Posted: 1/7/2011 by Jurrien Timmer
Mr. Timmer has more than two decades of experience in the investment world and is a 13-year veteran at Fidelity. Fidelity Investments is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing, and other financial products and services to more than 20 million individuals, institutions, and financial intermediaries.
He plays a key role in Fidelity's global asset allocation group, where he specializes in tactical asset allocation. As an investment strategist and portfolio manager, his work includes macroeconomic, technical, and quantitative disciplines.
Mr. Timmer's research is widely used by Fidelity's portfolio managers and analysts. In addition to this internal role, he is also a spokesman on investment matters to Fidelity's clients and associates.
Mr. Timmer joined Fidelity in 1995 as a technical research analyst. In 1998, he became responsible for the oversight of charting and other market research capabilities within Fidelity Management & Research Company. In this role, he became responsible for Fidelity's chart room content. Mr. Timmer joined the asset allocation group in September 2005, but remains involved with the chart room.
Since November 2007, Mr. Timmer has put his experience as a market strategist to work as the portfolio manager of the Fidelity Dynamic Strategies Fund. This is an "open mandate" asset allocation fund that consists of both Fidelity mutual funds and ETFs. The fund is managed using the same top-down holistic approach that drives his research.
Mr. Timmer received a bachelor of science degree in finance from Babson College in 1985. He was born and raised as a Dutch citizen in Aruba, but has been living in the United States all of his adult life and became a U.S. citizen in 2002.
But I don't expect a free ride. I believe there are several risks out there and one or more of them may well pop up in 2011. This could be be a rollercoaster bipolar year much like we saw in 2010, so I continue to think of gold and silver as a potential insurance policy against market turmoil.
Here in the U.S., we have a Fed that remains committed to quantitative easing (QE)—at least through this coming spring—and a fresh shot of fiscal stimulus via the extension of the Bush-era tax cuts and a 13-month extension of unemployment benefits. Other major central banks (the European Central Bank (ECB), Bank of England, and Bank of Japan) also remain accommodative. So, the easy money spigot remains open in these countries, which is something the stock market has tended to like. As the old saying goes, "Don't fight the Fed." Stocks like growth, but I believe they like growth plus easy money even more. Ironically, it may be an economy that does too well that could derail the bull in 2011, because it might lead the Fed to end QE.
I believe there are also technical reasons to remain bullish. Another saying is "Don't fight the tape," referring to the stock market's internal "voice"—technical indicators, such as measures of new highs, advancers vs. decliners, etc. Currently, the tape has remained strong for U.S. stocks, and breadth has made a new recovery high, confirmed by important indicators like commodity prices and credit spreads. And, one last factor to consider: we are in the third year of the presidential cycle. This historical pattern has tended to be bullish from the September of the second presidential year through the summer of the third year. We are almost at the halfway point of this period, and so far the bull is in play.
All in all, I believe the same dynamics that drove risk assets higher in 2009 and 2010 are still in place.
What I am more worried about are the structural risks. One such risk is the divergent paths that the U.S. and China are on in terms of monetary policy. I believe another risk is that the ongoing European debt crisis could flare up again, although that risk appears to be somewhat reflected in the markets already. Then there's a potential state budget crisis here in the U.S. and what the policy response might be in Washington (austerity or bailout). Finally, I believe there is a remote risk that Treasury yields might rise significantly and the Fed may feel compelled to bring them down. There's only a fine line between quantitative easing and debt monetization.
In this week's edition I would like to focus on the first one, the growing monetary imbalance.
I believe the best case scenario may be that we get some sort of soft landing wherein the U.S. and Europe gradually tighten, while China and others allow their currencies to appreciate. But I am not holding my breath because, in my opinion, neither the Fed nor the ECB are in a position to tighten for some time to come, given the sovereign debt crisis in Europe and the looming state budget crisis in the U.S. At the same time, China and others have big inflation problems, which they are addressing through monetary tightening, credit controls, price controls, and capital controls. One recent piece of good news is that the Chinese yuan has strengthened quite a bit lately, which seems to me like a better solution to the inflation problem than price controls.
In my opinion, the most likely scenario is that this imbalance continues to grow until we eventually have another hard landing, but the next one would be inflationary instead of deflationary. With the Fed and the ECB possibly staying very easy throughout 2011 and perhaps beyond, it may make it even more likely that China and others will continue to tighten further. After all, I think it could be a domino effect: quantitative easing in the U.S. could lead to a weaker dollar, which could put upward pressure on the yuan, which could force the People's Bank of China (PBOC) to intervene further (which it would do by creating fresh reserves in order to buy U.S. dollars), which leads to the risk of a credit bubble, which in turn could force the PBOC to tighten further. And so the vicious cycle could continue for a while longer, until it finally breaks. And when it does, I suspect we may be dealing with plenty of volatility—especially for currencies—and a good deal of inflation.
I don't know how or when this growing imbalance will correct. It might be a soft landing or a hard landing. It might be 2011 or 2012, or even 2013. But until the breaking point occurs, I think stocks may continue to do reasonably well, especially inflation beneficiaries such as energy and materials. I also think that commodities may continue where they left off in 2010 and perform well in 2011, while, at the same time, I believe the dollar could weaken further against the currencies of countries that are tightening.
If we do reach a breaking point, I think bonds, the dollar, and possibly equities may bear the brunt of the damage, while precious metals and strong currencies could become safe havens.
One thing is for sure: 2011 should be another interesting year!
In general the bond market is volatile, and fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities. Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
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