It was less than six months ago that pundits were declaring the U.S. economy healed. The government ended its shutdown and the folks in Congress agreed (for the most part) on a budget. The economy added more than 200,000 jobs last October and November. Things were looking brighter in the world’s largest economy, then came winter. The economy added just 84,000 jobs in December and 129,000 jobs in January. When one considers that payroll calculations during winter months, particularly January, contain significant upward seasonal adjustments, the economy probably added very few (if any) jobs in January. This is a poor result in even a harsh winter. Although February’s 175,000 jobs were strong, the number was also aided by seasonal adjustments. One could make the argument that in a “normal” winter, the number would have been higher. We agree, but we doubt that the data would have been much above 200,000. Considering that February data might have benefitted from both a catchup from a frigid January and hiring by businesses trying to get a head start on the spring selling season, the data appears only moderately encouraging for us.
Still, last month’s hiring data appear to indicate that the economy is at least chugging along. However, we have been wary of exogenous events, some we saw coming and some, which have come as surprises. Russia’s incursion into Crimea was an unforeseen exogenous event. We did not see it coming, few did. However, China’s problems were there for all to see. The problem was; few wanted to look.
One of our readers (an expert in the area of international fixed income) commented that China has been a problem for more than a decade. If China has been a problem for that long, why is it that investors have continued to plow money into the “Middle Kingdom?” It is because of a global thirst for yield. With nearly every developed economy offering exceptionally low rates of return, investors looked to emerging economies for enhanced returns. When a large amount of capital chases similar opportunities, it tends to get invested in bad opportunities as well as good. The consistent flow of investor capital, a lack of transparency and the (mistaken) belief that the Chinese government would not allow its corporations to fail, pushes asset prices higher. Investors marveled at their high, seemingly low-risk, returns and plowed more money into China. When that trade appeared crowded, money flowed into emerging markets on a macro basis. Investors cared little about in which emerging market countries or corporations their money was being invested. They only cared that it was going into EM investments. Few realized that they were benefitting from a self-fulfilling prophecy. As long as they and their yield-seeking brethren continued to pour money into emerging markets, their investments would perform well.
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, NYThomas ByrneDirector of Fixed IncomeWealth Strategies & Management LLC570-424-1555 Office570-234-6350 CellE-mail: [email protected]Twitter: @Bond_SquadHigh yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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