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QE: Every asset class is on the rampage

The effects of an increase in money supply.

In this issue of Market View, Cadiz Asset Management portfolio manager, Matt Brenzel discusses the impact of the proposed Quantitative Easing II (QE II) that is intended to increase the supply of money in the US.  He also explores currency war talk and looks at credit default swaps.

Quantitative Easing II, the proposal that follows on QE I which ended in March, would see the US Federal Reserve apply the proceeds from its maturing loan book to provide additional support to the beleaguered American consumer by buying bonds as a way of keeping rates low and so encourage mortgage loan rates to be reset at even more attractive levels. Bond rates have already collapsed in anticipation, while the US dollar has plumbed new lows against nearly all currencies.  In effect, the US is exporting deflation to the rest of the world, raising the ire of all exporting nations, leading to what Guido Mantega, Brazil’s finance minister has termed a “currency war” in which leading world economies are seeking to devalue their national currencies in a bid to increase their competitiveness.

Matt thinks the best strategy under the circumstances would be to encourage Chinese consumers to follow the lead of their counterparts by saving less and spend more.

Meanwhile, back in the US the winning equity market strategy has been to invest in high dividend yielding shares with investors more willing to pay for yield in an uncertain environment.  A beneficiary of this approach has been the corporate bond market.  Since 2009, inflows into Investment Grade (IG) bonds have totalled some $81billion and even High Yield (HY) bonds have attracted $25billion but  IG and HY bond yields have narrowed substantially; the former from a high of 22% to some 9% and the latter from 9% to 4%. 

Read the full report here

*Matt Brenzel is a Portfolio Manager at Cadiz Asset Management

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