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| JULY 2006 NEWSLETTER On the Topic of Gradually Moving Back to Bonds  Is it time to get back in the pool? That is the long-term bond pool. We think the answer is yes. As the Fed raised and lowered short-term interest rates, we expected bond values to react in an opposite manner, and predictably they did just that. If you owned bonds, their prices went up as rates went down, and their prices fell as rates went back up. This is why we used cash or inverse bond funds as part of your portfolio’s bond allocation. We believe that it is now time to begin dipping our toe back into the waters of the bond pool. Why? Interest rates can be thought of as simply a way to compensate bond issuers for the risk that they incur in issuing bonds. Inflation is a major part of that risk. It is our belief that inflation is not a very large risk from now until the end of the decade. Therefore the Fed will not see a need to raise interest rates more than the current string of 17 consecutive times. Essentially, they have already “over-steered” in their analysis. It takes 18 months for an interest rate hike to fully work its way into the economy. The problem lies in that they over-steered once before in the last wave of 13 consecutive rate decreases and now they are attempting to correct this problem that they created. More importantly, demographics (you knew that what was coming) tell us that the Boomers are in the shank of their most productive years: the mid-forties. Leveraged by technology, the Boomers are definitely a force of nature! This historic productivity seems to surprise the Fed, even though it was predicted by Harry Dent many years earlier. This productivity and the generational spending wave will peak and crash as the Boomers move to the stage in life where they will have the most impact: Retirement. This peak is as predictable as your next birthday. Did you know that 11,000 of us are turning 60 every day? That pace will increase as the largest birth years, 1957 and 1961, progress through the python of our economy. So, enjoy your summer at the pool and the beach, and know that we will be busy preparing you for the waves of the economy and investment markets that lie ahead. We look forward to speaking with you soon. | |
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Ready to Retire