Dog days of Summer

August is the month that the market (including myself) takes a break.

Thus, any action you see in the marketplace should be taken with a grain of salt.

I am in the camp that the next macroeconomic foot to drop will be related to the onset of inflationary pressure, but in order to see this you need a very spontaneous change of mentality amongst market participants that cash is something to be throw into assets, as opposed to cherished because of high uncertainty in terms of US government policy. There has been a lot of money throw into the economy, but the money has not been sloshing around – it has been saved up in the balance sheets of financial corporations. When this money eventually gets released, it will be ugly.

However, the bond market, where you can lend your money to the US government at 2.91% for 10 years, seems to say otherwise.

It is very difficult to predict exactly when this phenomenon will occur, or whether I am just another kooky market analyst that has no idea what he is talking about. There is one element that I think everybody can agree with – the sheer amount of government debt will be crippling unless if there is some sort of monetary inflation, whether now or later. It is very unlikely that the government will be repaying this debt with equal-value or deflated-value (i.e. higher purchasing power) dollars.

In the meantime, I continue to wait patiently and observe where the currents are going. My current answer is that the money is swimming to income-oriented securities and since my portfolio has been loaded with these since early 2009, I will be waiting for appropriate exit opportunities. Even after all of the investment managers turn off the autopilot switch on their portfolios when they return home this September, I don’t think it will be the end of the universe for fixed-income securities. This is fortunate since some positions are at the upper range of my price bands and I don’t want to needlessly dispose them in calendar year 2010 exclusively for tax reasons. Although taxation is important, it should not dominate the decision to sell a security above fair value.