Just a quick note. Retail sales declined for the second consecutive month and the minutes of the June FOMC meeting indicated that the Fed's outlook for inflation and economic recovery has softened. The treasury market responded by rallying. The equity markets initially headed lower before recovering and finishing the day slightly higher. Stock jock pundits touted the equity markets' predictive power and downplayed the Fed minutes by accusing policy makers of being behind the curve and a lagging indicator.
In my two decades in the capital markets I have found no better predictor of economic direction than the bond market (among the capital markets). Although the Fed is not infallible (they are human after all), one dismisses Fed opinions and policy at their own risk. More times than not Fed policy is grounded in reality while equity markets are driven higher on optimism and hope. Hope is not a strategy.
The recovery will be sluggish and inflation will remain tame. The credit markets (especially bank bonds which will benefit from the Dodd bill by making balance sheets more conservative in nature) remain attractive. TIPS are not attractive and should be used only as hedges against eventual inflationary pressures, modest though the may be. Investors should consider TIPS with prices close to par or a discount and with an inflation factor as close to 1.00 or below if possible.
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