Category Archives: Central Banks


The U.S. Dollar: Should You Stick To It Or Diversify Now?

  • The dollar has been positively correlated with stocks for the last 4 years which is unusual.
  • Potential FED interest rate increases don’t make international diversification a great idea right now.
  • Any sign of a U.S. recession should be a good time to think about international diversification with emerging markets.


On big news sites like Bloomberg you often come across headlines related to the movement of the U.S. dollar. The headline below is a good example.

figure 1 bloomberg news

Such headlines relay what has been going on in the few hours before publication but are completely irrelevant for investors that aren’t trading pips on forex. This article is going to investigate the longer term relationship between the dollar and stocks, and discuss the best option for maximum return with minimal risk.

Recent Dollar & Stocks Movements

Before 2012, as the dollar strengthened, stocks went down and vice versa. The reason was simple, a strong dollar meant U.S. exports were less competitive and businesses suffered, while a weak dollar made U.S. goods cheaper across the world and increased corporate earnings. Since 2012, however, the story has been a little bit different. The dollar has gotten stronger and stocks have gone higher.

figure 2 fred dollar stocks
Figure 2: U.S. dollar vs. S&P 500. Source: FRED.

The reason behind this is the fact that no matter what we think of the FED, it is the most globally coherent financial institution. In an environment where the European central bank is continuing with stimulus and the Japanese think about printing money for direct spending, the FED is the only institution that contemplates raising interest rates. So the positive correlation between the U.S. dollar and the S&P 500 comes from the relative success of the U.S. economy and the global faith in the U.S. dollar as the only safe currency.

On one hand, the strong dollar lowers corporate revenue. But on the other hand, it also lowers corporate costs, something CEOs never talk about when reporting earnings. As the U.S. has a net trade deficit, the strong U.S. dollar makes everything around the world cheaper and therefore expenses should also be much lower. Don’t forget this in the next earnings season.

Long Term Dollar Strength

The long term perspective is a little bit different than the above. Since 1975, the dollar has slowly but consistently weakened in relation to foreign currencies.

figure 3 long term dollar
Figure 3: Dollar index since 1975. Source: FRED.

The slow decline of the dollar means that global trends are shifting, which is also normal given the development in China and other countries. As the rest of the world is expected to grow at a faster rate than the U.S., the long term trend for the dollar is clearly and slowly downwards. This point is essential for international diversification. We have discussed many times how ChinaIndia and other fast growing emerging markets are essential for healthy diversification.

Forecasts & Economic Factors

In the short to medium term, it looks like the dollar is going to continue to strengthen. If the FED increases interest rates and others continue with their stimulus, the dollar will surge even higher. The most recent FOMC minutes clearly indicate that we could see a rate hike by the end of the year. But, eventually the strength of the dollar will kick back as exports will be more expensive and the trend will turn and continue to follow the declining line seen in figure 3 above.

What To Do

There are two options with currencies. They go up or down and do so for longer periods until the structural influences rebalance on a global scale. With interest rates low and good news from the U.S. economy, the FED will eventually raise interest rates and send the dollar higher. The moment of maximum strength of the U.S. economy and the dollar will be the time to diversify to other currencies but until then, sticking to the dollar is not a bad idea, especially for the majority of our readers who are living in the U.S. If the U.S. economy slows down and the dollar weakens, you will still have most of your assets in your home currency which will not represent a real change to your portfolio. But if you are exposed to other currencies and the dollar gets stronger, you will have to look at losses, which is never pretty.


U.S. investors have the benefit that if the dollar gets weaker, international diversification is just a missed opportunity while if the dollar gets stronger, it was a good idea to stay at home. International investors have to play it differently. With the FED eventually increasing rates, the dollar has no other direction to go than up which is a great diversification play when looking at the stimulus in Europe and Japan which weakens their currencies.

In the long term, it pays to be exposed to the currencies of the countries that are going to grow at a faster pace than the U.S. economy, i.e. emerging markets. We have seen the Chinese Yuan get weaker in the past two years due to some fears about China slowing down, but the longer term trend is clear.

figure 4 cny usd
Figure 4: Chinese Yuan per 1 USD. Source: XE.

With the economy expected to grow at a pace of above 6% in the next 10 years and the Chinese getting richer, there is only one way for their currency, up. Think about international diversification, but only when the dollar strength reaches its structural limits and the U.S. is close to a recession.



