Category Archives: Investing Money

Get Ready For A Bear Market

moneyMy Comments: This person may be right, or not. Yesterdays sell-off sure was ominous but you never “know” until it’s too late. One way to profit from the downturn is with alternative investments. Only very few investment managers use them as a matter of course when promoting their skill set to the public.

Those of you who know me may know about a company called Portfolio Strategies. My associate Alan Hagopian and I use them almost exclusively when positioning our clients money for the very same reasons described in this article from Axel Merk. We don’t try to hit any home runs, but being able to make money when everyone else is losing theirs is very helpful.

Axel Merk, Merk Investments Aug. 4, 2015

Increasingly concerned about the markets, I’ve taken more aggressive action than in 2007, the last time I soured on the equity markets. Let me explain why and what I’m doing to try to profit from what may lie ahead.

I started to get concerned about the markets in 2014, when I heard of a couple of investment advisers that increased their allocation to the stock market because they were losing clients for not keeping up with the averages.

Earlier this year, as the market kept marching upward, I decided that buying put options on equities wouldn’t give me the kind of protection I was looking for. So I liquidated most of my equity holdings. We also shut down our equity strategy for the firm.

Of late, I’ve taken it a step further, starting to build an outright short position on the market. In the long-run, this may be losing proposition, but right now, I am rather concerned about traditional asset allocation.

Fallacy of traditional asset allocation
The media has touted quotes of me saying things like, “Investors may want to allocate at least 20% of their portfolio to alternatives [to have a meaningful impact on their portfolio].” The context of this quote is that because many (certainly not all!) alternative investments have a lower volatility than equities, they won’t make much of a dent on investors’ portfolios unless they represent a substantial portion of one’s investment. Sure, I said that. And I believe in what I said. Yet, I’m also embarrassed by it. I’m embarrassed because while this is a perfectly fine statement in a normal market, it may be hogwash when a crash is looming. If you have a theoretical traditional “60/40” portfolio (60% stocks, 40% bonds), and we suppose stocks plunge 20% while bonds rise 2%, you have a theoretical return of -11.2%.

Now let’s suppose you add a 20% allocation of alternatives to the theoretical mix (48% stocks, 32% bonds, 20% alternatives) and let’s suppose alternatives rise by 5%: you reduce your losses to -7.96%. But what if you don’t really feel great about losing less than others; think the stock market will plunge by more than 20%; and that bonds won’t provide the refuge you are looking for? What about 100% alternatives? Part of the challenge is, of course, that alternatives provide no assurance of providing 5% return or any positive return when the market crashes; in fact, many alternative investments faired poorly in 2008, as low liquidity made it difficult for investors to execute some strategies.

Scholars and pundits alike say diversification pays off in the long-run, so why should one deviate from a traditional asset allocation. So why even suggest to deviate and look for alternatives? The reason is that modern portfolio theory, the theory traditional asset allocation is based on, relies on the fact that market prices reflect rational expectations. In the opinion of your humble observer, market prices have increasingly been reflecting the perceived next move of policy makers, most notably those of central bankers. And it’s one thing for central bankers to buy assets, in the process pushing prices higher; it’s an entirely different story for central bankers trying to extricate themselves from what they have created, which is what we believe they may be attempting. The common theme of central bank action around the world is that risk premia have been compressed, meaning risky assets don’t trade at much of a discount versus “risk-free” assets, notably:

Junk bonds and peripheral government bonds (bonds of Spain, Portugal, Italy, etc.) trade at a low discount versus US or German bonds; and
Stocks have been climbing relentlessly on the backdrop of low volatility.

When volatility is low and asset prices rise, buyers are attracted that don’t fully appreciate the underlying risks. Should volatility rise, these investors might flee their investments, saying they didn’t sign up for this. Differently said, central banks have fostered complacency, but fear may well be coming back. At least as importantly, these assets are still risky, but have not suddenly become safe. When investors realize this, they might react violently. This can be seen most easily when darlings on Wall Street miss earnings, but might also happen when central banks change course or any currently unforeseen event changes risk appetite in the market.

Fundamental Truths

profit-loss-riskMy Comments: If you have money invested somewhere you may be  wondering how the next several months are going to unfold. We’re in the sixth year of a bull market and that’s a historically long time without a serious correction. This commentary by a very knowledgeable person may give you some insights worth having.

