Casino Inflation in Junior Stocks

QEII makes a casino of investing. Place your bets...!

SO WHAT IF the Fed pushes short-term yields so low on US notes and bonds that it forces everyone else to takes heaps of risks and buy stocks and commodities? asks Dan Denning in his Daily Reckoning Australia.

That is the question that kept us tossing and turning Sunday night. By monetizing so much of the debt at the shorter end of the US yield curve (note and bonds that mature in 10 years or less) the Fed makes those instruments extremely unattractive to anyone who wants a return that beats inflation.

And in point of fact, yields on two-, five- and 10-year notes are all at or near record lows. Prices go up a bit, but not really enough to make buying US debt a winning trade. That means investors have to go out and buy junk bonds, or corporate bonds, or emerging market bonds. Or equities. Ahh, yes. Equities.

Perhaps that is why the stock market went up on the QE announcement last week. The size of the Fed's move wasn't a big surprise. But perhaps the dynamics of its movement – crowding everyone else out of the short-end of the bond market – is setting off the hunt for other assets...and stocks are an easy option. This is why stocks could make new nominal highs without any real improvement in the earnings prospects for major companies (ex financial).

Meanwhile, in the derivatives market, Gold Futures were knocking on the door of US$1400 per ounce, about to kick down the door. We're here in Sydney to talk about gold to the Gold Symposium on Tuesday. The easy thing to do now is make a price forecast. Goldman Sachs did that last week, setting a price target of $1,650 for gold in the medium term. But all the action in the precious metals is pretty bullish right now, including silver, platinum, and palladium. And we mentioned on Friday that some analysts are even saying the base metals will thrive in the QE II trade, with some copper forecasts hitting $12,000 per tonne.

Reuters reported on Friday that copper hit a 27-month high, just a couple of hundred Dollars off its all-time high on the London Metals Exchange. It was a kind of delayed reaction to Wednesday's Fed news. First, a possible strike at a major mine in Chile clouded the supply picture. But really, it's as if everyone started to think the same thing at exactly the same time: Inflation!

The fact is that each phase of global financial crisis has been met with a money flood from the authorities. That money usually (and first) finds its way into the share market, and it takes the small fry up fastest. To me, this is the definition of financial gambling. That is, the Fed is turning the entire global stock market into a casino. It's also probably accelerating the flow of capital out of Dollar denominated assets and into other markets with less destructive central bankers and politicians. That said, it could be bullish for tangible assets and thus, junior resources.

Says Barron's magazine:

"This year, for the first time ever, China has been investing more overseas in assets like iron, oil and copper than it puts into US government bonds. China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other US government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices."

So yes. That seems all very bullish and favorable for Aussie stocks. Almost too good to be true, though. The devaluation of the Dollar isn't likely to be so easy to profit from. And it's probably going to get a lot more political.

Buying Gold or physical Silver Bullion today...?