Investment Consequences of Economic Recovery

Wednesday, 30 Jan 2013 07:56 AM

By Gary Jakacky

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As the economic recovery approaches its fourth anniversary and gross domestic product growth gains steam, investors should pay close attention to the impact this growth will have on the price of various categories of assets.

Sure, we have seen stock prices soar to new highs. Long may this continue! So what can we expect for bonds and commodities, two categories that have grown popular with investors in recent decades?

Lower Bond Prices/Higher Interest Rates: The Federal Reserve congratulates itself on its zero interest-rate policy. Ask any retiree or skinflint who has managed to put money aside for the future if they miss the billions (some say trillions) of dollars in interest payments they hoped would help make ends meet.

Relief is on the way. The central bank’s machinations notwithstanding, long-term interest rates have been rising, and long-term bond prices have been falling steadily since last summer. Even with this correction, however, long-term bond prices remain higher than they were in the worst of the crash back in December 2008.

I expect long-term government bond prices to fall more than 25 percent in the next year or so, as our recovery gains traction. Japan Inc. was a big buyer of U.S. real estate before the bust in the 1980s.

Expect China Inc., with their huge holdings in Treasury securities, to be left holding the bag for 30 years while they wait to get their (deflated) dollars returned. Another Asian tiger reduced to kitty litter.

Precious Metals: One of these days, buyers of gold and silver are going to get tired of waiting for Godot. Despite years of predictions of German-style hyperinflation, it has yet to rear its ugly head. In 2013, just when some price increases start to bite as the recovery picks up steam, the rise in interest rates will make the carrying costs of these metals far more painful.

How ironic it would be to see gold tumble as (mild) inflation finally arrives. But in times of economic prosperity, wealth locked in vaults (earning nothing: a true zero interest-rate policy!) is dead weight investors will not afford for long.

I shudder to think how far gold prices could fall: they began rising over a decade ago, egged on by doomsayers spooked by everything from 9/11, the demise of the dollar as world currency to the dawn of a new Europe. (How’s that going lately?)

The industrial metals, such as copper and steel, and commodities such as grains and meats are much harder to judge. Fortunately most investors have steered clear of these often-arcane markets, even with the temptation to “play them” via the many newfangled exchange-traded fund in these sectors.

Prices will be torn between stronger demand from growing consumer spending, balanced against higher interest rates and increasing supply, as we recover from droughts and other special factors.

Much the same for oil and natural gas: geopolitical concerns, frackophobia and the politics of the Keystone Pipeline make forecasting a crapshoot.

There is an old saying in the Chicago commodity pits. “If you wake up one morning and find you have the strange desire to trade commodity futures, roll over and go back to sleep as fast as you can.”

Leave these markets to the experts. If you want to protect yourself against increases in the price of basic consumer goods, you would be better off owning shares in high-quality, dividend aristocrats in these sectors. I’ll highlight some of these in future articles.

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