thoughts in this newsletter. It is a MUST READ for its sheer wit. J.K. Galbraith’s views on the usefulness of  economics and Tim Price’s comments on Paul Krugman are priceless.

Here are his comments on what goes for ‘MARKETS’ today:

Unfortunately for those of us with a purist‟s approach to the business of investing, “the market” is rapidly becoming something of an endangered species. Your mission, should you choose to accept it, is to try and identify any asset of significance that isn’t experiencing huge and artificial distortion to its price by forces that we might term “the monetary authorities” and their huge and daunting printing presses. Inasmuch as participating in “the market” is a game, it is a game of water polo with a blue whale as referee.

But there‟s the “nice-to-have” market, and then there’s the “market-as-currently-exists”, with all its attendant monetary debauchery and artificial, bad bank-perpetuating stimulus. We may not want to be starting the investment journey from here, but we do not have the choice. Amid all the stimulus and the QE and the LTRO, the bubbles denoting investment insanity are more than usually visible. They are, more to the point, wearing high visibility jackets, sounding klaxons, and wearing garishly coloured T-shirts and party hats announcing  ”We are a giant bubble !”

They include, but are by no means limited, to:

10 year UK Gilts yielding 2%

10 year German Bunds yielding 1.75%

10 year US Treasuries yielding 2%.

At the same time,

UK CPI stands at 3.4%. Conventional Gilt buyers are losing money in real terms.

Euro zone CPI stands at 2.3%. Bund buyers are losing money in real terms.

US CPI stands at 2.7%. Treasury bond buyers are losing money in real terms.

After reading it, those who think of me as an ‘Economist’ can conclude that I have the ability to laugh at myself. Alternatively, they can accept my explanation that I was never a formal student of economics. I did my Bachelor’s Degree in Commerce in Madurai, my MBA from IIM-A (some would legitimately like to equate both MBA and Economics as voodoo/pseudo sciences that try to sell snake-oil to the unsuspecting public and they would be right, in my view) and my Ph.D on exchange rates. My professor taught Finance at the School of Management in the University of Massachusetts.

But, let me end this trivia as I do not want to stand in your way of reading this great piece of wit, sarcasm and wisdom.


DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.