Don't think - Just follow the money

It may sound strange in the financial world saying to smart people not to think. In fact people working in the Wall Street pride themselves in having higher IQ than the rest. However, I think that we are better off not thinking this year.

For the past year and so far this year, we are faced with a strong equity market (especially in merging market and Europe), continual commodity bull run (indisutrial metals), gold breaking out multi year highs, low+lower yield, weak US dollar against Asian and Latin currencies, good run in the Nikkei and yield curve flattening...

If one were to try to put everything together in a normal macroeconomic framework, it does not make great sense. For example, is commodity rise leading to inflation, if so why is bond yield lowering. If bonds are correct, then is the economy expected to have even more productivity gain in absorbing the rise in commodity prices. Then if there is little final goods inflation worry, can consumers continue to leverage up and support retail sales which lead to strong equity market. Is gold running away for the heck of it or are the gold bugs right?

As you can see: Where the world is now? Perhaps there is not a perfect financial model that can explain everything.

So how about looking from this angle:

I think that there is just simply too much money around. Let's see where the money are:

1. Central Banks (especially Asian) are awashed with liquidity from currency intervention. Although the rate of build up has slow (apart from China), they are still having to manage a big fx reserve.
2. Petro nations are earning billions of dollar every day with oil price up here.
3. Pension funds are still one of the larger pool of money around.
4. ... maybe I am missing a few big players too.

So let's think what they are going to do with their money. Central bankers will continue to buy Government bonds since they cannot take the credit risk of practically anything else. However some governments are loosening up the limits to buy real assets such as oil or mines. This will support commodity run and buffer the effect of a potential slowdown in global growth. As for the petro money, their local markets are too small for them (Middle East stock market has a huge run already). So they will look for returns in their US Dollar. They will continue to buy and to diversify from US dollar. They will buy anything with potential to generate returns higher than 10y note. Chasing equity, commodities, credit...etc Pension funds is finding it harder and harder to achieve benchmark without taking more risk.

At the fault of global central bankers, the world is full paper money. The liquidity is chasing for asset return which in terms leads to lower volatility which also keep the "asset inflation" gravy train running. Yes, there may be different assets in vogue during different times, but overall, gravy train will still be around for now.

Therefore "don't think, just follow the money".*** while it is still worth something.