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Cheap money is here to stay

Dec 16, 2009

It is that time of the year again when the US central bank takes a call on what yield most asset classes around the world should trade at. And it appears near certain that the status quo is going to be maintained. The Fed is expected to announce its policy decisions on Wednesday afternoon US time and no one is expecting a miracle. With unemployment still a huge eyesore and Bernanke making it clear that his number one priority is sustaining the recovery, the question of raising interest rates just does not arise.

Hence, the attention now veers to the next most important question. Whether Bernanke and his colleagues will hint about when they will reverse course and start boosting rates. There is a possibility that they would. But it is not going to be an easy task mind you. Too fast a reversal and one puts the nascent recovery at risk and too slow a reversal would mean setting asset prices on fire and inviting the wrath of inflation. Hence, while the decision of keeping interest rates record low looks rather easy, the Fed may be on a somewhat slippery ground on the second one.

Is gold miles away from being a bubble?
Is there a near foolproof way of determining that an asset class has become extremely overvalued or undervalued and is now due for a major movement in the opposite direction? We are not sure. But there are indeed some methods that could prove quite effective. Legendary fund manager Peter Lynch was in possession of one such very effective method when he was managing money.

He is once believed to have said: "If I go to a party, and introduce myself as a mutual fund manager to strangers, and they walk away from me and talk to other people instead, I know the market is near the bottom. If they sit down and ask me what stocks they should buy, the market is at normal levels. If they sit down and tell me what stocks to buy, the market is near the top."

Indeed. When even a common man on the street catches fancy to some asset class then it is rather safe to conclude that the asset class under consideration is no longer an attractive one for investment and has instead become a mania, susceptible to violent corrections.

Jim Rogers, another famous investor of our times, has used a slightly different variation of the same technique and has come to the conclusion that the yellow metal gold, which looks something like a mania right now to many of us, may not be even close to being one. He is believed to have surveyed 300 people, which included some big money managers at a presentation in the European city of Prague. Rogers observed that an overwhelming 3/4th of them had never owned gold. Hence, forget common man. If even specialists like money managers have not owned an asset class believed to be the next big thing, the asset class could well be in the initial stages of its rise.

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