With the market in correction, it is probably superfluous to repeat our constant explanation regarding methodology. We are playing defense until the markets go back into uptrend. The issue facing our intellect today has to do with what may be a fear induced inflation expectation. It is no secret that the Fed will likely start to taper whether it be in September or December. It doesn’t matter when they do it; it matters that they do it. But, will this Fed tightening trigger a serious round of higher prices and subsequently cause the stock market to explore the nether regions? We do not think so, although higher prices as a result of the easing of QE2 is probably in the cards. The reason for our lack of concern has to do with expectation. The last time that we had serious inflation in the United States was during the Jimmy Carter era. The dilemma is that investors have a very, very long memory. The investors of today are in their 60’s. During the Carter years, they were in their early 20’s and they remember the oil embargo and gas lines, and 15% mortgage rates. All of that muscle memory is fueling the fear mongering of today. But, is today even remotely like then? We think not. Firstly, inflation remains incredibly low and it has to do with the velocity of money. Because of the fiscal crisis of 2008, the Fed has pumped hundreds of billions of dollars into the economy and yet the money supply has barely budged. Why? Well, we think it can be argued that people and businesses have taken the low interest rate environment as an opportunity to pay down debt. As a result, the money generated by the Fed in large part has not made its way into the economy. That has kept prices low. As the Fed eases off the accelerator, the expectation is that people will spend and borrow less at higher rates; not more. We believe that is going to make it difficult for prices to rise precipitously. So, GDP slows down. Make no mistake, higher rates will not be good for a bond portfolio, and money will work its way out of shorter term instruments and into higher yielding ones. However, the move, in our opinion, will not be drastic and the rise in rates will occur over several years. For those reasons, we believe that equities will still represent an opportunity albeit the individual investor and the professional manager must remain extraordinarily judicious with their allocations. This and/or the accompanying information was prepared by or obtained from sources which DFE believes to be reliable but does not guarantee its accuracy. Any opinions expressed or implied herein are not necessarily the same as those of DFE and are subject to change without notice. The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instruments or to participate in any trading strategy. The investments or strategy discussed may not be suitable for all investors. Past performance does not guarantee future results. Sale of option contracts can be risky and may not be suitable for all investors.
Posted on: Tue, 20 Aug 2013 13:32:19 +0000
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