An intriguing article discussing the speeds of economic recovery between the USA and Europe:
Should You Be Rotating Out of Bonds?
This past summer, we may have seen the warning we needed when it comes to the portion of your portfolio in bonds. Interest rates can’t go down any more, they can only go up. This could result in the value of your current bond holdings going down. This is discussed as “The Great Rotation”. Investors who flocked to bonds in 2008 and 2009 are now starting to rotate to stocks. On the surface, many investors think it’s time to drop bonds altogether.
And it’s not just investors thinking this way. Many of the top financial institutions agree (great chart on that here)
When the consensus is that bonds will be a weak investment, it’s easy to jump on the band wagon. But markets often do exactly the exactly opposite of what you would think.
Instead of following the heard, perhaps investors should simply review their bond holdings and look to upgrade the quality of the funds. Not all bonds or bond funds will be affected by rising interest rates the same way –something the chart and most investors don’t follow.
The Mississippi Bubble: One of the First Bubbles
There’s a lot of talk about if the US market is in a bubble these days. It’s next to impossible to determine if we are, in fact, in a bubble. But the media will do just about anything to produce a story that will get more people to read their publications.
Instead of reading their predictions, consider watching this video about one of the first economic bubbles ever recorded.
John Law and the Mississippi Bubble by Richard Condie, National Film Board of Canada
The US Energy Revolution Could Be Big
It’s hard to believe the energy revolution that is going on in this country. It’s being touted as a “game-changer” and “transformative”. The US is quickly becoming the low cost provider of energy. International companies are in the process of building new manufacturing facilities in the US because energy prices are so low (especially natural gas). Just to stay competitive, they need to set up shop in the US. In the next few years, the US could be exporting energy to other countries.
This could all lead to…
- Lower cost to do businesses (especially energy dependent ones) can lead to more profits.
- Industries could transform. Perhaps in the near future natural gas will be a bigger player in transportation.
- Added infrastructure and jobs to support this booming industry
More stable energy prices. It was just a few years ago that OPEC was discussed what seemed like daily on the nightly news and price swings at the pumps would occur everytime there was a disruption in oil production abroad.
If you’re interested in reading more, visit: Blackrock
How the Economic Machine Works.
Great 30 minute video explaining how the economy works by Ray Dalio of Bridgewater. For those who follow him, it will come at no surprise that the focus is on one of the most misunderstood components of the economy… Credit and debt.
If interest rates were to rise…
There has been a lot of talk these last few months about what will happen to portfolios when the Fed eventually raises interest rates. The Fed will only make changes to its low-interest policy when the economy confirms it will continue to improve. The earliest the Fed would make any changes would be in September, although some experts predict it won’t happen until 2014. Below are a few key points that can help put this into perspective and explain what this means for you:
If interest rates were to rise…
- Changing trends could provide new investment opportunities.
- We could see certain domestic bonds decrease in value. Not all bonds but certain types, such as long-term government backed bonds, may be more affected than others when rates do rise. We see opportunities in short duration funds or funds with global diversification or a variety of sub asset classes (such as corporate bonds, senior loans, convertible bonds).
- It could strengthen the dollar thus making stocks more attractive (both small and large cap could be buying opportunities).
- The financial sector (regional banks, insurance companies, etc.) could be an opportunity as they historically perform well during periods of rising interest rates.
- Large Multinational companies based in the US could see their values go down as a result of the strengthened dollar, while multinationals based outside of the US could be a better investment.