I’m swamped with putting the finishing touches on my talk for the Society of Actuaries, so this post will be brief. When it’s done, I’ll be posting it here for all of my readers. When the transcript gets published, I’ll post that as well, but that takes a while.
A few observations, some of them obvious, because we’re at an interesting juncture in the markets now:
- The equity markets are near new highs. Who’da thunk it?
- Equity implied volatilities have returned to a semi-normal state, and corporate credit spreads have tightened, but lagged.
- Fixed income implied volatilities look high.
- Fed policy, if LIBOR, narrow money, or the monetary base is the measure, hasn’t worked that well.
- Fed policy, if the stock market or total bank liabilities is the measure (credit expansion), has worked pretty well.
- The dollar has bounced, but I would expect it to retrace the losses.
- We’re experiencing a small period of macroeconomic quiet amid the start of earnings season. Earnings season should be good overall, with weakness in housing-related areas, and strength in export-related areas.
- Banks should be able to end the logjam in the LBO debt markets. The cost is feasible.
- Residential real estate prices are still weakening, and provide most of the drag on the US banking system and economy.
- Inflation is rising with many of our trading partners; the US may begin absorbing some of it.
- Our trading partners are going to have to choose between controlling their interest rates, and following US policy, or letting their exchange rates rise further.
- In this environment, I am trimming my equity portfolio slowly as positions hit the upper end of their trading bands. 20% of the portfolio is within 5% of the upper rebalance point. Almost nothing is within 10% of my lower rebalance point, so I’m not likely to add anytime soon.