All Summer Long

I am on vacation this week so I probably won't be writing much. Some of you probably thought I was on vacation as my post from last week did not go out (although it was on the blog website). Don't be confused when you see the June 15th post today, sorry. That being said there are a few things to which I would like to call your attention.

First: This week is Fed week. I don't think we will see any surprises. The Fed is in no position to tighten, or even jawbone rates higher.

Second: Markets should continue to trade sideways, albeit with considerable volatility as many market participants are, like myself, on vacation. Expect these conditions to persist throughout the summer.

Third: Look for the 10-year note to remain range bound between .00% to 4.00% for the balance of the summer, or perhaps 2010 (and beyond). As Meredith Whitney pointed out on CNBC, the 10-year is the only place to safely stash cash. Why the 10-year. No yield inside the 10, too much potential volatility farther out, too much risk and uncertainty overseas.


Ms. Whitney made other astute observations. First: during the past decade short-term rates have been all over the place (they move with Fed policy), but long-term rates (10-year) have been range bound. This is due to modest inflation pressures and the U.S. dollar's reserve currency status. Secondly: Banks' earnings could be more modest as their fee revenue should be lower. Much of the fees they earned prior to this year (going back several years) were from underwriting their own deal, especially ABS deals. Thirdly: there is little impetus for companies to hire workers.

Many investors who have come of age during the past 20 years may view all of this being negative. I view this as being realistic. There was no way to perpetually sustain the kind of economic activity we experienced since Paul Volcker and Ronald Reagan repaired the economic damage caused by the great society. The problem is that the 25 year rebound from nearly two decades of malaise was considered to be "normal" The 25 year bull market was no more real than the prior 15 years of economic malaise. At best we are now settling in to a more fundamentally-based economy or, at worst, heading into another great-society-like malaise thanks to government over reach.


This promises to be a nerve-wracking time for equity investors, but for retiring baby boomers this could lead to a stable bond market with attractive credit spreads (corporate bond yields) just when they are needed. Some may wish for higher yields for even higher return. However, investors should keep in mind that higher yields usually mean higher inflation. That means what ever you gain from higher yields, you lose in the way of higher prices.


Happy Summer!