Commentary by Scott Minerd August 17, 2015

Markets that are in the midst of transition do not behave according to script, despite the best efforts of policymakers to script them. Last week, China loosened control of its currency, resulting in its biggest one-day loss in two decades, compounded by additional losses over the following days. As of this writing, the renminbi (RMB) has depreciated by close to 3 percent since the start of last week. This “surprise” move roiled markets and triggered concern that other central banks would follow suit, but the reality is that the fundamentals were so overwhelming that the People’s Bank of China’s (PBoC) action was practically unavoidable, as I wrote on July 31.

Central banks and policymakers often perpetuate confidence-inspiring narratives in the face of contradictory fundamentals. In this instance, Yi Gang, a vice governor at China’s central bank, told investors at a May 22 meeting that given the size of China’s trade surpluses, further currency devaluation would not be necessary. Unfortunately, Mr. Yi’s statement turned out to hold as much water as when then-U.S. Federal Reserve Chairman Ben Bernanke told us in the spring of 2007 that the subprime crisis was a contained and limited event. After allowing the RMB to weaken, the PBoC made the unusual move of hosting a press conference last Thursday to defend its actions and to reiterate that the RMB has made sufficient valuation adjustment that it would not devalue further.

We should know by now that the reality of a situation can be very different to how policymakers package it for public consumption. The problem is they often say exactly what the market wants to hear, not what it needs to know. The lesson to be learned is to trust the fundamental underlying data. In the case of China, the latest weakness in trade data—China’s July exports declined by 8.3 percent year over year, much worse than the 1.5 percent decline expected by the market—would suggest the RMB faces more downward pressure. When policymakers are telling you one thing and the data are telling you something different, heed the data.

Right now, the Fed is telling us that it is going to raise rates soon. I don’t know what the definition of “soon” is, but most players in the market think that soon means sometime this year. Of course, the Fed is conspicuously retaining its data-dependency clause, affording it the privilege to change its mind. Unlike in China, the economic data in the United States is much more aligned with and supportive of policymaker guidance. We are on course for a Fed rate increase this year. Whether the Fed acts or doesn’t act in September or December doesn’t matter—we know it is coming. For investors, there are more pressing matters at hand in almost every other major global market. On top of a slowdown in consumer activity, Europe faces the prospect of a slowing economy due to export demand falling off in China and the uncertainty created by Greece, which probably means that rates in Europe will go lower. Similarly, Japan’s economy will suffer as China, its largest trading partner, loses steam and the devaluation of RMB makes Japanese exports less competitive. The depreciation of the RMB will put more downward pressure on commodity prices, so we are not at the end of the road for industrial metals or energy price declines. Regardless of a Fed rate hike, demand for safe-haven U.S. Treasuries as a result of all this global turmoil could push yields meaningfully lower, even as low as 1 percent. While the data on the U.S. economy is clearly showing softness, which seems to correlate with a drop off in exports of capital equipment to Europe and China, the U.S. economy is nowhere near recession territory.

Uncertainty eventually yields to opportunity, and while it would probably be premature to jump in today, there are places in the world where things are getting cheap enough that they deserve a look. The bottom line is we are now into the dog days of summer. Markets have little new information upon which to act. Given the light volumes and lack of new buyers, risk assets will continue to languish. Risks remain to the downside (lower prices) as new data, especially from overseas, seem more likely to disappoint than to support improvement in economic activity. Negative surprises like the sudden decline in the Malaysian ringgit will continue to put downward pressure on commodity prices, which will probably spill over into both stocks and corporate debt, especially those of commodity companies like energy and mining. We are likely to see credit spreads widen (ground zero will continue to be in the energy sector), stock prices decline, and long-term interest rates rally.

I do not believe the swirling uncertainty portends a giant bear market for risk assets, but we have not had a U.S. equity market correction in over four years—it has been 1,471 days since the last correction started, more than double the historical average since 1928 of 706 days—so we are well overdue. In short, I doubt we have seen the worst. We should not be surprised at this seasonally challenging time to see a meaningful selloff in equities. I would expect that the current downward pressure on risk assets will abate sometime in late September or early October. Until then, the environment should be supportive for longer duration U.S. Treasury notes and bonds. Caution is the watchword.

