Duringthe1970’s,ratessoaredandthisperiodcoincidedwithagiganticbull-marketincommodities。

Despitesky-highrates,allthecommoditieswentupseveral-fold!

Itisinterestingtonotethatthe1970’ssawaviciousbearmarketinstocksandbonds。

Backthen,theUnitedStatesunderwentahugerecessionandBritainhadtobebailedoutbytheIMF。

ratespeakedintheearly1980’sandthiscoincidedwiththeendofthecommoditiesboom。

Inthefollowingtwodecades,bothratesandcommoditiesdeclinedwhilststocksandbondswitnessedahugeboom。

Thereisnodoubtthatthepreviouscommoditiesboomtookplaceamidstrisingratesandasevererecession。

So,nexttimewhenthe“experts”claimthatcommoditiesareabouttocollapsebecauseofrisingratesandaslowingeconomy,perhapsyoucandirectthemtoagoodhistoryteacher!

Investincommodities:theinflationmyth

I’llletyouinonasecret,whichisessentialtoyoursuccessasaninvestor。

Youmustunderstandthatthecentralbanksdon’traiseinterestratestofightinflation。

Afterall,themodern-daycentralbankingsystemisinflation!

Centralbanksraiseorlowerratesinordertomanagethepublic’sinflationfearsorexpectations。

Duringsuchtimeswhenthepublicwakesuptotheinflationproblemandstartslosingfaithintheworld’spapercurrencies(presentscenario),centralbanksraiseratestoshowthatthey’refightinginflation。

Interestratesarepulledupinanefforttorestoreconfidenceintheworld’scurrenciesasahigheryieldmakescurrenciesmoreattractive。

Ontheotherhand,whenthepublic’sinflationfearsareundercontrolandconfidenceinthemonetarysystemishigh,centralbankslowerratestocreateevenmoreinflation!

Duringcyclesofmonetaryeasing,therateofinflation(money-supplyandcreditgrowth)accelerates,therebycreatinganeconomicboom。

Duringperiodsofmonetarytightening(suchasnow),therateofinflation(money-supplyandcreditgrowth)slowsdowntemporarily,causingfinancialaccidentsinahighlyleveragedglobaleconomy。

Makenomistakethough,theresponseorcureofferedbythecentralbankstoeveryfinancialaccidentisalwaysmoreinflationandcredit。

Atpresent,everycentralbankhasassumedtheroleofan“inflation-fighter!

”Ratesarebeingincreasedinthemajorityofcountriesunderthepretenceofcontrollinginflation。

However,itisworthnotingthatdespiterisingrates,ourworldisstillawashinliquidity。

Recently,thenon-goldforeignexchangereservesheldbythecentralbanksrosetoarecord$4。

4trillionUS,upnearly10%year-on-year!

Emergingnationsheldarecord$3。

07trillion。

TheUSandthedevelopednationsheldanear-record$1。

33trillionUS

OpinionisdividedastowhetherUSinterestrateswillcontinuetorise。

ThemajorityseemstothinkthattheFederalReservewon’traiseratesmuchfurtherforthefearofseriouslyhurtingthehousingboom。

However,IfeelthattheUSrateswillhavetocontinuetoriseorelsetheUSdollarmaystageadramaticdecline。

GivenachoicebetweenprotectingeitherthehousingboomoranoutrightcollapseintheUSdollar,IcanassureyouthattheFederalReservewillchoosethelatter。

ThetruthisthattheFederalReserveexportsUSdollarstotheentireworldandit’lldoeverythinginitspowertodelaythedestructionofitsmerchandise。

Insummary,IconcedethattheFederalReservemaypauseduringthesecondhalfofthisyeartooffersomerespitebeforetheUSmid-termelectioninNovember。

However,themajortrendisnowupandratesmaywellbeindouble-digitswithinfiveyears。

Investincommodities:settooutperformotherassetclasses

Ifmyaboveassessmentiscorrect,youcanbetyourbottomdollarthatUSstocks,bondsandpropertyaregoingtocomeunderseriouspressure。

Already,thereal-estatemarketintheUnitedStatesisshowingsignsofaslowdownastheestablishmenttriestoengineerasoftlanding。

Inmyopinion,wenowamidstaglobalhousingbubble,whichwilleventuallydeflateduetorisingborrowingcosts。

Itisinterestingtonotethatthebondyieldsfellbetween1981and2003。

Asthecostofborrowingdeclined,housingaswellasbondpriceswentthroughtheroof!

However,inJune2003,bond-yieldsbottomedoutandhavebeenrisingeversince。

Overthepastthreeyears,thecostofborrowinghasbecomemoreexpensiveandwe’rebeginningtoseeitsimpactontheslowingreal-estatemarketsworldwide。

TheUS10-yearTreasuryyieldhasnowbrokenoutofits20-yeardowntrendandthisisanominousdevelopment。

Thisbreakoutpointstomuchhigherinterestratesinthefuture,soI’dhavetoadviseyoutosellyourleveragedpropertiesandbondswithoutfurtherdelay。

ThegreatbullmarketinbondsendedinJune2003andthisisnotagoodtimetobeinvestedinfixed-incomeassets。

Inthepast,I’vestatedthatinahighlyinflationaryenvironment,stocks,commoditiesandrealestatecanallriseatthesametime。

Basically,anover-supplyofpapermoneycausesitspurchasingpowertodiminish。

Istillmaintainthatoverthecomingdecade,evenifallassets(withtheexceptionofbonds)continuetorise,Iexpectcommoditiestooutperformallotherassetclassesonarelativebasis。

ByPuruSaxenaforTheDailyReckoning。

YoucanreadmorefromPuruandmanyothersatwww。

dailyreckoning。

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