Senin, 16 September 2013

Demand for safe assets beginning to decline

I first introduced this chart a few months ago. I think it's a good way to track the world's demand for safe assets. Gold is the classic "safe asset," being both durable and traditionally a refuge from monetary and political risk. 5-yr TIPS are also a "safe asset" since they are default-free, their price is relatively stable, and they offer protection from inflation. As the chart shows, the real yield on TIPS has correlated inversely with the price of gold for most of the past six years. (Another way to say this is that the price of TIPS, which moves inversely to their real yield, has correlated positively with the price of gold.) Both prices have been moving down of late, which I think tells us that the world's demand for safe assets is beginning to decline, after having risen substantially for more than 5 years.

If gold and TIPS are at the cutting edge of the demand for safe assets, then they could be leading indicators of the demand for other safe assets, such as cash, currency, bank savings accounts, and short-term bonds. So far, there is little, if any, evidence that demand for these other safe assets is declining.

U.S. currency in circulation is growing at about a 7% annual rate, or about the same pace it's averaged for the past 4-5 years. There's no sign of any slowdown in the growth rate of currency, and I note that the world's demand for dollars has been relatively stable over this same period.

Similarly, there is no sign of any slowdown in the growth of M2, arguably the best measure of "money." For the past two years, M2 has grown at a 6.5-7% pace, which is only slightly above its long-term average.

Bank savings deposits have been growing at an 11-12% annual pace since the Lehman crisis in Q3//08. The pace of growth has slowed a bit in recent months, but is still relatively strong at 9-10%. Demand for the safety of bank savings deposits is still strong.

After four years of strong and virtually uninterrupted gains, taxable bond funds have experienced significant outflows in the past several months. This is a sign that the world is less anxious for the relative safety of bonds, and this reinforces the message of TIPS and gold.

To judge from this collection of charts, any decline in the world's demand for safe assets is still in its early stages.

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