Where money in the markets may go next
June 22, 2014, 12:18 am
The US Federal Reserve, above, and other global central banks have injected record levels of liquidity into the markets, leading some to expect higher inflation.
The so-called "inflation trade"
Over the past 5 years, central banks worldwide have injected record levels of liquidity into the global markets. For example, according to Bloomberg, when the US Federal Reserve eventually ends its purchasing of bonds on the open market (known as quantitative easing), the Fed will have in total injected $1.29 trillion over the course of the program.
The European Central Bank, moreover, to force excess liquidity to be put to work in the real economy, has adopted negative interest rates, which means they basically charge companies to keep their money idle.
Inflation eats fixed income
Inflation increases eats at the value of money. Assets that can fluctuate with inflation, like stocks and commodities, are not susceptible. But bonds and other types of fixed income, on the other hand, do not fluctuate, and so inflation slices directly into their fixed percentage returns.
The daily chart for US treasury bills may suggest investors may want less exposure to fixed income:
The stock market may go parabolic
With the failure of bearish sentiment in the stock market to break support levels and send the market lower, it seems the bulls are in charge and the market may go higher into record territory. In fact, the charts suggest the stock market may be set to rise steeply. Consider this weekly chart of the S&P 500, which looks red hot:
Whither goest gold?
The loss of value of fiat currency is the battle cry of investors who believe gold is the only real currency that holds real value. Following the recent bear in gold market over the past year, it appears gold may have bottomed and is sending rumbles of a possible incipient bull market. See this weekly gold chart:
Where to learn more
To learn more about the financial and trading topics discussed in this post, check out these Thirsty Finance lessons:
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