Ailing Copper Price,

 or Disconnect Between Stock Markets and Economic Reality

The fund management section of the Financial Times had an interesting article on May 13, 2013 discussing the disconnect between the stock markets and economic reality.

It took the view that the markets are in thrall to the unconventional measures pursued by the developed world's central banks, which have encouraged investors to take on more risk and hunt for yield.

As an example, Rwanda attracted orders worth nearly half of its $6.8 Bn gross domestic product for its recent $400 Mn bond issue. The yield on this 10-year bond was 6.875%. [Side note: the 10 year US Treasury bond is yielding 1.9% as of May 15, 2013.]

The reliably bearish Albert Edwards, strategist at Societe Generale, argues that the ailing copper price has been giving early warning that central bank liquidity will not save risk assets. He suggests bailing out of equities now and being overweight in government bonds on a short-term cyclical view that recessionary forces remain powerful. His longer-term argument is that we are only one short recession away from outright Japanese-style deflation, which will prompt further central bank hyperactivity and ultimately, rapid inflation.

Warren Buffet declared at the recent Berkshire Hathaway annual meeting that all this quantitative easing has been very clever policy, "but the unwind of it has got to be more difficult than buying."

For fund managers, the question is where to be. In equities the least bad place remains the US. Meanwhile, valuations in real estate look less stretched than in equities and most bonds, according to the article.

See full text of article here:  http://on.ft.com/19dSXph (I learnt after the fact that FT may restrict access to non-subscribers ...)

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