Okay, I would say it is official. The world economy is taking a breather. Manufacturing has slowed globally. For some, this is the end of it all. For others (I am one), it simply means a readjustment, a cyclical phase in which inventories rise, purchases reduce, factory orders slow, and production moderates. The word “moderates” is key. When you look at the numbers, it is not as if manufacturing fell off a cliff. It simply moderated from its month after month roll. Investors have noticed as the 10-year U.S. Treasury yield is closing in on 3%, which brings me to an interesting point – where will investors go to get a return on investment?
Let’s just say inflation is running at 2%. Now, we know where the 10-year T-Bond is, and we know the other T-Bonds offer even less. We know the global economy is slowing down, which suggests the speculation in oil and other commodities will dissipate to some degree, as pressure from supply and demand will force prices lower. So, I ask again, where will investors go?
Gold is an option, as it is certainly perceived a “safe haven” in times such as these. I guess silver is an option as well, along with other precious metals, but these offer little stability for a money manager whose job is to provide a steady return on investment for his or her clients. Now, money managers might see gold or other precious metals differently if the sense of the future were dire, but, as the excerpt below suggests, “the street” does not see it this way.
It appears the new term on the street is the “See-Over Trade.” At a charity event last week, hedge fund traders discussed how well the market was holding up despite problems in Europe and a weaker US economy. They believe, or should I say HOPE, the economy will pick up steam in the 2nd half of the year despite the lousy numbers right now. In essence, they are seeing over the mountain to better days ahead. If that’s not a classic case of the slope of hope, I don’t what is. So, the psychology of the day is we are Seeing-Over the Soft Patch. In other words, we are looking beyond a slowdown in a weak recovery.
High-yield corporate bonds offer attractive yields, but in these times of uncertainty, the risk factor associated with debt could be too high for many of the more conservative money managers. So, I ask again, where does the money go to grow? It seems the equity market is the place, and here is the simple reason why.
Other than an increased outflow from mutual funds, we see little fear from investors. The VIX (the fear index) is telling us this. It appears even the fear around raising or not raising the debt ceiling has dissipated. So, if fear is low, I suggest investors are comfortable putting their money in solid equities that throw off solid dividends. If fear is low, investors are comfortable getting paid to wait for the storm clouds to pass, for the “bad news” to subside, for the consumer to spend in the summer months, for the rebuilding of inventories, and so on.
Now, any huge event could change this, but, if the world does not fall apart, I suggest we are entering a period of relative “quiet,” at least until either fear or hope takes the reins.
Trade in the day – Invest in your life …
