Similarly, industrial metals are advancing strongly, and precious metals are hitting all-time highs. Even good quality corporate bonds have gained some 20% year-to-date while high yield indexes are up more than 50%.
Obviously, these markets are reflecting burgeoning confidence in economic recovery. TARP, the stimulus package, buyer incentives for homes and autos, and the Federal Reserve’s persistence in keeping interest rates low are having an impact!
...the yellow flag is out!
In fact, they’re having a dual impact. First, they appear to be helping pull us out of recession. Home sales have turned around, industrial capacity utilization is improving, and the unemployment rate has ticked down for the first time in several months.
These are the hoped-for results, and are certainly part of what is being reflected in the investment markets. But, it’s the unintended consequences that may be having the greatest impact, pushing not just stocks, but also bonds, precious metals and other assets to what can only be called inflated levels. And, not just in our domestic markets. Investors worldwide are doing exactly what should be expected from such governmental largesse, whether or not it is what those governments intended.
How the game is played.
And, what, exactly, is it that investors are doing? It’s merely the latest version of the “carry trade.”
1. They borrow (dollars in this instance) at the near-zero interest rates set by the Federal Reserve,
2. They use those borrowed dollars to invest in assets that appear undervalued, or at least capable of being bid up in price, and
3. They ultimately sell the assets, hopefully at sizeable gains, and repay the loans with “cheaper” dollars that are almost certain to have resulted from the ballooning Federal deficits.
Where does this leave investors like us here at CoreStates? We choose not to play this game. We never subject our clients to the risks of this form of “borrowing short and investing long,” having seen far too often (most recently in housing) how asset prices can suddenly drop when interest rates begin to rise and the throngs of debt-burdened “carry-traders” all stampede for the exits. But, we do have to deal with the volatile markets these traders help create with their high-risk games.
Our strategies in today’s environment of increasingly inflated prices are intended to participate in a good portion of any continuing run-up in asset prices, but to gradually lighten exposures as prices inflate. This investment approach is almost certain to mean that, unlike the extremely favorable performance we have been able to deliver through the market recovery to date, our clients may not fully participate in the latter stages of such an extreme market advance, but nor will they be fully exposed to the risks of a market collapse.
The way we look at it, the possibility of realizing modestly lagging returns if asset prices continue to inflate is simply the price that must be paid to assure better preservation of values when the bubble eventually bursts. And, this is the best way we know to fulfill our commitment to clients – to protect their lifestyles and preserve their legacies for as long as their investment assets are under our care.
We wish everyone a wonderful Holiday Season, and a safe and secure New Year!
The information provided above reflects the viewpoint of Corestates Capital Advisors, LLC and is subject to change. This article was prepared for general informational purposes only, without respect to the investment objectives, financial profile, or risk tolerance of any specific person or entity who may receive it.