The Next Bear Market?

financial freedomMy Thoughts: Like a broken clock that is right twice a day, my talking about the coming market crash will be seen as truth. Some, including me, think the downturn has already started. Something will trigger a free fall, and then it’ll start going back up. There are strategies that will help you survive and thrive and they are alluded to here.

Jesse Felder, – Jul. 30, 2015

Yesterday I found myself reading GMO’s latest quarterly letter and thinking, ‘Wow, I’m fairly bearish but Jeremy Grantham just sounds like a grumpy old man!’ Until I came upon this passage:

“…you may think that I am particularly pessimistic. It is not true: It is all of you who are optimistic! Not only does our species have a strong predisposition to be optimistic (or bullish) – it is probably a useful survival characteristic – but we are particularly good at listening to agreeable data and avoiding unpleasant data that does not jibe with our beliefs or philosophies.

Facts, whether backed by 97% of scientists as is the case with man-made climate change, or 99.9% as is the case with evolution, do not count for nearly as much as we used to believe. For that matter, we do a terrible job of planning for the long term, particularly in postponing gratification, and we are wickedly bad at dealing with the implications of compound math. All of this makes it easy for us to forget about the previously painful market busts; facilitates our pushing stocks and markets on occasion to levels that make no mathematical sense; and allows us, regrettably, to ignore the logic of finite resources and a deteriorating climate until the consequences are pushed up our short-term noses.”

We are only a few years removed from one of the worst financial crashes in our history and investors have already put it out of their minds. Most importantly they have forgotten perhaps the greatest lesson of that time: overpay for a security and you are essentially taking much greater risk with the prospect of much reduced reward.

Right now, stocks as a whole present very little in the way of potential reward. According to Grantham’s firm, investors should probably expect to lose money over the coming seven years in real terms (after inflation). Other measures (explained below), very highly correlated to future 10-year returns for stocks, suggest investors are likely to earn very little or no compensation at all over the coming decade for the risk they are assuming in owning stocks.

In trying to quantify that risk, Grantham’s firm suggests that investors are now risking about a 40% drawdown in order to earn less than the risk-free rate of return. I have also demonstrated recently that margin debt in relation to GDP has been highly correlated to future 3-year returns in stocks for some time now. The message we can glean from record high margin debt levels is that a 60% decline over the next three years is a real possibility. Know that I’m not predicting this outcome; I’m just sharing what the statistics say is a likely outcome based on this one measure.

This horrible risk/reward equation is simply a function of extremely high valuations. As Warren Buffett likes to say, “the price you pay determines your rate of return.” Pay a high price and get a low return and vice versa. Additionally, if you can manage to buy something cheap enough to build in a “margin of safety,” your downside is limited. However, when you pay a high price you leave yourself open to a large potential downside.

Speaking of Buffett, his valuation yardstick (Market Cap-to-GNP) shows stocks are currently valued just as high as they were back in November 1999, just a few months shy of the very top of the dotcom bubble. Investors should look at this chart and remember what the risk/reward equation back then meant for the coming decade. For those that don’t remember, it meant a couple of massive drawdowns on your way to earning very close to no return at all. (Specifically, this measure now forecasts a -1% return per year over the coming decade.)

Instead, investors today choose to hide behind an “eminence front.” They ignore these facts simply because they are unpleasant to think about. Despite the horrible risk/reward prospects of owning equities today, they have now put nearly as much money to work in the market as they did back in 1999. (This measure is even more highly correlated to future 10-year returns. It now forecasts about a 2.5% return per year over the coming decade.)

It’s truly an astounding phenomenon that investors, after experiencing the very painful consequences of buying high – not just once but twice over the past 15 years, can once again be so enamored with paying such high prices yet again. Amazingly, they are as eager as ever to take on incredible risk with very little possibility of reward. It proves that “rational expectations” are merely the imaginings of academics and have no place in real world money management. It also validates Grantham’s view that it’s not him who is pessimistic; it’s investors who are too optimistic.

Rates Must Rise To Avert The Next Crisis

200+year interest ratesMy Comments: Interest rates are the price paid for using money owned by someone else. The rise and fall of that price, which we call interest, is a critical element when it comes to deciding how your money should be invested. For over 30 years they have been trending down and you will soon see that trend reversed. Being prepared will result in greater financial freedom for you.

