Professional Documents
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AMM AMERICAN MONEY MANAGEMENT, LLC
SEC Registered Investment Advisor
PO Box 675203, Rancho Santa Fe, CA 92067 Tel 888‐999‐1395 Fax 866‐364‐1084 info@amminvest.com www.amminvest.com
ECONOMIC TUG-OF-WAR
There is currently a tug of war between improving economic and company fundamentals on the one side, and con‐
cerns about debt‐related stress points and the longer‐term strength of the economic recovery on the other. Those com‐
mitted to spending our way to recovery (including the current Administration and a majority of the Federal Reserve
Board) are focused on continued government stimulus and an ʺeasy moneyʺ monetary policy (see near zero interest
rates) to maintain the momentum of the current recovery. Economist Paul Krugman sums up this position in a recent
New York Times op‐ed piece:
ʺYes, America has long‐run budget problems, but what we do on stimulus over the next couple of years has almost no bearing on our
ability to deal with these long‐run problems. As Douglas Elmendorf, the director of the Congressional Budget Office, recently put it,
ʹThere is no intrinsic contradiction between providing additional fiscal stimulus today, while the unemployment rate is high and many
factories and offices are underused, and imposing fiscal restraint several years from now, when output and employment will probably be
close to their potential.’ʺ
Of course, to fund continued stimulus will likely require larger deficits and increased federal debt levels. The past two
years have made the consequences of too much debt painfully clear to individuals and businesses. Some of the same
basic math applies to the federal government. By themselves, high debt‐to‐income levels do not necessarily strain re‐
sources. (Many people carry mortgage loads in excess of their annual incomes.) However, when the interest rate on debt
is higher than the rate of income growth, a problem starts to develop ‐ debt servicing eats up a progressively higher per‐
centage of income ‐ unless debt is paid down. Over the last 28 years, there has been a long decline in the interest rate
paid on the Ten Year U.S. Treasury Note (Chart A). This has effectively allowed our federal government to issue more
and more debt at increasingly favorable rates.
Chart A
P a g e 2
Chart B
Since the start of the new millennium, the amount of this debt held by Foreign & International investors has bal‐
looned (Chart B). While concerns about the national debt are not new, the massive increase in debt as a percentage of
GDP (not seen since World War II) combined with the European debt scare in May have caused investors around the
world to question both the ability of developed economies to repay their debts and the point at which creditors will de‐
mand a higher rate of return. Regardless of when rates may rise in the future, it is clear that the global economy, while
better off than it was in late 2008‐2009, still faces many challenges. High government debt levels in the developed world
will have to be dealt with through inflation, higher taxes, entitlements or a combination of the three. None of these are
particularly good for economic growth.
BONDS: Bonds typically serve as the backbone of a typical income or balanced account. Historically, bonds offer
lower volatility than stocks and are perceived as a safer asset class. Over the last few years, we have increasingly
used bond‐oriented investments in growth accounts as well. Like all assets, however, bonds should be purchased at
attractive prices. Given the extremely low interest rate environment and massive inflows into bond funds over the
last few years, we do not see significant value in the typical investment grade bond. Longer maturity bonds, which
will fall more in price in the event of rising interest rates, are especially unappealing at this stage in the business cy‐
cle. Nevertheless, we still find some reasonable value in three classes of bond investment:
1. Emerging Market Bonds: These bonds include the bonds of developing economies like Brazil and Indone‐
sia. Potential returns come from the interest income and our expectation that the economic fundamentals
(less debt and more growth) in many developing economies are very likely to lead to currency appreciation
(versus the dollar) over a multiyear time frame.
P a g e 3
Bonds (cont.)
2. Inflation Protected Bonds: Commonly known as TIPS (treasury inflation protected securities), the princi‐
pal value of these bonds fluctuate with changes in inflation. Given our view of higher future inflation, we
view these bonds as an attractive investment grade alternative to owning regular treasury bonds.
3. Shorter term investment grade (tax free and taxable) bonds: While we view longer maturity bonds as un‐
attractive at current levels, some shorter‐term bonds (1‐7 years in maturity) are still relatively appealing at
current levels. If interest rates do begin to rise, shorter term bond holders will be able to roll into higher
yielding bonds at maturity.
STOCKS: Based on long run historical risk/reward profiles, stocks provide higher long‐term returns but signifi‐
cantly greater volatility than bonds. While stocks remain a core part of most growth and balance oriented invest‐
ment portfolios, we have lowered our weighting to this asset class in recent months.
1. Emerging Market Stocks: We view the financial strength, demographic makeup (younger popula‐
tions) and growth opportunities in these countries as supportive of higher stock prices over the next 3‐5
years.
2. Dividend Paying Stocks: Some high quality stocks with the ability to pay dividends (generate income) are
currently attractive.
DIVERSIFYING ASSETS: Diversifying assets include non‐stock and bond investments like gold and real es‐
tate. We continue to favor income producing global real estate via the Alpine Premier Properties Fund. This fund is
currently trading at a 15% discount to underlying net asset value and yielding approximately 7%. Additionally,
where appropriate, we have provided accounts with exposure to broad commodities through exchange‐traded
funds. Both of these investments are meant to provide some hedge against future inflation.
In May, we sent a ʺMarket Updateʺ to our clients via email. We intend to send more of these updates periodi‐
cally. Please contact us if you did not receive the update, so that we can confirm your correct email address.
As always, we thank you for entrusting AMM to help you achieve your investment and retirement objectives.
If you have any questions, concerns, or comments, please do not hesitate to contact us.
Your Portfolio Management Team
Gabriel Wisdom Michael Moore Jim Rhodes, CFA Mickey Christian Tom Jolls Joseph Dang, Esq.
Managing Director Chief Investment Officer Executive Director Executive Director Executive Director In-House Counsel
Glenn Busch Adele Canetti Bryan Case Allen Kay Robert Frazier Vicki Moore
Portfolio Manager Portfolio Manager Financial Advisor Financial Advisor Financial Advisor Operations Manager
AMERICAN MONEY MANAGEMENT,
LLC
Mailing Address: PO Box 675203, Rancho Santa Fe, CA 92067
14249 Rancho Santa Fe Farms Rd, Rancho Santa Fe, CA 92067
www.amminvest.com