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What do
U.S. stocks, Asian stocks, Brazilian stocks, gold and
other commodities and high-yield bonds all have in
common?
Some
would argue that they are all risky assets, driven
higher in an attempt by the Federal Reserve and central
banks worldwide to entice investors away from safe
havens such as U.S. Treasurys.
In the
vernacular of economists, the prices of the risky assets
are being driven ever higher by "liquidity,"
or the huge amounts of money poured into the system by
the central banks to pump life into a distressed
economy.
In other
words, central bankers haven't wanted investors to cower
in the safety of assets such as U.S. Treasurys because
they would fail to get the economy moving. Instead, the
bankers have provided a nudge. They are essentially
printing money, and through various policies making the
interest in Treasurys almost nonexistent so that
investors will venture further into riskier bonds and
stocks in search of better money-making possibilities.
"They've
made it painful for anyone who wants no risk," said
strategist
Ed Yardeni
of
Yardeni Research
.
Now, with
investors buying stocks and pushing prices higher, the
Dow Jones industrial average finished Tuesday at
9829.87, the highest close since
Oct. 6
. And gold, though known as a safe haven in its own
right, is attracting investors who are hoping to do
better than they can in Treasurys. Gold closed Tuesday
at
$1,014
, up more than 44 percent in less than a year.
Some
analysts are growing increasingly fearful about what
lies ahead. They know that prior liquidity-fests have
ended badly, with a technology bubble bursting in 2000
and the stock market plunging 49 percent. Then came the
housing bubble, fueled by liquidity flowing in to fight
the tech-bubble recession. The 2007 bubble caused home
prices to inflate, and a debt binge contaminated the
health of the global economy.
"Now,
they've created another risk bubble," said
Howard Simons
, a strategist for
Bianco Research
. "There is just too much paper out there."
That's
paper in the form of stock certificates in global
markets, shares of the gold exchange-traded funds and
high-yield bonds. The money is flowing into paper
assets, Simons said, because it's easy.
"It
takes an effort to build a plant or buy equipment,"
he said.
Because
so much money is available to invest, Simons notes,
"You can't knock stock prices down for more than
three hours in a day."
Meanwhile,
the U.S. dollar looks troubled as it drops. But
Michael Woolfolk
, senior currency strategist at
Bank of New York Mellon
, said he doesn't believe the dollar is declining
because investors think the U.S. is weak financially.
Rather, he said, investors are just making the natural
choice to put money into securities that offer a
potentially greater return.
That's
the same view offered by Global Insight economist
Nariman Behravesh
.
"In
a crisis, all pile into the dollar" for safety,
Behravesh said. "But it's not surprising that as
the economy strengthens, people move money into the
stock market."
In the
short run, at least, investors are enjoying soaring
markets. "I love bubbles," Yardeni said.
"They are good for my customers and my
business."
But in
the long run, Simons said, the danger is that investors
are all doing the same thing, putting money in the same
places.
The risk
is that if faith in a recovery starts to wane, investors
could all decide to flee from the same assets at the
same time, and everything from commodities to stocks and
high-yield bonds could drop in tandem.
The lack
of clarity in the outlook has investors questioning
what's driving gold prices, apart from liquidity.
David Darst
, chief investment strategist at Morgan Stanley Smith
Barney, said gold investors have had an eye on moves by
countries such as
China
and
Russia
to push world leaders to adopt a monetary system less
reliant on U.S. dollars and retain gold reserves.
He thinks
gold's recent move is in response to likely
conversations on that subject as the G-20 leaders meet
in
Pittsburgh
this week. In addition, he said, as investors take more
chances in the stock market, they like to hold gold
"as a calming device, a financial Tylenol."
He said
he might add to that calming tonic, perhaps if prices
fell
$50 to $100
. But now, he'd be comfortable holding perhaps 4 percent
of a portfolio in gold as an ongoing security measure.
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