Here’s something you don’t see every day: stocks, Treasury
bonds and gold all sold-off yesterday.

One might think that when investors sell, they sell
everything. But the financial markets are all about money-flows. When
investors sell stocks, they put the cash in bonds for the safety and the
quick yield.

That’s one reason the Fed is keeping rates exceptionally low
for an extended period of time: Bernanke is actively trying to reduce the
incentive of owning bonds. In fact, if he can get bond yields below inflation
rates, then owning bonds is a punitive position because you’re effectively
losing money.

For an economy to grow, it needs what’s called “the velocity
of money.” That basically means money needs to move. It needs to get spent
and invested. People spend and invest when they see the opportunity to make
more money.

If people see no opportunity, they don’t spend or invest.
They save. Money stops changing hands and you can get deflationary
conditions.

So Bernanke is trying to force money out of bonds and
savings and into stocks and other investments. He’s trying to force the “risk
trade” (stocks) to help kick-start the economy.

After all, if you can’t make money in bonds, maybe you’ll
try stocks

Published by Wyatt Investment Research at