Investment Manager’s Report
What happens next? Well…let’s say the Fed continues with its measured response. The implications of very visible quarter point, incremental, increases in short rates would fail to temper the enthusiasm for speculation, in my opinion. In such a world, the US economy would continue to create over a trillion dollars of new credit each year via the housing market (Bernanke’s helicopter, perhaps). Asian central banks would continue to hold the other side – dollar i.o.u.s collateralized by American homes. The economy would continue to advance and as a consequence the stock market might sustain its trading range, volatility would remain surprisingly low and hedge funds would cancel out each other’s returns. Under this ‘preferred’ option the incipient visible inflationary momentum of the last few months would continue, PE ratios would contract and commodities such as oil would remain attractive.
