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3/12/2012

Negative real interest rate Fed policy and the creation of “mal-investing”…an interesting topic.

You all know what Fed policy has been for the past fours years or so and what the plan is for the next year or so, simply zero interest rate policy, which when adjusted for prevailing inflation, yields negative interest rates.  This initiative has spurred increased risk taking by investors of all walks that are scrambling to achieve positive yield for funds managed.  This increased allocation of funds towards risky assets, that would not have otherwise taken place if not for zero interest rates, can almost be categorized as the creation of mal-investment practices or investment activities that bend or break traditionally accepted risk management policies.

US Stocks have been on a tear over the past three months, with the major indexes posting in the realm of 15% returns will little to no noteworthy corrections.  One disturbing note is that these price moves have occurred with lighter volumes (given the continued reluctance of retail investors to trust the markets).  Another disturbing note involves the gains of the NASDAQ, which has greatly outperformed other major indexes, where a major catalyst behind the move is a prominent chart pattern (head and shoulders bull formation).  Lower volumes, speculation off of chart patterns, lack of normal corrective cycles in price action…this all smells like bubble related, mal-investment forces at work.

One positive from all of this is the creation of a “feel good affect” of some investors who have seen their retirement funds re-flate from gains in Stocks.  This also trickles into other parts of the economy in the form of consumer confidence and even real estate activity.  But the point to remember is that these short term positive affects are largely the result of bubbled up market assets and not from sound, long term economic fundamentals.  Sound familiar??   It should…it’s the same scenario that has caused recurring economic crisis’ over the past decade.

For another perspective on mal-investment, watch Jim Grant’s interview with CNBC (thanks to Zero Hedge).

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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