subject: Where Should I Put My Money Now? [print this page] As governments tighten fiscal policy, central banks are almost certain to indulge in another round of monetary easing. With interest rates at zero, this means yet more quantitative easing.
The question is therefore how do you invest?
The immediate bull case has to be for government bonds. Quantitative easing is designed to push down yields along the curve and if that takes central bank buying of long dated government debt, that's exactly what'll happen.
Sovereign debt will also be helped by the accompanying deflation story. Government austerity raises the risk of declining aggregate demand, which, in turn, is highly deflationary.
Ultimately, all monetization of government debt in all but name will be inflationary. But over the near to medium term, deflation remains the key story.
The equities story is more complicated. Analysts are projecting strong earnings over the coming quarters, though these might be trimmed as government spending goes into reverse. After all, a substantial part of the big jump in corporate profitability since the darkest days of the credit crunch can be attributed directly to stimulus programs.
Economists are favouring equity, whilst others favour shares with strong dividendswith bond yields being pushed down, anything that produces income will be attractive.
In some European countries, lack of built-up savings means that "baby boomers" due to start retiring next year won't. Instead, they'll stay in the labour force, pushing up unemployment rates, which will generate downward pressure on wages and should sustain margins.
Some analysts are a little more sceptical about corporates being able to maintain earnings. But within the equity story, it's hard to disagree about the case for value versus growth.
Industrial commodities are likely to fare badly. Though they've done well during the past couple of years, much of this has been down to Chinese stockpiling. With China's warehouses and storage tanks stuffed full of aluminium, iron ore, copper, oil, zinc and just about any other mineral you can name, demand has already started to wane. If, as seems likely, the Chinese economy cracks under the pressure of its huge domestic and international imbalances, these commodities will fall, and fall hard.
Food and other soft commodities could well remain bid, particularly as third world consumption of meat grows. But that's another story.
Currencies are likely to see significant volatility as investors remain alert to signs of QE-driven inflation popping up here or there. Sterling is likely to be more vulnerable than most.
But the Euro story will predominate. There is some question that the single currency will fall apart. If a break up does occur, it's just a question of which countries leave first. Will it be Greece, or Germany?
Until it happens, the single currency will whip around like a snake with its head in a vice. But it should prove good for German assets, particularly German real estate, some of the cheapest around. The Euro rate is held low comparative to the strength of the German economy, masked by the weakness in other areas, and any re-evaluation of the currency in Germany would lead to an appreciation of the rate.
What's more, with east European workers finally allowed full rights to live in Germany and France, demand for German property is likely to go up, particularly where it most closely borders Poland and the Czech Republic, not least, Berlin.
