A New Asset Bubble?
Over the last month we have been consulting with clients and continue to focus on selecting value and quality in equities. Investors should be aware of the U.S. recovery weakness, downside risks and the effect of current U.S monetary policy on equity valuations and the risks of a new asset bubble and future inflation through the dollar carry-trade and monetary inflation of the U.S. economy
Supporting this new fear of the risk of this new bubble rates turned negative on some bills maturing in January this week. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.
Bill Gross who manages the world’s biggest bond fund at Pacific Investment Management Co. (PIMCO), said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.
“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on PIMCO’s web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”
While we are cautious on the global recovery and outlook, our focus is to look beyond the U.S. “centric” focus where indeed valuations maybe getting overdone due to the U.S dollar carry trade inflating risky asset classes and creating bubble like conditions.
Rather we are encouraging clients to focus on our key theme for 2010 and beyond of the “Asian Century”. On that front, Postro Wealth will be giving clients a closer look into the Asian growth story as we visit Shanghai in December 2009. We will be taking an in-depth look at the Chinese capital markets, participate in tours of several manufacturing hubs in the Shanghai region and have the opportunity to speak with our industry colleagues on the ground in the world’s fast growing economic region and powerhouse.
