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JAForlines Global: Midsummer Night’s Scream

08/15/2013

New York, August 9th, 2013, Advisor Update ®
Midsummer Night’s Scream
You’d have to go back to the spring of 2009 and then back to 2003 to find more cross currents in bond, credit and risk markets. When and how does the Fed taper? How will the dollar react? Will US equities begin to lose their lure? Is the Euro area finally bottoming? Can UK and Japan’s central banks engineer a US-like recovery? Is China going to finally disappoint after a decade of double-digit growth?
Summer is supposed to be a leisurely time of family vacation, outside reading and no worries, so I won’t add to our Advisors’ angst. In fact, we have expressed a view on all of the above in our risk managed and tactical funds, so don’t cancel that Grand Canyon visit with all the relatives.
When you return to your desks in September, you WILL have to focus on what we believe is the largest single issue in markets since the aforementioned years–flows and fundamentals in the US bond market. The period between mid-May and early July demonstrated how a spike in rates volatility can derail practically every asset class but cash. You have to go back to 1953 to find a time where the two month rate of change in the bond market was so dramatic.

Is the long bond bull market finally over? Not quite, but now you can see how it will end. The trillions (the flows) that have gone into the relative “safety” of bonds and guaranteed annuities are the tender for the next bubble burst. The trillions on bank balance sheets, the anticipated re-pricing of US rate structures (the fundamentals) are already in place. It’s not if, but rather when do we start to map out our plans for this major credit turn in the spring.

The irony of course is that risk-equities and commodities will do well initially when the bond market reverses. And frightened investors will run to them at precisely the wrong time. Risk managed strategies thrive in this kind of environment, so let’s turn this summer of discontent into a mutual opportunity.

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