Salient to Investors:

Gary Shilling at A. Gary Shilling & Co writes:

Investors’ zeal for yield has:

  • Depressed yields and spreads of below-investment-grade debt versus Treasuries so much that it now takes real skill to default. The global recession will hype defaults even though many low-rated companies have a cushion of safety from prefunded debt.
  • Decreased returns on junk munis to just 3.15 percent more than investment-grade issues, the narrowest gap in two years.
  • Private-equity firms, helped by Wall Street banks, unloading fracking sand, gas stations and coal mines into master limited partnerships and attracting investors with mouthwatering yields. The market value of MLPs has jumped to more than $350 billion from $65 billion in 2005.
  • Narrowed the yield spread between commercial mortgage-backed securities and their benchmark to below that when real estate was still booming and risks were ignored. Credit-rating companies are warning that the loan quality of such mortgage-backed paper is weakening.
  • Encouraged the stampede into emerging-market bonds and stocks, even though those economies are largely driven by exports to Europe, in recession, and a faltering US, while Chinese export growth and the Shanghai stock index slide.
  • Not slowed investors moving into the sovereign debt of small countries in eastern Europe and elsewhere

Decoupling, like a free lunch, doesn’t exist. Export-led developing countries simply can’t grow independently of Europe and the US, which directly and indirectly buy most of their exports. Evidence emerging-market stocks, which have underperformed the S&P 500 Index in the past year.

Commodities are a speculation, not an asset class with a strong upward price trend. It is commonly believed that commodity prices must go up in the long run since there is limited supply and demand grows as the world demand grows. However, human ingenuity and substitutes have always overcome shortages quickly, viz:

  • New mineral extracting techniques
  • New mining shovels that lift 120 tons and 135 tons.
  • Increased agricultural productivity from better seeds and fertilizers.
  • Improved breeding and veterinarian care in meat production
  • Plentiful natural gas from shale which has collapsed US prices and new crude oil finds have shattered the theory of a near-peak in global energy output.

For the past 150 years, real commodity prices have been in a declining trend, quickly overcoming temporary imbalances caused by the American Civil War, World War I and World War II, the oil shocks in the 1970s.

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