By Scott Minerd, Chairman of Investments, Guggenheim Partners
As appeared in the Financial Times global print edition, July 16, 2015

In 1898, Swedish economist Knut Wicksell argued that there existed a “natural” rate of interest that balanced the supply and demand of credit, assuring the appropriate allocation of saving and investment.

Should market interest rates remain below the natural rate for an extended period, investors will borrow excessively, allocating capital into less productive investments, and ultimately into purely speculative ones.

This is what the US economy faces today after years of meagre borrowing costs. Policymakers have created a Wicksellian dilemma where investment spurred by low interest rates is driving economic growth, but these inefficient investments support growth at the expense of lower productivity in the economy.

In recent years, this investment has flowed into housing, commercial real estate, and equities, driving asset prices higher, exactly the goal of the Federal Reserve in the wake of the financial crisis. But as the recovery in real estate and equities matures, a darker side of this imbalance between natural and market rates is beginning to emerge. Many investments today using artificially cheap capital are not increasing productivity – they are being made, because money is cheap and the profit motive is strong.

Consider the evidence. This year likely will witness record US stock buybacks; the second biggest year for mergers and acquisitions; the highest percentage of non-investment grade borrowers among new issuers of corporate debt; and a record for covenant-light loan issuance.

In the midst of all this, stock prices are appreciating at the slowest pace since the financial crisis. Why? Because top-line growth is low and productive investments in core businesses are wanton.

Over time, the natural rate of interest should roughly equate to the average return on new capital investment. Distortions in economic activity begin to occur when the natural rate varies materially from the market rate.

The aftermath of the current period of corporate borrowing and splurging will be nasty. Consider that the majority of defaults of US high-yield bonds during 2008 and 2009 were loans originated between 2005 and 2007 – the final three years of the last credit cycle when M&A and leveraged buyouts peaked. Similar to today, credit remained cheap and the Fed was slow to raise interest rates.

We are not back in the frothy days of 2007, but we are leaving the realm of smart investment decisions and moving into the “silly season” when investors become convinced that recession is nowhere on the horizon and market downside is limited.

It is a world where asset prices continue to appreciate and confidence remains strong, while capital chases a shrinking pool of productive investment opportunities. Similar to the run-up to 2007, rising asset prices and malinvestments today may be sowing the seeds of the next financial crisis.

The harsh reality is extended periods of malinvestment result in declining productivity growth, lower potential output, and slower increases in living standards. A failure to normalize market interest rates soon will result in more capital plowed into investments that are less productive and more speculative.

As productivity declines, long-term growth will be stunted. Eventually, inflationary pressures will build, forcing market interest rates to rise. The longer market rates remain below the natural rate the greater the purge will be once higher rates induce a recession, causing a sharp rise in defaults among malinvestments made during the period of cheap credit.

Today looks a lot like 2004 or 2005, when investors were blissfully ignorant of what awaited. It is still early, but I get increasingly concerned the longer I see undisciplined investors clamoring for bonds with suspect credit worthiness at ludicrously low yields. Higher rates, higher prices, or both are on the horizon. Before long, some of those bonds may become toxic waste.

The good news is there remains time to take action. Policymakers can still make adjustments to avoid the worst phase of the credit cycle. To reduce the continued accommodation of these marginal investments, the US central bank should normalize rates soon. For investors, the time has come to consider opportunities to book gains in assets that in the reasonable light of day a prudent investor would never buy.

Staring Into An Abyss

deathMy Comments: Greece is the focus for many of us whose professional interest is the management of money, both for ourselves and our clients. I’ve said the crisis has the potential to be calamitous, not just for Europe, but for the rest of the world too.

Here, Scott Minerd suggests we step back a bit and stop being apocalyptic.

July 06, 2015 Commentary by Scott Minerd, Guggenheim Partners

In the wake of the results of Sunday’s Greek referendum, there fundamentally remain three possible outcomes. The first is as follows: Greece remains in the European Union (EU) and the eurozone while remaining in arrears on its payments to the IMF and defaulting or falling into arrears on its next payment to the European Central Bank, which is due on July 20, and the Troika begins to work out a restructuring of Greek debt.

