Markets around the world must soon contend with central banks adapting their policies to a much-recovered economic environment. This may start this fall in the U.S. with tapering of quantitative easing policies. Europe and South Korea have already started, and some other east Asian countries are not far behind. Coming up, either next year or soon thereafter, raising interest rates.

Every investor knows this is inevitable, but it will still cause rumblings and dislocations in both the stock and bond markets. Poorly conceived strategies will crumble, some speculators will be caught wrong, and volatility will increase. Policies are changing and adapting to a much-improved environment, and this may offset any major damage. If companies can show that their prospects are even better, the stock prices will overcome setbacks. This is likely because money is still easy, and the economy is strong. Our stock selection process anticipates this new era.

Bond markets, however, have no escape. There will be damage. Quality issues will have to adjust to higher rates; remember this means current prices will fall. Lower quality issues may suffer greater damage because defaults will be an increasing risk. The only solution is to keep maturities short and stay with very secure credits. Interest rates too low for too long have been harmful; good riddance!

The Bull and his partners have already begun preparing for these eventualities. We will continue to adjust as needed to enable our clients to weather and possibly thrive in this new era. One man’s risk is another man’s opportunity. We are vigilant and bargain hunting; stay steady my friends.

The Lonely Bull