A View From an Institutional Manager

One of the great opportunities we get because of the amount of money we manage is access to people that are usually hard to get to.  I had a call this week with a portfolio manager from Guggenheim Investments.  We got to talk about the recent Federal Reserve comments and their view on the economy over the next several years.  In their view, the Fed is overly worried about slowing down the economy, so much so that their actions might actually cause the next recession.

The US Federal Reserve controls the amount of money in circulation and short term interest rates.  Recently, they announced measures that would encourage growth, but the announcement was met with concern by the markets.  The Fed was proposing medicine to the economy and the market didn’t even know it was sick.  We believe this market pessimism is a short term thing.  Our projections show several months of sustained growth on the horizon and an accommodative Fed just helps the market run.  But the Fed only has so many bullets or ways of spurring growth.  If it uses those bullets too early, they might be able to help less when it’s needed.

Guggenheim sees growing cracks in the bond market.  This is not the first time this week that we have heard this.  Another institutional income manager, Mike Terwillinger from Resource Credit, mentioned that protections to investors continue to decrease, which affects a bond holder’s ability to recover money if the borrower defaults.  Guggenheim echoed the same concerns and added that the rating agencies appear to be more generous with their “investment grade” rating than they should be.  Big names like AT&T are borrowing a lot to buy other companies and that should negatively affect their credit rating, but it hasn’t.  In the end, it means that investors might be buying bonds that aren’t as safe as they think.

Guggenheim’s belief is that the Fed’s accommodative stance is causing this bond rating bubble to grow and it will make the ultimate adjustment of prices more dramatic around the end of 2019.  At the same time, stocks could be on a growth trajectory, fueled by easy and available money.   When the Fed steps in to cool down the stock market, the bond market tightens, bonds get repriced down, funding dries up, and the economy moves towards recession in late 2020.  Guggenheim’s funds are already moving away from risk.  In fact, to quote them, they feel like people are picking pennies up (interest) in front of a steam roller.

We don’t know what’s actually going to happen, but it would be reasonable to act with caution.  One thing our clients get from us is access to information from these types of institutional thought leaders and dynamic portfolios which attempt to adjust to risk.

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