BlackRock Joins Pimco Warning Investors to Seek Inflation Hedge
Date
3/30/2016 9:07:12 AM
(MENAFN- ProactiveInvestors - UK) Fuller Treacy Money 09:29
BlackRock Joins Pimco Warning Investors to Seek Inflation Hedge
Here is the opening of this topical article from Bloomberg:
BlackRock Inc. joined Pacific Investment Management Co. in recommending inflation-linked bonds and warning costs are poised to pick up.
'Stabilizing oil prices and a tighter labor market could contribute to rising actual and expected U.S. inflation' Richard Turnill BlackRock's global chief investment strategist wrote Monday on the company's website. 'We like inflation-linked bonds and gold as diversifiers.' New York-based BlackRock manages $4.6 trillion.
Federal Reserve Chair Janet Yellen in a speech Tuesday in New York said she was confident inflation would gradually return to the Fed's 2 percent goal. Pimco which manages the $87.8 billion Total Return Fund and BlackRock have both told investors this year that inflation is picking up.
Treasuries gained after Yellen said caution in lifting rates is 'especially warranted" as the global economy presents heightened risks. The speech made a case for running the economy hot to push away from the zero boundary for the Fed's target rate.
David Fuller's view
From the Fed's perspective they would much rather keep rates low and deal with inflation later rather than risk having to roll back premature rate hikes because the US economy slipped into recession.
This is nothing like the 1970s script of the Aladdin inflation genie escaping from the bottle causing every employed person to expect significant annual salary increases. Today we still live in a deflationary environment due to slow global GDP growth following the credit crisis collapse of 2008 plus the positive deflationary contribution from accelerating technological innovation.
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Decline of the U.S. Middle Class
Here is the opening of this interesting article from Bloomberg:
As the presidential primary season continues much has been madeof the appeal that candidates Donald Trump and Bernie Sanders hold for the angry disaffected working class. Everyone seems to agree that this group is in trouble and needs serious help.
But which Americans exactly are part of the working class? There is no set definition. You can define class by wealth but a young worker starting out on Wall Street and earning relatively little is hardly lower-class. You can define it by income although that will be distorted by local differences in the cost of living and by age (retirees have little income but usually more wealth). You also can define it by educational status.
But perhaps the most important definition is in people's minds. Gallup periodically asks people to place themselves in one of five classes -- upper upper-middle middle working and lower. Here are the results for the five categories:
The percentages of Americans who consider themselves working class has stayed relatively stable. But the self-identified middle class has plunged by about 10 percentage points matched by an even larger increase in the percentage of Americans who label themselves lower class. The self-identified lower class should probably be included in the working class that gets discussed in articles about Trump and Sanders.
Why do fewer Americans identify as middle class? One obvious possibility is that the middle class has been spreading out separating into a well-to-do upper-middle and an expanding working class. The evidence shows that something like this has been happening for decades now. Here is the U.S. Gini coefficient a broad measure of income inequality:
David Fuller's view
Many people are concerned that the US political process is now destructive and going off the rails. That is possible but it is not the only result that we are likely to see. More voters are rejecting the status quo. Whoever wins the most obvious point is that taxes will go up for the wealthy and there will be some support for the less well off.
The sensible decision in my opinion would be to increase fiscal spending on too often neglected infrastructure and not just in the USA. A positively creative decision would be to write off student loans. It is socially destructive and bad for economies if university students without rich parents or scholarships graduate heavily in debt. That can too easily curb their ambition and it also deters some capable students from attending university.
Investors Are in Denial About China
Here is the opening of this informative report from Bloomberg:
As you've no doubt noticed companies and investors around the world are feeling the pain of China's economic slowdown. They're worried about all the layoffs cuts to surplus capacity and deleveraging to come on the mainland which will further depress demand. The natural temptation is to blame China for the world's woes. But outsiders should focus just as much on their own missteps -- starting with the widespread misperception that "this time" would be different.
Back in 2009 as China unleashed a massive fiscal stimulus and investment spree in response to the global financial crisis the rest of the world was all too willing to believe the impossible. Aided byconsultant research predicting decades of explosive growth companies placed huge bets on China and expected to ride the never-ending boom to riches.
Amid the gold rush they bulked up to sell China t-shirts or tons of iron ore. They urged their governments to sign free-trade deals with Beijing. Commodity producers heedlessly expanded capacity believing that 10 percent growth would continue indefinitely. Consumer brands rushed to set up flagships in third-tier Chinese cities. Shipping companies scrambled to build new fleets to meet an expected explosion in global trade.
However as with so many previous bouts of irrational exuberance this time wasn't really different. The ruthless rules of supply and demand still applied. And now the longer that painful decisions are delayed the harder they'll become.
Commodities firms in particular are learning that lesson the hard way. As prices rose with Chinese demand they made large upfront investments financed by borrowing -- often on a 20-year timeline in the expectation that growth would last and last. Now with China's economy slowing and the prices of everything from oil to metals plummeting the bills are coming due.
David Fuller's view
All markets are prone to boom and bust cycles. It is part of human psychology. Many companies did extremely well participating in China's boom years. The most savvy of these knew in advance that they would overstay their welcome and this prepared them to cut back quickly when China eventually and inevitably slowed. For commodity producers expensive and lengthy lead times in production complicate the situation. However they are now cutting production and demand is increasing including from China.
My personal portfolio
A trade increased; a stop triggered
Fuller Treacy Money