Enis’s Macro Wrap – From Protecting Purchasing Power to Generating Yield

by Enis September 24, 2012 7:46 am • Commentary

In the midst of unprecedented money printing, oil has fallen almost 10% in the past 2 weeks.  It’s broken support levels from August, before the central bank party was officially announced.  It highlights the interesting question for any investor in an era of 0% interest rates worldwide.  If you don’t want to hold cash, what should you hold?

Stocks, bonds, and commodities have all been winners over the last 3 years, rallying concurrently in rare fashion (relative to the past 100 years of history).  Real estate outside of select housing bust countries (like the U.S. or Spain) has actually been quite strong as well.  Global investors have been rewarded for holding anything but cash.

With QE and OMT unlimited upon us, the hold-anything-but-cash era seems likely to continue.  But it is quite unlikely that all asset prices will be higher still 3 years from now.  Rather, I imagine there will be more divergent performances among the major asset classes.

Oil’s slide indicates one weakness of investing in the commodity complex.  Those commodities overly dependent on industrial demand, and for which storage is more expensive, have been laggards this year.  Iron Ore is actually near 3 year lows.  Copper has rallied recently, but is well off its highs in 2011.  Oil is in a similar position.  You are basically flat over the past 3 years, if hoarding crude was your protection strategy.  Meanwhile, gold is near 3 year highs.

Moreover, investors have shifted their interest this year from protecting purchasing power (through hoarding commodities) to generating yield (through stock dividends and bond coupon payments).  Stocks and bonds are both near 5 year highs in the U.S. (and many dividend payers are at all-time highs).  Global bond yields are near all-time lows worldwide.  Real Estate’s new appeal is through generating rental yield rather than capital appreciation.  Options implied volatility can also be interpreted as a measure of yield, and it is near 5 year lows as well, another indication of a hunger for yield.

Investors have finally given in to the central bank game.  But as oil’s slide shows, not all assets are created equal.

Markets overnight:

  • Asian markets were mostly in the red, but less than 1% for the most part.  Europe opened in the red and stayed there ever since.  SPX futures indicate an open down 0.5%
  • German business sentiment dropped for the 5th straight month, to a 2 year low.  The drop was particularly notable since most responses came after Draghi and the ECB announced their bond buying plan in early September
  • Oil continued its slide, down more than 1%, as the U.S. dollar caught a bid vs. most major crosses.  The Aussie dollar continues to be the weakest major cross since QE3 was announced, highlighting Chinese growth fears
  • Spain continues to delay its request for additional aid.  On Friday it will unveil how much aid its banks will need from the EU (initial allotment was 100 billion euros)