In spite of the best efforts of market participants, bullish economists and financial media pundits to talk up recent economic data, the fixed income markets are not biting. The most recent employment data painted a picture of a moderately growing economy with modest wage growth. If not for logging and mining (which includes energy production), hours worked would have declined year over year. When logging and mining is included, average weekly hours are unchanged versus last year. The pace of job growth and wage increases will probably trend below the more bullish expectations. However, for those who understand that the world is flat, this should come as no surprise.
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For several weeks, media pundits and equity market participants questioned the bond market’s outlook on the economy. Some market participants went as far as to say that the bond market “had it wrong.” This is something with which we vehemently disagreed. Economic data released in recent weeks (including last week’s jobs data) has supported the bond market’s outlook. As a result, the yield of the benchmark 10-year Treasury note has settled in the neighborhood of 2.70%. It comes down to this:
For growth to pick up, either household incomes must rise or prices must fall. On one side; fiscal policies set wages through minimum wage laws, government worker contracts, etc. On the other side is monetary policies designed to prevent price deflation. The challenge facing developed economies is how to generate growth without allowing prices and wages to reset to levels determined by global economic realities. For more than two decades, economic growth exceeded wage growth as debt took the place of higher household incomes. As it is wont to do, the Fed lowered borrowing costs to record low levels in the hope of increasing borrowing and lending. However, the problem is not the cost of household leverage. It is that households are unable and unwilling to borrow and spend as they have in the past. As a result we have U.S. workers who (although they are making less than in the past) are being paid artificially-high wages (versus global competition) trying to purchase goods which could be priced lower if markets were permitted to function properly.
By Thomas Byrne – Director of Fixed Income – Investment Consultant
Thomas Byrne brings 26 years of financial services experience to Wealth Strategies & Management LLC. He spent the last 23 years as Director of Taxable Fixed Income for Citigroup, Inc. and predecessor firms in New York, NY. During the course of his long fixed income career, Mr. Byrne was responsible for trading preferred stock, corporate bonds, mortgage backed securities, government debt, international debt and convertible bonds. Mr. Byrne was also responsible for marketing, sales, strategy and market commentary within the taxable fixed income markets.
- November 2012 – Present, Wealth Strategies & Management LLC, Stroudsburg PA
- December 2011 – November 2012 – Bond Squad, Kunkletown, PA
- April 1988 – December 2011, Citigroup and predecessor firms, New York, NY
- June 1986 – March 1988 – E.F. Hutton, New York, NY