“Helicopter Money” Contagion & A Weimar Germany Type Hyperinflation?

  • Japan is flirting with new and more aggressive monetary easing.
  • Inflation in the U.S. might already be higher than officially reported.
  • Further monetary easing could be beneficial if, and only if, it stays under control.


We live in very interesting financial times. With low inflation, central banks are able to inject lots of money into the economy through asset swaps, and still keep interest rates low.

figure 1 balance sheet and sandp
Figure 1: FED balance sheet and S&P 500. Source: FRED.

In theory, more money should mean more growth. Since there has been no inflationary consequence thus far, why shouldn’t central banks just keep injecting the economy with more money?

Figure 1 shows how the increase in available liquidity has influenced asset prices by lowering risk aversion, as the S&P 500 has moved in lockstep with increasing liquidity.

Since there has been no visible inflation, a rumor that central banks might inject even more money into global economies by using so called “helicopter money” is now circulating among certain financial circles.

This article is going to introduce you to what “helicopter money” is, what the real risks of it happening are, what the impact will be on your portfolio, and discuss some investment ideas if it really happens.

What is Helicopter Money?

“Helicopter money” is an idea made popular in 1969 by the great American monetary economist Milton Friedman in his paper “The Optimum Quantity of Money” where he shares the following:

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The idea is that if you receive more money, you will spend more and thus bring inflation to the target rate. As printing money is done at a minimal marginal cost, there are no constraints on central banks, however, they have not yet resorted to such a measure. The latest rumor of using “helicopter money” was started after Former Federal Reserve Chief Ben Bernanke visited Japan and discussed more creative and extreme monetary policies. The first consequence of more monetary easing is currency devaluation. And last week, just the rumor of more easing saw the Japanese Yen depreciate by 5%.

figure 2 yes usd
Figure 2: JPY per 1 USD in the last 7 days. Source: XE.

No monetary policy seems to work in Japan and its central bank has reached its limit of “asset purchases.” There may be no other option for Japan than to get creative with “helicopter money.” If Japan pulls the trigger, other global economies will follow in order to stay competitive.

Consequences of Helicopter Money

The main consequence of such bold moves would be even more uncertainty. We already have negative interest rates and ballooned balance sheets, for which we have no historical precedent, the same holds for “helicopter money.” With no hard evidence all we can do is guess how such an experiment will end.

The first signs of increasing uncertainty will show up in the currency markets. Figure 2 above showed that even the mention of new monetary measures in Japan sent the Yen 5% lower against the dollar.

“Helicopter money” is always a bad idea with negative long-term consequences, even though in the short run it may provide a “boost” to the economy. Let’s not forget, the same argument was used for the current easing monetary policies, which have yet to “boost” the economy. When easing didn’t work, central banks and politicians opened the easing spigot even more. The same temptation would exist with “helicopter money” and could get completely out of control.

If central banks choose to deploy “helicopter money,” their only focus should be to reach the 2% inflation target for Japan, Europe or the U.S., which according to the FED has not yet been reached.

But increasing the money supplies can become a “monetary addiction,” since it makes it easier for any government to repay its debts and go deeper into deficit spending, which always helps to get reelected. With the coffers full of new money, much less thought is given to the need to repay debt.

figure 3 U.s. inflation
Figure 3: U.S. Inflation rate. Source: U.S. Inflation Calculator.

Even though the Fed says the 2% inflation target has not yet been met, other sources state that the inflation rate is much higher than what is officially reported. The common consumer price index (CPI) is a questionable measure of inflation as it tracks consumer spending and not the real supply of money. The current money supply has been constantly growing which means money is worth less. What’s misleading is the fact that the constant increase in money supply has not translated into higher prices in the last few years.

figure 4 money supply
Figure 4: M2 money supply vs. CPI. Source: FRED.

As the CPI measuring method constantly changes, it’s a good idea to take a look at inflation that doesn’t take into account measuring method changes since 1980. The shadow stats rate of inflation is much higher than official, and in line with the above increases in money supply.

figure 5 shadow inflation
Figure 5: Constant CPI method inflation. Source: ShadowStats.

The true definition of inflation is an increase in the money supply, which always makes it worth less, regardless of what current economic indicators tell you. Rising prices are just a symptom of inflation, and more money put into the system might spur hyperinflation, should central banks decide “helicopter money” is the road to take.

