Fund Managers Catch Flu
The swine flu rages, yet the markets are climbing a wall of worries. In the first quarter, consumption turned positive, but business investment fell off a cliff. Who do you think has it right: businesses that only spend on necessities or consumers?
The swine flu creates yet another headwind to the economy. Even before, we were concerned that the current rally may not be sustainable, mostly because – in our assessment – we have yet to see the bottom in the housing market. The foreclosures we see now mostly reflect homeowners who purchased their homes in 2005 or earlier. What about those who bought their homes at the peak of the market in 2007? Many of the “3/1″ mortgages will reset in 2010, creating another wave of foreclosures.
We believe the reaction to these headwinds will be more stimulus by the Fed and Congress. At the same time, the 10 year Treasury Bond has fallen, with bond yields rising to 3.085%, the highest level in months. The Fed’s buying of bonds has so far not been effective. We remain most concerned that the Fed may not be able to mop up all the liquidity it is creating. If bond yields rise much further, it may stall the nascent recovery; if the Fed intervenes to keep the yields low, inflationary pressures build further and may eventually cause the Fed to give up to control the long bond.
In any case, for the time being, investors are chasing the trend. Fund managers are starting to get worried about their jobs – it’s one thing to lose in a bear market, but if you under perform in a bull market, someone is waiting to take your job. Sounds to us like fund managers have caught the flu that makes them play catch-up.
Axel
Axel Merk
Author of Sustainable Wealth
President and Chief Investment Officer, Merk Investments
