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.
Answer to #1: I’d a thunk it. Actually wrote that in several places, including comments to WSJ blog where they linked me on 8/16. Actually, lotsa folks thunk it, and got some ridicule for it.
Same with #2, and the resumption of the carry trade.
So what’s the topic of your talk to the Plumbers & Pipefitters, er, excuse me, SOA?
Bill, I was adding amid the fall-off, as I’m sure you were too. I encouraged risk control in the types of equities purchased, but it was a time to buy. At these levels, I trim slightly with rises. I tend to resist market trends.
2) Yes, the carry trade is resuming. It usually only shuts off when implied volatility in the carry trade currencies gets so high that hegding is infeasible.
I gave them four choices, and they took the most challenging one: the Global Macroeconomy. The title of my talk is “Past the Peak of the Credit Cycle.” Now, there are cycles within cycles, and some areas of over-lending have been reconciled, but most haven’t yet.
I wish I could attend your presentation; but I’m looking forward to reading your transcript. Good luck (not needed of course) on your presentation!
Well, you had plenty of opportunity to trim with rises over the past few weeks.
Paul: KC KS or KC MO? I have a theory that nobody admits to being from KC KS, those folks typically say they’re from Shawnee Mission or Overland Park, or suchnot …. Everyone I’ve ever asked who said “KC” was from the MO side.
Bill I agree with you; although my buddies from KC,K proudly proclaim it. I live in Lee’s Summit, MO; work in KC MO, went to college at K-State; and grew up in CA so I pick the area that seems relevent (although in my early 20s I always said CA because it was “cooler” lol). I don’t really get the rivalry between MO and KS because they both look the same to me!