The likelihood that the ECB will extend more liquidity to Greek banks seems remote under any circumstances. The ECB could call loans made under Emergency Liquidity Assistance to Greek banks or just maintain those loans. Either way the ultimate outcome will be the same – Greek banks will run out of euros sometime this week and the whole of the Greek banking system faces insolvency.

The second option is the same as the first except that Greece or the EU decide that Greece should leave the eurozone. I don’t see this as being much different than the first except that it increases questions about the long term viability of the euro. I think that question exists regardless, but it obviously raises the severity of the issue in the near term.

The third option would be like the second, but would include Greece exiting the EU. I think this is very unlikely unless Russia or China (or both) were to suddenly provide some kind of lifeline to Greece. This could be devastating to the EU and the NATO Alliance. I believe this is a low probability outcome. We will not know which path policymakers will follow until later in the week and then maybe longer. Nevertheless, markets will have to deal with the uncertainties created by the outcome of the referendum and have not fully priced for the risk of this event. If we had a “YES” vote I think equity markets would have rallied and bonds would have generally sold off. That tells me that some of this risk has been baked into prices.

A replay of last Monday is quite likely, which means a classic risk-off trade with a rally in German bunds and Treasury notes and bonds. Bonds of European periphery governments like Spain and Italy are likely to sell off again. The euro should come under pressure, while the dollar advances and global equity markets experience another sell off.

How long will this go on and how protracted will this risk-off period be? That is the real question. A number of years ago, the contagion threat posed by “Grexit” is a lot different than today. Since then, most banks outside of Greece have been purged of their Greek credit exposures, which now look immaterial relative to bank capital.

Of course, exposures are material in official institutions, but still small in absolute terms at less than 2 percent of annual European GDP. Questions still loom as to undefined derivative exposure throughout the financial system. Compared to the resources and tools available to the global central bankers (particularly the ECB) and the relative preparedness in contrast to the days when Lehman Brothers failed, I do not believe we are on the brink of a systemic collapse as we were in 2008.

But there remains at least one black swan event that deeply concerns me and should not be ignored. If other countries in Europe which have engaged in austerity should view the Greek outcome as a win, then political pressures may build and the survival of the euro, which one commentator referred to Sunday night as “hanging by a thread”, may itself be drawn into question. The warning signs of that outcome would be to see German bund prices decline in the wake of bad news. While I assess this risk as low, keeping an eye on bund prices as a barometer for survival is still important.

Regardless, the reaction of central banks will be vigilance. The trusty printing press stands ready to inflate asset prices and swell liquidity as needed. Don’t expect preemptive action. Central bankers will wait to see if and how much actual action is needed. There will be an attempt at the illusion that money printing will not be immediately undertaken to avoid the appearance of creating moral hazard. But, if anything was learned by the Lehman event, moral hazard exists and it is alive and well. Every effort will be made to stem any crisis in the wake of the Greek referendum.

For those who are ready to declare the failure of the great European experiment and view Greece as the beginning of the endgame for the euro, they might be advised to wait.

The Greek referendum will likely cause yet another round of innovation and recommitment by European policymakers to the success of a unified continent. In the days ahead, pro-growth policies will likely be expanded around the continent. For example, just last week Prime Minister Mariano Rajoy of Spain announced an acceleration of tax cuts while increasing projected economic growth to 3.3 percent for 2015, a growth rate which may end up greater than that of the United States. Expect more of these announcements in the coming days.

Countries at the core of Europe are deeply invested in the success of the eurozone. The idea that Greece may exit will be enough for policymakers to double down in the days ahead. While many see Grexit as the beginning of the end, it may end up ushering in a new beginning for Europe. Let’s face it, many believe Greece should never have been allowed entry into the eurozone in the first place. Few would make that statement for Italy, Spain, Portugal, or Ireland. Nevertheless, the eurozone is a political creature whose fate will ultimately be decided through political means. That’s why policy makers will move quickly to offer largess to shore up the currency union.

While risks loom, it would be premature to throw in the towel on Europe especially as it is beginning to turn the corner. The wild card event may be that after an initial bout of euro-skeptic turbulence, things in Europe will get better, not worse.

