Global Investing Advice: Don't Fight Your Central Bank

Javier E. David | Special to
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In a world where virtually every major economy is being flooded with cheap liquidity, investment professionals can only muster one solution: don't fight your central bank.

The practical application of this philosophy means that investors should invest their money in markets where these central banks are most active –or markets that stand to benefit the most from massive monetary easing – rather than trying to reap returns elsewhere.

The Federal Reserve is leading the charge with its unlimited bond buying targeted toward mortgage markets, its third iteration of quantitative easing in four years. Meanwhile, the European Central Bank, the Bank of England and the Bank of Japan are taking similar actions, all in an effort to re-inflate stagnant economies.

"Respect what the Fed, ECB and BoJ are telling us," Pimco CEO Mohammed El-Erian told CNBC this week. "They are all in, and they are going to be in there supporting asset valuations." (Read more: 'Fiscal Cliff' Deal Won't GuaranteeGrowth: El-Erian.)

So what exactly does the 'central bank trade' resemble? In a normal world, stock and bond prices would not be rising in tandem. This being the new normal, however, both asset classes are being inflated by monetary policy –which means investors should go along for the ride, analysts say.

El-Erian suggests that for investors, shorter and intermediate term Treasuries are a worthwhile investment bet, even though ultra-accomodative policies will mean investors will not reap the benefit of high yields.

"The front end will be more stable anchored both by purchases by the Fed and the [policy statement] language about keeping interest rates at zero," the bond guru said. "The long end is going to be more volatile and more dangerous, so it depends where on the curve you look."

Can't Fight the Fed!

"The [Fed] has created an environment where there is no effective alternative to stocks," said Omega Advisors CEO Leon Cooperman to CNBC earlier this week.

Although central bankers aren't buying equities at all, the boost from monetary policy is being felt most dramatically in stocks.

Despite fears about the U.S.'s struggles to bring its budget into balance, some experts grudgingly recommend that investors not sit out the rally, lest they miss out on the potential short-term rewards.

"I could keep [money] in cash and that's zero, and the Fed has told us that it's going to be zero for a couple of more years,"Cooperman said. (Read more: OmegaAdvisors CEO Cooperman Says Fed Rates Make Stocks Best Bet.)

Unlike El-Erian, however, the hedge fund manager was dismissive of Treasuries, calling the near-historic low yields on the 10 year note "ridiculous". Over the next three to four years, bonds "make no sense"because of negative returns, he said.

Aside from record high balance sheets – the ECB's has nowtopped $3 trillion while the Fed's is threatening that bulwark – central banks havebrought the so-called "gold bugs" out of the woodwork.

Gold is another asset that central bankers are staying awayfrom. Yet should the excess liquidity stoke inflation and lead to currencydevaluation, investors in the metals market stand the most to gain, someexperts say.

Among assets to avoid would be the dollar, which has reacted badly to more stimulus, and trades inversely of the yellow metal. Customarily, gold is considered a safe-harbor asset. With global monetary policy around the world, the yellow metal's dynamic has shifted.

Investors worried about future inflation now see it as an alternative to paper money, and it now tends to trade in tandem with stocks and other asset markets that are rallying on central bank expectations.

Yet over the last several weeks, has been pilloried by investors nervous about the outcome of the U.S. "fiscal cliff". That makes even notorious gold bulls such as Jim Rogers sound more cautious.

"Most things correct 30 percent every year or two, even in big bull markets – 30 percent corrections are normal and yet gold has only done that once in the past 12 years," Rogers said to CNBC. "Gold on any kind of historic market basis is overdue for a nice correction."

Still, bullion is in the midst of a 12 year bull market, he said, which is likely to continue as central banks around the world continue to boost their economies.

Meanwhile, the euro, which this week set an eight month high versus the dollar in spite of the ECB's balance sheet expansion, may also benefit because of Europe's comparatively higher yields.