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Boil, Boil, Toil and Bubble

Two stories on two seemingly very different subjects. But they point in the same direction.
Apparently suffering from the same hubris that Greenspan and Co. had less than a decade ago,
Very Serious People™ have yet again headed the financial system on an unsustainable trajectory.
And, as last time, the Little People will bear the brunt of the elite’s folly

What Does the Boom in Mergers&Acquisitions Tell Us?

Money & Company: We’ve seen a mini-boom in mergers and acquisitions of companies — do you think that is just ramping up or about to peter out?

Jeff Werbalowsky: I would say that there’s an artificially induced component because of the probable expiration of the capital gains tax rate. Our deal flow really has got a flavor of, “‘Let’s get it done by the end of the year, because who knows what the tax law will be next year.’”

But in addition to that, there is such a desperate hunger for yield that money is fairly abundant….

Now we’re seeing this weird recovery that I’ve never experienced before, where confidence in the financial system has returned in spades, fears have all but vanished and there is an unimaginable volume of nearly free money that is on a yield-hunting mission.

Dollar slump drives emerging markets, gold ETFs;
Hot money chases precious metals, commodities, other currency hedges

Activity in exchange-traded funds that target emerging markets, precious metals and commodities is ramping up as investors seek ways to protect their portfolios from a sagging U.S. dollar….

Many investors are “concerned that the probable escalation of quantitative easing and potential ‘currency wars’ will lead to a marked devaluation of paper assets,” said J.P. Morgan in an Oct. 7 research note….

In another sign of rising inflation expectations, agriculture and soft-commodities ETFs have started October with a fierce rally. For example, iPath Dow Jones-UBS Grains Subindex Total Return (JJG 47.38, +4.48, +10.44%) jumped more than 10% last week. Cheap money is likely providing fuel to commodities

Investors have also been stuffing cash into emerging markets ETFs that stand to benefit from strength in commodity prices. Interest rates in many developed countries are near zero, while some emerging economies are offering better yields and growth.

The Bernanke Bubble

The common thread in these stories is the dangerous amount of liquidity sloshing around the US financial markets, looking for return in a near zero interest rate environment. From retirees who were counting on a safe 5% a year to fund their golden years (hah), to life and casualty insurers who are having a time seeing how their business model works when ten year Treasuries yield 2.47%, to dentists in Des Moines who don’t see how .01% on a money market account counts as investing, there is a desperate race on to throw money at asset classes that not long ago would have been considered too risky.

High yield bonds. Emerging markets. Commodity ETFs. M&A smoke and mirrors.

Apparently wanting to outdo his predecessor in the record books,
Ben Bernanke is presiding over one of the great asset bubbles of all times.
As the saying goes, this will end badly.
And we will again be told that no one could have expected.
But don’t take my word for it:

Pimco’s El-Erian Says ‘Peace’ Being Lost

Policy makers are losing the peace two years after thwarting a worldwide economic catastrophe, the chief executive of the world’s biggest bond investor said Sunday….

Separately, El-Erian said that the market has already priced in another round of so-called quantitative easing by the Federal Reserve…

Many economists expect the Fed to boost the money supply with another round of debt-buying when policy makers meet in November.

El-Erian said that the test for the markets will be if quantitative easing is effective in helping the economy, and not in just pushing up asset prices.

Effective in helping the real economy?

What is this guy, a socialist?

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