Exposing The Dark Side of Personal Finance

financial freedomMy Comments: A recent report that airlines may be colluding on price is but one example of corporate excess that pervades our system. It’s not yet systemic, but given the opportunity, corporate America will take steps to advance its own cause at our expense.

After 40 years as a financial planner, I’m sensitive to questionable behavior by companies and their agents. With Rand Paul now suggesting the world is again about to end, anyone I can reach needs to be careful and know how to respond to those who step in your space and try to take your money. I echo the authors comments about the two named personalities; there is typically a collective groan at financial symposiums whenever their names surface.

by Brian Kay,, January 2015

This video is a great interview with Helaine Olen, author of the new book “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.” The interview – and her book for that matter – really sticks to it the talking heads of the personal financial industry such as Suze Orman and Dave Ramsey.

First, she calls out Orman for suggesting that people put all their savings in the stock market, a strategy Orman does not employ to her own finances out of concerns for stock market volatility.

More broadly, Olen objects to the idea that one person can give blanket advice to millions of viewers and readers.

“The idea that anybody can give specific advice to millions of people… it doesn’t really work. We’re all specific. We are not archetypes,” Olen said.


Every person has a different income than the next. Different needs embedded in their tightly woven budgets. Different plans for retirement. Different levels of comfort with savings and investing.

And it should be mentioned that all those talking heads are millionaires. It’s much easier for them to say, “Paying down all your debt is your number one priority” when they can immediately do so with the change in their couch cushions.

Real people are living under the economic pressure that hasn’t seemed to let up on those living and working on the ground level of our economy. They rely on credit for medical emergencies, unexpected repairs to their cars and homes, or to help them get through a long drought of unemployment.

Though I am not a big fan of her financial recommendation to “always buy indexed funds,” I strongly agree with her assertion that our financial problems stem from a culture that avoids having frank conversations about debt and savings.

If you are like me and can’t standing seeing flocks of people led astray by these “experts,” take solace in knowing that you provide an antidote to our culture’s financial problems.

By that, I meant that you provide honest, frank discussions with clients about their personal finances, savings and debt. You provide personalized financial advice to them for their – and only their – situation.

Not only do you provide that ideal financial solution, your solution is less complicated, more applicable and more trustworthy.

A book can’t ask a person what their biggest financial concerns are. A talking head on TV can’t say something relevant to everyone watching (though they think they are).

A book can’t build up enough trust with clients to hold them accountable to achieving their stated financial dreams. A talking heard can’t follow up with prospects after initial meetings via phone, e-mail or snail mail.

And neither can answer a call or text from clients when they have questions.

My hope is that you use this as ammo to keep fighting the good fight and to dare to ground people who are lead into the clouds by famous “experts” and dropped without a parachute.

Sunny with a Chance of Turbulence

coins and flagMy Comments: Many of us were blindsided by the severity of the pullback that happened in 2008-09. Many of us are still trying to get back to where we were and are fearful of it happening again soon. Some on TV are pushing the idea that it’s just around the corner.

It’s not. The chance of a massive collapse like happened a few years ago is virtually non-existent, short of an asteroid falling on us somewhere. Scott Minerd has a great understanding of financial dynamics, and his comments are always worth reading.

June 25, 2015 by Scott Minerd, Chairman of Investments, Guggenheim Partners

It seems summer brings out the sunny disposition in everyone. Despite the fact that returns across U.S. investment categories are pretty dismal year to date, markets are pricing optimistically and it seems the sunshine has brought growth back to the U.S. economy. Recent data from the Bureau of Labor Statistics showed a 280,000 increase in employment in May. Additionally, building permits rose 11.8 percent in May, better than the 3.5 percent decline forecast by economists, while the pace of existing home sales hit its fastest rate since late 2009. Taking everything into account, the likelihood that the U.S. economy will suffer a recession in the next year or two would appear to be extremely remote.

Still, seemingly isolated events could yet sour the mood. Since the euro crisis erupted back in 2010, the possibility of a “Grexit” has been a recurring issue. A number of commentators have painted the possibility of a Greek exit from the euro zone as the equivalent of a Lehman Brothers-style event, a view I’m not so certain is correct. With that said, seemingly minor occurrences have in the past set the stage for larger economic events, such as the collapse of the Thai baht, a seemingly contained event that ultimately proved to be the first domino to fall in the 1997 Asian crisis. While we cannot discount the consequences that a Greek exit could potentially herald, I believe a solution to paper over this seemingly never-ending crisis is likely to calm markets in the near term.

