Our belated publication this month has more to do with tax season than lack of market moving events. Markets in early March saw a big adjustment as the bond market sold off hard on the back of ebullience from continued strong stock returns and a renewed "risk on" mentality by investors.
We used the sell off as a chance to increase our holdings of long term bonds, and it looks to be one of those temporary moments when investors get confused and stampede in the same direction. We went the opposite way. Yields have since retreated and the stock market has lost its sizzle.
Cumulative total returns for various markets through March 31 are listed below:
Ben Bernanke's remarks on March 26 to a business economists group were, for us, the exclamation point of the month. While describing the tepid "recovery", he also said that consumers and businesses could be cajoled into more producing and consuming by "continued accommodative policies". While it is fairly well known that the Fed is set to keep short term interest rates low until 2014, this comment points toward more Fed buying of longer term bonds, thus flattening the yield curve and producing even lower current yields for savers of all stripes (including large and systemically important pension funds).
Since these funds are not earning their actuarially required rate of return, they are becoming massively underfunded (in pension speak "accumulated unfunded pension benefit obligation"). This is truly the ticking time bomb that is going to blow up the fiscal health of many U.S. states and private companies over the next decade if intentional repression of interest rates is not lifted by the Fed.
Current macroeconomic evidence points to sluggish economic growth globally, especially in the Eurozone, which may be entering a recession. After breathing a sigh of relief during the Greek bailout "anti-climax", investors have turned their attention to Spain, where interest costs are rising sharply. Investors should be clear that the ECB, having cleaned house of those pesky Germans, is hell bent on throwing money at whatever country or economy poses the next challenge, through what has now been dubbed "LITRO" in market-speak. It is a page right out of Bernanke's playbook: creating money (more debt) to lend to insolvent banks/countries with non-performing assets whose values are heading south. The debt contagion has not gone away, and investors should be settling in their seats for the next act of the ongoing drama/tragedy staged by the EU.
We don't know where all this is going to wind up, but investors ought to be noticing the huge divergence in performance between stock indices and gold mining shares - the gap has rarely been this wide. Talk of market manipulation by central banks and high frequency traders cannot obscure the value in the ground of proven gold reserves that are enormously underpriced at present. This looks to be among the biggest long term divergences that have occurred in the markets over the past year, which normally spells opportunity. If gold is the "anti-Dollar", or safe haven asset in a world of perilous paper, then gold mining shares should soar once they get their mojo back.
Thanks for reading our Journal, and we'll be back in early May with more observations and reports on portfolio activity.
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