This deleveraging process has been a very unique one. Over the last decade, the Fed led many central banks around the world in an unprecedented expansion of money supply. While there is massive credit being withdrawn from the global system, the long-term effects of this money supply expansion has yet to filter through. Investors are running scared of stocks, real estate, and bonds (except Treasuries of course), and have shifted positions to commodities, government bonds, and other “safer” investments. This, along with Bernanke’s decision to drop rates, has led to a serious mispricing of risk and return among government and other bonds. As investors realize that the US government is bankrupt and currency is nearly worthless, high yield rates are likely to skyrocket. Of course, gold will jump as well.
