What the Baby Boomers turned Retirement Boomers mean for Growth, Jobs, Inflation and the Markets
That sounds quite gloomy, but what are the actual implications? My main issue in my posts last year was that while everyone was complaining about low growth, growth was actually much faster than you could long-term expect (that is until about 2025). While people talk a lot about a “new normal” and how the Great Recession has slowed credit growth and therefore economic growth, my opinion is that only the slack from the recession made the current growth possible. Now that unemployment is fast approaching what economist regard as “full employment” (or the “natural rate of unemployment”, which is estimated by the Congressional Budget Office), labor shortages are becoming wide spread and growth will actually slow further till it reaches a new equilibrium, where unemployment is steady.
This was what I thought about when I last year wrote about temporary full-employed recessions, something completely unusual to the US, but not that unusual in other countries that have a shrinking work force. Growth will be so slow that the economy will just due to the usual short-term fluctuations temporary shrink without causing the usual hallmarks of recessions like a spiking unemployment rate. The 1st quarter of this year, though weather-related, may be sign of things to come.
So low growth, low unemployment and low inflation (until around 2025). Where does that leave the Federal Reserve and the financial markets? With inflationary pressure absent, there is less need to raise rates, but with unemployment lower there is also no justification to conduct quantitative easing (QE) forever and let the FED balance sheet explode. So while a see QE to end in October as planned, I don’t see any meaningful interest rate hikes either. For quite some time people have feared that the more than 30-year old bull market in bonds will end in a big crash, once the Fed starts raising rates. I don’t see that.
And stocks? They have been living a great life in the last 5½ years thanks to an ever-expanding Fed balance sheet.
With the end of QE, the risky asset party will be over, while bond yields will be depressed for another decade, till inflation will eventually pick up after the retirement wave will have peaked around 2025.DYI Comments: During a bridge tournament one of the players partner after winning the hand scolded him by saying "we should have lost that hand." He resorted to luck instead of skill level to win. Investing is much like the game of bridge which favors the skilled players over those who rely on luck. Currently the long end of the bond market is just like playing bridge using skill instead of resorting to chance. In my prior post I stated that our 10 year Treasury bonds a proxy for high quality paper is now 95% above its long term average as measured by Price to Interest. What this tells us is that bonds historically measured are way over valued. However it appears they could stay that way for many years to come; the problem is knowing exactly when!? By staying (I'm comparing short/long bonds only) with short dated bonds you are playing your hand correctly. Many will continue to stay out on the long end and reap the higher rewards playing on luck to get out before the interest rate tide turns.
9-1-2014
BONDS
100 - [100 x ( Curr. PI - Avg. PI / 2 ) ]
________________________________
(Avg. PI x 2 - Avg. PI/2)
% Allocation 3%
3% x 60% (max. allocation) = 2%
(43PI - 22PI)/22 x 100 = 95% above average
DYI
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