How Will Investments Behave?

With more money flooding the system, the current asset inflation would just continue.  However, there will be sectors that outperform.

As governments start “dropping” money from helicopters, infrastructure companies should be some of the biggest beneficiaries. As more infrastructure gets built, it requires more materials. Since there is a limited supply of commodity resources, it’s inevitable that with more money in circulation, prices rise. Therefore, materials can protect and hedge against inflation.


We don’t know when and if central banks are going to pull the trigger on more monetary easing, but it is a good idea to consider such a scenario and how it could affect the global economy and various investments.

If Japan starts with “helicopter money,” investments there might increase as the Yen devaluates since the revenue of many of Japan’s corporations is derived abroad. A weaker yen also promotes their exports. If “helicopter money” appeared to be working in Japan, Europe would quickly follow since the other forms of monetary easing haven’t achieved the desired result in either country.

In the short run, any additional monetary easing efforts should benefit all equities, which has been the case over the last 7 years. But in the long run, if the easing is not done “properly” (can we expect politicians and bankers to behave properly?) it is almost certain to bring long lasting economic troubles, similar to those Japan has experienced over the last 20 years. One has to wonder why they think more of what hasn’t worked is the best solution.

Historically, all money printing experiments end badly. One of the worst resulted in a World War as Germany was looking for a way to exit its hyper-inflationary crisis. The 1924 100 billion Deutsche marks banknote is an indication of how monetary easing can easily get out of hand.

figure 6 billion mark
Figure 6: German 1924 100-billion-mark note. Source: Solingen.

We can hope that monetary easing doesn’t get any more out of control than it already is.  And that it only continues to inflate asset prices and increase investment returns, as it has done for the last 7 years. But don’t bank on it.



As The S&P 500 Reaches New Highs, Asset Inflation Continues

  • All factors are indicating an artificially created asset inflation.
  • Earnings are expected to decline with economic outlook being constantly revised downwards.
  • Gold is gaining alongside stocks which confirms that all assets are inflated.


Amidst all the turmoil from BREXIT, negative interest rates and global downward economic growth forecasts, the S&P 500 has reached a new high. On Monday it closed at 2,137.16 points, overtaking the previous high of 2,130.82 from May 21, 2015. The Monday record was surpassed again on Tuesday and Wednesday, with Wednesday closing at 2,152.43.

figure 1 s and p 500
Figure 1: S&P 500 in the last 5 years. Source: Bloomberg.

This new high isn’t significant in terms of real returns as the market hasn’t really gone anywhere in the last 14 months, but it is significant from a psychological and confidence perspective. In this article we are going to look for the breakout reasons and fundamentals, and analyze potential risks.


It’s pretty straightforward: if earnings grow then the S&P 500 is also supposed to grow, if earnings decline and the S&P 500 grows we can assume we are in a bubble. At the moment, earnings are not growing and this earnings season will probably be the fifth consecutive quarterly earnings decline. In total, net income is down 18% since its 2014 high.

figure 2 earnigs
Figure 2: S&P 500 index and earnings. Source: Bloomberg.

The 18% decline isn’t that bad when compared to the average 36% earnings decline in recessions since 1936, but currently we are not even close to being in a recession.

Investors seem optimistic and willing to pay a hefty premium for stocks. The current S&P 500 PE ratio is approaching 25 and it has been higher than 25 on only two occasions in the last 100 years, in the dotcom bubble and in the midst of the Great Recession when earnings plunged.

figure 3 S&P 500 pe ratio
Figure 3: S&P 500 PE ratio. Source: Multpl.

As earnings are not growing and fundamentals are deteriorating, there must be something else that creates investor optimism.

Economic Data

As stock prices reflect future expectations, a look at GDP forecasts will give a good perspective on the rationality of the above valuations. In June, well before the BREXIT vote, the World Bank lowered its global growth forecast from 2.9% to 2.4% indicating more trouble for corporations. The International Monetary Fund has cut its forecast for the U.S. from 2.4% to 2.2% for 2016 but expects a pickup to 2.5% in 2017, while the FED expects moderate and stable economic growth at 2% for the next few years. In greater detail, the media highly promoted the 287,000 new jobs added recently but failed to focus on the increased unemployment rate from 4.7% to 4.9%.

