Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
IBM - Investing in AI Machine Intelligence Stocks - 25th May 19
Seasonal Dysfunction: Why Generations of Gold and Silver Investors Are Having Such Difficulty - 25th May 19
Employment - The Good and the Bad of Job Automation - 25th May 19
Gold Mining Mid-Tier Stocks Fundamentals - 25th May 19
Buy This Pick-and-Shovel 5G Stock Before It Takes Off - 25th May 19
China Hang Seng Stocks Index Collapses and Commodities - 24th May 19
Costco Corp. (COST): Finding Opportunity in Five Minutes or Less - 24th May 19
How Free Bets Have Impacted the Online Casino Industry - 24th May 19
This Ultimate Formula Will Help You Avoid Dividend Cutting Stocks - 24th May 19
Benefits of a Lottery Online Account - 24th May 19
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

Money Flows, Where Will It Go?

Commodities / Inflation Feb 17, 2011 - 03:19 AM GMT

By: Dr_Jeff_Lewis

Commodities The price of money is rising, especially as it relates to time.  With inflation fears growing and governments local and federal looking toward record deficit and financing requirements, strain is beginning to take its toll on the bond markets.  Treasuries are rising, and muni bonds, which are generally very slow in their price action, have reached peak volatility.


We are soon to see a global rebalancing of risk and inflation when the emerging markets, tired of being the brunt of every other central banks’ policy, begin to raise their own domestic rates.  While it is suspected that China and India each offer negative real rates, any additional hikes will further compromise that easy carry trade, and the result will be financial flows out of the emerging markets and back to their home countries.

The media has misconstrued the problem, noting that inflation is highest in the emerging markets and is affecting investors in developed economies.  That point, though, is moot.  The emerging markets are more transparent in their inflation, bringing it to the top of the inverted money pyramid, while the developed world continues to hide money at the bank reserve level.  Where you can spend the inflated cash in China and India, it rests in bank coffers in the US, making banks plenty of risk-free money with net-zero exposure to inflation. 

A Tsunami of Cash

Because the purchasing power carry trade from the United States to China and India is highly-levered and largely dependent on a very small spread between inflation and interest rates, each uptick in rates makes the trade significantly less profitable.

If, for example, the cost to borrow was 4%, and inflation was 5%, then the net gain is 1% per year.  However, if rates rise to 4.25%, profits drop 25%, creating an overnight change in the risk to reward ratio, and pushing many investors out of the foreign markets. 

Such is the problem with systemic, centralized monetary policy.  It is unlikely that in a free market where interest rates are set not by central banks, but by the supply of capital, rates would ever fluctuate that much in one day.  Nor would there be as many guessing games as to the future direction of interest rates.  Where one institution decides the value of money, 7 billion people would take their place. 

Any further rate increases in China and India mean less foreign investment.  Much of this foreign investment comes from the United States which has one of the lowest rates of the developed world. 

Time Arbitrage

It is believed that negative real interest rates in India and China are soon to disappear, perhaps by the end of 2011.  Analysts suspect that with the present unemployment outlook as bleak as it is today, a slow-growth economy might allow for Fed rate hikes by 2012, but not sooner. The Bank of England and the European Central Bank are expected to hike rates later in the year.  Canada, Australia, and New Zealand, each developed world countries with strong commodity economies are already raising rates.

By the end of 2011, negative real rates in foreign economies will have closed, and dollars will have to come back to the United States (in order to protect unnecessary currency exposure).  Where will they go then?  An easy question!  That money will go to the favorite place for inflation protection: commodities and monetary metals.

Beat the next rush, but hurry because time is of the essence.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules