Value of Perfect Information

As the summer tug of war commences, there are many events to take note of.

Existing home sales were up again, though slightly less than expected.  The fact that expectations are rising should be seen as a positive development, though the glass half empty is the path of least resistance for most investors.  As the prices have come down, the overhang of inventory of homes for sale seems to be waning.  The price drop was the third largest on record. 

The PMI indexes of Europe, Japan, China and the United States are all showing signs of a relative recovery in the psychology of manufacturers.  In fact, if you look at what is going on in the Emerging Markets, there appears to be at least a consistent theme of building inventories across the globe.  We believe this is driven by two components:

1. Inventory draw down has had a significant impact on the excess capacity that has resulted from declining consumption of predominantly US consumers.  Led by the Chinese infrastructure plan and global government stimulus programs, demand has slightly picked up.

2. Consumer confidence has picked up in the US, the largest consumption based economy.  We have said for some time, with the US consumer being nearly 20% of the global economy at their peak, how they spend will dictate much of the health of the developing world. 

We are already seeing a rush to predict the increase in the Fed Funds rate by the FOMC next year.  A “spiraling” inflationary issue is the number one cause for this.  Quite frankly, the FOMC raising rates may occur, however the curve shape is the one thing people should be considering.  With a normal curve at 200 bps and currently we stand at 420 bps, something has to give.  This marks only the second time in the last 18 years that we have breached the 400 bps level.  Three years following the earlier two times, we experienced a curve of less than 75 bps.   

As such, the long end of the curve may become range bound as the short term catches up to where the long end resides.  The long end is really responding to the large net new issuance that will be required over the next few years, however we don’t think it wise to  underestimate the pension buying of long dated treasuries as it nears the 5% level. 

Short term rates may rise, but inflation will likely take years before it can truly take hold as consumer inflation will be dictated by wages rising high enough to absorb higher costs.  Without higher wages to absorb costs, inflation cannot truly spiral and will therefore become an inhibitor to growth. 

Disclosures:
This report is provided for information purposes only and does not pertain to any fixed income security product or service and is not an offer or solicitation of an offer to buy or sell any product or service. Unless otherwise stated, all information and opinion contained in this publication were produced by Advisors Asset Management, Inc (AAM) and other sources believed by AAM to be accurate and reliable. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications.  All expressions of opinions are subject to change without notice.

All AAM employees, including research associates, receive compensation that is based in part upon the overall performance of the firm.  AAM may make a market in or have other financial interests in any given security with which this analysis suggests may be benefited from its conclusions.  Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  Past performance does not guarantee future performance.

Advisors Asset Management, Inc. (AAM).  All rights reserved.  AAM is a FINRA/SIPC member and SEC Registered Investment Advisor.  Copyright © 2009.

Categories: Markets

Most Recent Comments