Capital and labor pricing are out of balance. Policies like quantitative easing have re-inflated assets, creating huge wealth for those who own, but achieve little for those who don’t.
The result: assets prices have outpaced underlying economic growth.
Appreciation in asset values has played itself out in core real estate across the US and has made cities like San Francisco and New York increasingly unaffordable. Core, cash flowing institutional real estate is priced at a historic high. Wages, goods, and services have not kept pace with the inflation seen in stocks, bonds, and real estate.
A high dollar and retiring (baby boomer) workforce are to blame for lagging US growth. 401k withdrawals now outpace contributions. With an aging population and smaller labor force, productivity must jump significantly or we’ll continue to see limited growth.
The economy is typically flat in year 4 of a Presidential Cycle and substantially down in year 1 (ex. 2000-1, 2008-9). This time around we will be in a rising interest environment, as rates increase from 0.75% to 1.50% over the next 2 years.
After a 7-year bull market, we are preparing for a modest recession in 2017 as interest rates rise but growth remains stunted. Despite potential headwinds, most credit markets have priced risk cheap.
We like alternatives as a volatility dampener.
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Image Source: Dan Nelson, Flickr