Like every participant in the financial markets, I’ve seen numerous opinions on quantitative easing, both pro and con. But I’ve never seen this take on it, which comes from a piece in the Economist:
My more fundamental point is that the US is a debtor nation. It has committed to borrow money from other countries in the form of dollars. Printing money to repay those debts (which is what the Fed is doing by creating money to buy government bonds) is, in essence, a partial default. It is as if you tried to pay your supermarket bill with Monopoly money, on the grounds that it was the only paper money you could find in the house.
[Bold is my emphasis.] I’m not an economist so I have no real way to evaluate the merits of the partial default case, but it is interesting that investors are suddenly attracted to tangible assets like commodities and precious metals, and not so much to U.S. dollars and Treasury bonds. I’ve included a couple of charts that contrast the recent price movement of precious metals (DBP) versus long Treasuries (TLT) and of a continuous commodity index (GCC) with the U.S. dollar (UUP). If you swap the comparisons, it looks pretty much the same.
Click to enlarge. Source: Yahoo! Finance
It seems to me that tactical asset allocation may be a useful way to respond to performance differentials that are this large. Relative strength would dictate that you want to own more of what is strong and avoid what is weak. Overdiversification might really water down the gains from areas that are strong, or leave an investor with significant exposure to disastrous performance in a weak area. Does Mr. Jones really want 60% exposure to fixed income in an inflationary environment just because he is 70 years old? Systematic rotation to strong asset classes might have a better shot at preserving Mr. Jones’s purchasing power, even if it comes at the cost of higher volatility.