One might wonder if the above mentioned data is enough to sustain a PE ratio of 25 as historically the economy has grown faster than 2% and the S&P 500 has had lower PE ratios, again an indication that asset prices are inflated.

Low Bond Yields 

The inflation in asset prices is especially visible in fixed income investments. With 30% of global sovereign debt charging a negative yield, investors push bond prices higher and higher in a desperate search for positive yields. This is further enhanced by the central banks of Europe and Japan actively buying corporate bonds on the market, and even stocks for the latter. As long as central banks relentlessly continue buying securities, it is very difficult for stock markets to experience substantial declines which means that small risks are being smoothed out by monetary policies while the big black looming risk grows bigger and bigger.

Not only that, but capital flows toward fixed income funds are reaching record highs.

figure 4 etf flows
Figure 4: Cumulative fixed income ETP flows in billions. Source: Bloomberg.

S&P 500 Sector Performance

One could argue that the above mentioned corporate earnings decline is mostly the result of lower commodity prices and declining earnings in the energy sector, but only 4 of 10 sectors will see earnings growth in the coming earnings season.

figure 4 earnings per sector
Figure 5: S&P 500 expected earnings growth per sector. Source: FACTSET.

Despite that the energy sector is expecting the worst decline in earnings, its performance in the last 6 months has been the best as things have stabilized a bit. On the other hand, the fact that utilities, energy and materials were the best performing sectors in the last 3 months shows that investors are looking for investments that protect against inflation and have constant, recession-proof yields.

figure 5 sector spdr
Figure 6: S&P 500 sector performance in the last 6 months. Source: Sector SPDR.

The same conclusion related to the search for inflation protective assets can be reached by the looking at the continuing surge in gold prices.

figure 6 gold prices
Figure 7: Gold prices in the last 12 months. Source: Bloomberg.

Gold is usually not correlated with stocks, but from the chart above we can see that both gold and stocks are increasing which again leads toward the conclusion that all asset prices are inflated.

What To Do

It is difficult to be smart in such an artificially created situation, but stock picking and “stick to what you know” might be the best option. You must evaluate the companies in your portfolio and identify how they will perform in the uncertain times that are ahead as asset inflation, possible real inflation in the future, and higher rates will wreak havoc among securities.

Now is the time to be smart. Investors should grasp the opportunities given by the high liquidity but at the same time think of the potential risks if anything changes in the current financial monetary easing system.



Negative Yielding Debt: A Party for Investors or Pure Stupidity?

  • Almost 30% of global sovereign debt comes with a negative yield.
  • The situation is much worse in Japan and Europe than it is in the U.S.
  • Investors should enjoy the asset inflation party while it lasts but also be prepared for the worst.


Negative yielding debt seemed impossible and illogical for a long time, but it suddenly became a reality a few years ago and now we are seeing it slowly become the new normal.

This isn’t just strange, it’s dangerous as risk averse investors—like pension funds and insurance companies—are forced to invest in assets that have traditionally been considered safe but that have now become risky, and their returns minimal. Those low returns will result in lower pensions and lower savings which will create new troubles in the future.

This article will analyze how we arrived negative interest rates, what the current situation is globally, and what the long term implications will be for your portfolio.

History and the Current Situation

Negative interest rates started with a few European central banks cutting their interest rates below zero in 2014 (Switzerland and Sweden), followed by Japan in 2016. The EU is not far behind with its 0% interest rate. Apart from central banks’ negative interest rates, high demand for bonds also pushes the yields below zero. With the European Central Bank buying 169 billion of bonds per month with its asset purchase program, it also distorts the markets, and pushes bond prices up, creating negative yields.

It is now estimated that 30% of global sovereign debt has a negative yield.

figure 1 negative yielding debt
Figure 1: Global debt by yield. Source: Wall Street Journal.

Per country, the worst situation is in Switzerland where the complete yield curve is negative, even for bonds maturing in 2049. Germany and Japan have negative yields on debt maturing in 10 years with yields of -0.17% and -0.28% respectively, while The Netherlands and France are not far away with yields at 0.02% and 0.12% respectively. The situation is much worse for debts with shorter maturities.

figure 2 euro yield curve
Figure 2: Euro yield curve. Source: Financial Times.

