Back from Europe
I’m back from vacation in Europe. My take on things there and how it will affect markets is that Gold is headed into low 1200 area. While the politicians talk about saving the euro, the European people are preparing for its collapse. To me this means in the short term, ie 6-12 months, the dollar will rally strongly and gold will collapse as European central bankers will be sellers in an attempt to maintain liquidity.
Now that I am back home here is my take on some of yesterdays comments by the smart guys and my view on their comments. My opinion has not changed, eventually the FED will lose control and the risk of owning U.S. T-Bonds will overwhelm the FED desire to be accommodative. This will then ignite a deflation scenario and to me is the most obvious outcome of all of the FED activity since March 2009. In essence, the interest rate market will get detached from the FED.
Now for what others are saying.
2) Bill Gross: The cult of equity is dying, but the “cult of inflation” has only just begun, writes Bill Gross today, expecting not just a few years, but decades of an “inflationary solution” to the issues developed economies face. Obviously not great for the holder of long-term bonds, inflation won’t be great for stocks either. Jeremy Siegel’s 6.6% long-term real return from equities in the 20th century may have been an “historical freak. To me this comment is about half right, the first part I would disagree with, second part concerning Jeremy Siegel is partly right but the reasoning is wrong, as I believe as John Mauldin has written so well, returns are cyclical.
3) And Michael Harkins offers a quick lesson in duration, saying a buyer of the 10-year Treasury at 1.5% will get crushed with just a move back in yields to 2.5%. The bond market is a fabulous bubble, he says, growing in size as those who went short at the then impossibly low rate of 2.5% a year ago lack the conviction to do the same at 1.5%. Mostly right in my opinion.