Thursday, August 29, 2013

Wall Street is constantly changing. If you listen to the news media you would think that everything remains the same until Congress or the SEC decides to increase regulation or get more involved. That is not the case. Recent volatility in the financial markets have an very important lesson for the immediate future and provide an insight into the state of the US markets. This lesson is lost on most bond fund managers, which is why if you are invested in a bond mutual fund you have been getting killed recently. Wall Street has been quietly cutting their risk profile,not in response to the hue and cry of Congress but because a lower risk profile make better economic sense in terms of profitability. The fact that the big trading firms are less willing to carry inventory means that when institutional investors want to sell large blocks of bonds the price will drop farther and quicker than expected. A study of the corporate bond market in the late spring / early summer or the municipal bond market this summer will illustrate this point.

Wall Street firms have learned lessons from the financial crash of 2008, mutual fund managers have not.

Congress, who never cease to amaze, is warming up for another bogus discussion of the debt ceiling. Since all revenue bills must originate from the House the fact that the House is now considering not authorizing the funds to pay for the laws they have enacted makes less sense that usual. It is the equivalent of holding a gun to their own head and threatening to shoot themselves unless you stop them from doing what they just did. This is not fiscally responsible, it is just stupid.

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