For perspective, it is wise to compare this to how the U.S. nominal yield curve looks as it is much healthier. If economic news from the U.S. continues to be similar to the latest job news, we could expect an interest rate rise in one of the next FED meetings, which should normalize the U.S. yield curve even more.

figure 3 us curve
Figure 3: U.S. yield curve. Source: U.S. Department of the Treasury.

With longer term yield being above inflation, the U.S. debt market looks much healthier and more rational than the EU or Japanese markets.

Economic Reasons and Implications

Many of the World’s most renowned investors have warned that this negative interest rate experiment in Europe and Japan will backfire. Pimco’s Bill Gross stated that a new supernova is being created and BlackRock’s Larry Fink has warned that it will have huge repercussions on the ability investors have to save and plan for the future.

The main goal central banks had in mind by lowering interest rates was to stabilize the economy and increase employment. However, given the length of time yields have been at zero, or even negative, without the accompanying benefits to the economy, one could conclude that the experiment has not worked. In fact, the World Bank has now trimmed global economic growth prospects from 2.9% to 2.4%.

One of the reasons why it may not have worked, is because the whole world is pushing for liquidity by lowering yields, and the positive effect low yields should have on an economy has been diluted and the only thing that has been inflated are asset prices, which isn’t bad if you are fully invested.

Since central banks were unable to create a healthy inflation rate of 2% with what they deemed the appropriate amount of liquidity, they then flooded the global economy with too much liquidity. And instead of having the desired effect of raising prices, it has actually increased competition with more goods and services being offered, which has lowered prices.

We might now start to see some inflation in the U.S. as the unemployment rate is getting close to the natural unemployment rate but Europe is still far from it with unemployment at 10.1%. Until consumers increase spending and create inflation this negative interest environment will persist and we cannot know when it will change, what we can is prepare for when it will change and analyze the current risks.

Implications for Investors

The most painful consequence of negative yields is that savers are penalized and that investors desperate for any kind of yield pay a high risk premium for low yields. A global snap back in interest rates, or a fall in credit quality, would put the financial world under extreme pressure as investments that are usually considered the safest could lose a substantial amount of value depending on how high interest rates rise, since bond prices move inversely to yields. Goldman Sachs estimates that an unexpected 1% increase in U.S. treasury yields would trigger $1 trillion of losses. If you are highly invested in bonds please be aware of the risks you are running if interest rates rise and ask yourself if the low yield is worth the risk.

Inflation would put pressure on interest rates and companies which cannot transfer increased financing costs onto customers would have huge difficulties in refinancing their debt. The current S&P 500 debt pile is the largest in history and companies are taking advantage of the low interest rates in order to borrow as much as they can.

figure 4 net debt
Figure 4: Net debt issuance/reduction. Source: FACTSET.

Investors should take advantage of the situation as most of the corporate debt is used for repurchases that further inflate asset prices but be careful for the moment when the party stops. At some point, the party has to come to an end someday because corporations are not using the fresh capital to invest but instead are only using it mostly for repurchases and dividends, thus not thinking that much about the future.


As there is no historical precedent to the current situation, all that one can do is make an educated guess as to when it will end. We all know that this situation is artificial and we also know that it has not been that beneficial to the global economy in the last few years.

As the more mature investors reading this will know, the economy works in cycles and we will see this asset inflation end but we cannot know when. When it does turn, it will certainly be an ugly scenario as investors will sell inflated assets in panic, corporations will find it difficult to refinance debt and central banks will not have maneuvering options with interest rates already negative.

But, as central banks continue to hope that more of the same—which is clearly not working—will eventually work, and which according to Albert Einstein is the exact definition of stupidity, let us enjoy the party while it lasts, hope that it will last for a long time, and always stay prepared for an eventual change.



Monetary Policies – US, Europe, Japan and China

  • Central banks hesitate to increase interest rates.
  • Monetary easing does not manage to fuel inflation.
  • If inflation arises stocks should be the best protection.


The central bank of a country determines the base interest rate at which it gives loans to banks who add a risk premium and give loans to corporate and private customers. The base interest rate is therefore the primary factor for the stimulation of economic growth and reach of target inflation.

In the US, the FOMC (Federal Open Market Committee) meets every 6 to 8 weeks and the market and journalists anxiously expect its decisions and outlook on interest rates and the economy. The same meeting schedule applies for the ECB (European Central Bank) monetary policy meetings. The BOJ (Bank of Japan) decides on interest rates in Japan and the PBC (People’s Bank of China) sets the interest rates in China.