As for developments at the Federal Reserve, while some commentators have suggested that the Fed is leaning toward December, I can see no reason why the Fed would consider delaying a rate rise beyond September. Either way, I don’t think it matters: The bottom line is that a rate hike is coming. Personally, I consider the bond market to be in fairly good shape and capable of handling the beginning of “normalization” without a rerun of the 2013 taper tantrum, but only time will tell.

Lastly, despite the generally positive environment, it disturbs me how low returns have been across almost every asset class year to date. This tells me that markets may be getting fully priced for the near term, and that investors have already placed their bets on how they see major events of the day playing out. With all the chips on the table, new market inflows are likely needed in order to push prices higher, but I don’t envision significant inflows occurring until the fourth quarter. As evidence, the S&P 500 has not had a weekly move of more than 1 percent in either direction in two months, which is the longest such streak in over two decades. During this period, breadth has broken down in a meaningful way. For now, it doesn’t appear that investors are being compensated for the risks they are taking.

Despite poor year-to-date performance, the majority of forecasters have yet to alter their year-end S&P 500 price targets. In fact, the dispersion around analysts’ predictions is as tight as it’s been since 2009. This tells me the market doesn’t really feel like there’s a lot of uncertainty, which is concerning, because such high levels of complacency usually foreshadow some form of financial accident. I am not talking about a financial crisis, or a recession—we certainly have no indications of either yet—but there have been a number of periods of prolonged expansion where complacency climbs high and we wound up in an extremely turbulent period. Think about 2011, when there was a severe summer pullback in U.S. equities. Similar to today, at that time investors had basically put their bets on the fact the recovery was in place, and that stocks were going higher. Those bets turned out to be correct, but only after we narrowly avoided a 20 percent pullback.

With complacency as high as it is today, I fear we could be in for meaningful turbulence this summer. For this reason I would encourage investors to consider accumulating cash reserves or Treasuries in order to insulate themselves against any potential summer squalls during the next few months.

Economic Data Releases – U.S. GDP Revised Up in Final Estimate; Consumer Spending Records Fastest Growth in Nearly Six Years
• First-quarter GDP was revised up in the final estimate, but was still negative at -0.2 percent annualized. Better consumer spending helped revise the growth number upward.
• Existing home sales beat expectations in May, rising 5.1 percent to an annualized pace of 5.35 million homes. The percentage of first-time buyers rose to 32 percent.
• New home sales increased 2.2 percent in May, up to 546,000 after a positive revision to April’s data.
• Durable goods orders, excluding transportation, met expectations in May, up 0.5 percent. Nondefense capital goods orders excluding aircraft rose 0.4 percent, missing expectations after falling in April.
• The Federal Housing Free Agency House Price Index rose 0.3 percent in April, matching the previous month’s gain
• Personal spending jumped 0.9 percent in May, a stronger showing than the 0.1 percent gain in April and ahead of market expectations of a 0.7 percent increase.
• Personal income climbed by 0.5 percent in May, matching the upwardly revised increase seen in April.
• In the 12 months through May, the personal consumption expenditures (PCE) price index rose 0.2 percent. The core PCE price index, excluding food and energy, rose 1.2 percent in the 12 months through May

Euro Zone PMI Data Releases Continue to Point toward Growth
• Euro zone consumer confidence was unchanged in the initial June survey, remaining at -5.6.
• China’s HSBC manufacturing purchasing managers index (PMI) improved in June, but remained in contraction at 49.6.
• The euro zone manufacturing PMI showed a slight acceleration in activity in June, rising to 52.5 from 52.2. The services PMI rose to 54.4, a more than three-year high.
• Germany’s manufacturing PMI was better than forecast in June, rising to 51.9 vs. expectations of 51.2. The services PMI also rebounded after declining for the past two months.
• The French manufacturing PMI returned to expansion in June at 50.5, the highest reading in 14 months. The services PMI also made a multi-year high.
• Germany’s IFO Business Climate Index fell more than forecast in June, with both the current assessment and expectations worsening.