New Dawn Is Breaking – Be Ready

Monday, December 7, 2009

110403_santamonica_beach_3Typically I write about one subject to give you an insight into a timely topic, key information that is being overlooked or an objective evaluation of a subject producing misleading emotions. Today, though, it’s time to rise above the details and look at the big picture because a major shift is in the works. Here are elements of the new trend(*)

Economy – Growth time is returning to the economy. Growth rates could be high as the move back to normal compounds the increasing real growth. Expect all economic sectors to participate.

Employment – Real, broad-based improvement. Competition will drive companies to seek good, currently unemployed, individuals. Also, expect them to rush back to colleges.

Short-term interest rates – In spite of recent remarks, Fed will shift gears rapidly to inflation prevention. They will allow rates to rise significantly from today’s abnormally low levels. Many growth benefits, especially to $11 trillion (!) in money market funds, savings accounts and small time deposits now earning zilch.

Long-term interest rates – Going up as deflation risk disappears and inflation worries return. A lot of refinancing from short-term to long-term by the US Treasury will soak up funds.

Financial industry – Forget Dubai World, focus on Bank of America and rest of US finance industry to see how health has returned. Lending, a pet congressional desire, has turned up.

Government finances – Federal, state and local budgets will improve doubly: reduced support spending and increased tax revenues. Also, there is a burgeoning interest in a balanced federal budget.

US dollar – Up. Rise in short-term interest rates and improvement in economic outlook will start the new, strong trend. No, it won’t kill off exports. Rather, it will give US businesses greater resources to pursue global expansion plans.

So, here is how to invest for this new trend.

Bonds – Avoid. Rates will rise across the board, putting all bond prices lower. There are no hidden corners offering special potential. Massive flows from investors this year have taken care of that. That includes TIPS (US Treasury Inflation-Protected Securities) – current yields are historically low, meaning prices are high.

Stocks – Own. Corporations, as a whole, are very well financed, have structured themselves to produce profits at recent economic levels, yet are prepared for growth. Earnings can rise dramatically from here in a growth environment. Expect all sectors, industries and company sizes to participate.

Asset allocation – Consider a barbell: money market funds for your fixed income (you will get the benefits of rising rates without the price drops from bonds) and stocks (primarily US). Avoid any Wall Street-created products that promise return with less risk – they will underperform.

(*) I have written about many of these areas, so, if you haven’t already, take a look at my past posts to see the underlying factors I believe are at work.

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John Tobey on Seeking Alpha

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December 2009