The current interest rate in the US is 0.5%, in Europe it’s 0%, in China it’s 4.35%, and in Japan it’s negative with -0.1%. If the economy is weakening the central bank steps in and lowers the interest rate in order to promote more lending that should lead to economic growth. Those should be the reasons behind interest rate changes, however in 2015 the PBC had lowered its interest rate 5 times in order to prevent the Chinese stock market from falling further.

1 chinese interest rate cuts

Figure 1: Chinese interest rate cuts in 2015. Source: Bloomberg.

The BOJ brought its interest rate to negative in order to prevent a looming recession, but in Japan’s case the low interest rates have not fueled economic growth. Yes, a negative interest rate means that the bank is paying to lend money to banks, as strange as it might sound, it is the truth.

2 japanese interest rate

Figure 2: BOJ interest rate from 1976 to 2016. Source: Trading Economics.

The US is the first major country that is starting to raise interest rates as its economy seems to be doing better.

us interest rate

Figure 3: US interest rates. Source: Trading Economics.

It is important to see how this effects the market in the short and long term.

The Last FOMC Meeting and the Implication for Markets

The FOMC met for a two-day meeting on April 26, 2016 and left interest rates unchanged. The other important takeaways are that labor market conditions have improved further even as economic activity appears to have slowed. Inflation is still running below the 2% target.

Concerning the outlook, the FOMC expects that with gradual adjustments in monetary policy the labor market should remain strong end economic activity should improve at a moderate pace. It also expects that the interest rate is going to remain below expected longer run levels.

The implications for investors should be the following and unfortunately all the implications are double-edged swords. A further increase in the base interest rate would:

  • Strengthen the dollar as global capital flows would be looking for higher yields with low US risk. A strong dollar, as is already the case, makes exports more difficult and therefore lowers corporate revenues, which implies a return to lower interest rates if the economic consequences are too severe.
  • Increase the cost of capital for companies that would consequently lower their earnings.
  • Increase returns on bonds, and consequently expected returns on stocks. If expected returns on stocks increase the price usually goes down which reignites the downward economic cycle.

The above examples demonstrate just how difficult it is to set the correct interest rate. Interest rates that are low for too long should create inflation but the ECB, BOJ and FOMC have failed to reach their target of 2% inflation with the current prolonged low interest rates. This proves how the standard economic theory is failing in the explanation of the current global monetary and financial situation and there is no precedent on which to base estimations. Seeing how active the central banks are in supporting the economy and financial markets, it is plausible that the economic standards of the 20th century do not apply to new circumstances. A very important part for the application of the classical economic theory that is missing is inflation.

4 us inflation calculator

Figure 4: US inflation. Source: US Inflation Calculator.

Surging inflation above 2% would quickly prompt the FOMC to increase interest rates in order to prevent higher inflation rates. With higher inflation rates, stocks should perform well as higher prices increase revenues. Stocks are usually considered hedges against inflation. Bonds should be the worst performers as with higher interest rates and inflation, yields go up and bond values decline.


On April 28 the Bureau of Economic Analysis reported that the US GDP growth in Q1 2016 was the slowest in the last two years. This slowdown also explains the FOMC’s reluctance to increase rates at a faster pace. The reason behind the slowdown is a deceleration in consumer spending and a decline in business investments. It will be important to see if this is the start of a trend or GDP will bounce back in Q2. Also, it’s important to note the fact that as more data becomes available the GDP figures can be revised.

The BOJ and ECB

The BOJ surprisingly did not increase its stimulus for the economy as it needs more time to assess the effect of negative interest rates.

In Europe the policy makers are more eager to improve things as soon as they can. The European Central Bank (ECB) announced last Thursday that it is ready to use “all instruments” available, including further key interest rate cuts plus more quantitative easing.


The above is a lot of information to digest and there is no truth or rule that can help the individual investor. Monetary policies and macroeconomic trends are difficult to forecast and even more difficult to time.

The willingness of central banks to ease monetary policy at the first signs of slowing economies gives a certain perception of security. Until inflation kicks in, the banks have no limits to their easing potential and can fuel slowing economies and declining markets. If inflation does kick in the best hedges should be stocks as corporations can pass on the increasing costs onto the consumer. The financial markets and monetary policies have always been and always will be cyclical. It is up to the individual to assess how much volatility she or he can handle.