Gas prices are down, core inflation is up and jobless claims rose more than expected.  In addition, the European Union is struggling to come up with some economic solution to cover the outstanding debt of several of its members, while imposing some kind of new agency that would have budgetary oversight of all members.  The goal is to make sure all members handle their respective nation’s finances responsibly, not overspend, and then turn to the other members for a bailout.  Currently, this appears to be a very tough task.  Unfortunately, all this uncertainty is taking a toll on business and consumer confidence and resulting in global economic growth forecasts being revised downward. 

Along these lines, Toan and I met with two mutual fund representatives this week regarding what their respective fund managers’ outlooks are for the economy and what changes they made during the recent spate of market volatility. 

Both mutual fund management groups, one growth-oriented (i.e., stocks & convertible bonds) and the other bond-oriented, noted that they believe that the U.S. economy may slog along for the next several years before really breaking loose and incurring strong economic activity.  In addition, both management teams had made portfolio adjustments. 

The growth-oriented group became more defensive prior to the U.S. debt ceiling/budget impasse, but has taken a more risk-oriented approached in the last week or so and actually did some buying during the recent downturn.  The bond-oriented group shortened durations, which positions the portfolio so that it will be less adversely impacted once interest rates begin to rise, even though they don’t expect that to be the case in the U.S. anytime soon.  In addition, this management group noted as well that the recent market volatility presented buying opportunities.  They also noted that they continue to have success earning high total returns in some of their international bond funds via emerging market bonds, which in many cases offer better yields, appreciation and ratings than some of the more developed countries like the U.S., Japan, etc.  Read more

As soon as the ink dried on the newly signed debt ceiling legislation, world markets began to sober up to the economic environment and realized that there is still a pretty big mess to clean up. 

Just a short recap of the debt ceiling crisis: 

• The debt ceiling was reached in May at $14.29 trillion, but government could still function normally until August 2nd.  That is when it would run out of funds and default on its bond obligations, unless the debt borrowing ceiling is raised. 
• On August  2^nd the  debt ceiling was raised by up to $2.4 trillion to keep the government running into 2013.  In addition, at least $2.4 trillion in spending caps (reductions) are to take place over ten years. 

The U.S. Government and the word default should never be used in the same sentence.  The U.S. dollar is the gold standard of currencies and global trade is denominated in the dollar.  If the U.S. were allowed to default, even a paper default (like this one) would send shockwaves through the global markets.  A U.S. default would bring to question the very stability of the its dollar, that the AAA rated US bond (bonds that are not suppose to default) have defaulted.  But alas, we have stepped back from the brink, as most analysts had predicted.  Read more