“Currently what we have is a lot of money is in cash. And cash is a bad thing and it's not natural that it came to be cash because the central banks printed a lot of money - so they put out a lot of cash. That's what Japan is doing, too, because it needs to do that. So it produces a lot of cash within the system. In addition, because you have the risks, people want to be safe. So they put their money in cash - and there's a lot of cash hanging around… It's a natural consequence, and what will happen is the next big moves in the markets, and the next big moves in the economy, will be based on how the cash moves. Because [cash] is a bad investment. It has a negative real return. It has a return that's substantially lower than the economy's growth rate. And at the same time, we're in a situation where risks are being reduced. So the fear, the desire, to hold that cash is reduced. You can go out on the risk spectrum, because they're reduced for the reasons we're talking about. At the same time, if you're an investor, you can start to move out of the cash, because you're missing out on returns… As that happens, I think 2013 is likely to be a transition year. Where that cash, large amounts of cash… that will start to change. It will also move. It will move to stuff. It will move to all sorts of stuff. It will move to goods, services and financial assets. So, that will include most goods, services and financial assets. People will spend more with the cash. They will -- and that will help the economy. It will move into equities. It will move into gold. It will move… out onto that curve. As that happens, what happens is, it makes the Federal Reserve's concerns begin to change. Because, by putting the cash in they've lessened the risks. As the risks have lessened and that movement starts to move then the tilt starts to change. That's probably something that won't happen immediately. This is like a classic transition year, I think. And then as you get later into the year, I think that we're going to see more of that.”
Eoin Treacy's view Quantitative easing has flooded the market with liquidity and contributed to higher prices for financial assets across a range of sectors. Bull markets thrive on liquidity. Since the impetus for such extreme central bank action was fear of a banking collapse and ensuring global depression, a great deal of the capital created was parked in fixed income. This has created the perverse situation where real yields are negative. For example US 10-year TIPS still yield -0.5673% while inflation is well in excess of that.
As the fear of economic cataclysm subsides, the perceived need to accept negative real returns on “risk free” instruments is being reassessed. The above mentioned TIPS yield has rallied to challenge the medium-term progression of lower rally highs and the region of the 200-day MA. A sustained move below -0.785% would be required to question potential for additional weakness.
At least some of the money that left fixed income in the last few months has made its way into equities. January has to date been one of the most impressive starts to a year on Wall Street in decades. The medium-term outlook for equities remains positive as indices in the USA, UK and Europe approach the upper side of their more than decade long ranges. However, most are somewhat overbought in the short term and susceptible to some consolidation of recent gains. Despite a delay on the debt ceiling deadline, the automatic spending cuts due to go into effect on March 1 st remain a cause of potential anxiety. Clear downward dynamics, particularly if evident on a commonality basis across global indices, would likely suggest at least a loss of momentum ahead of a corrective phase.
Over the medium to long-term the allure of equities is likely to increase not least because improving GDP grwoth prospects as productivity gains due to lower average energy prices in real terms and the advances being implemented in automation across the industrial and manufacturing sectors. An additional consideration is that as medical advances in genetics and biomechanics come to market the productive working life of many highly skilled people could be lengthened considerably which would cause a shift in the way we think about demographics and growth potential.
At present the flow of funds from fixed income to equities has only just begun and is likely to increase gradually since perceptions of value take time to take root within the investing crowd.