This was a busy week on the economic calendar, with new Federal Reserve Chairman Jerome Powell making his first appearance on Capitol Hill, and with the U.S. Commerce Department releasing revised fourth-quarter GDP data and personal income data for January.
So, what do experts expect and, more importantly, what sort of moves might income-seeking investors consider given these events?
"Since the 1950s, economists who study the data, rather than theorize, know that at any period less than one year in length, the changes in economic variables is mostly noise," says David Merkel, a principal with Aleph Investments. "By the time you get one year out, signal finally dominates over noise. Thus, looking at the short-term data usually gives a false impression."
Merkel prefers instead to look at longer-term trends including declining increases in labor productivity, declining population growth rates, high debt levels, high valuation levels for assets, monetary profligacy by any historic standard, as well as the notion that "almost every nation on earth no longer cares about budget deficits."
These are worth talking about, he says. Not "blips" of the economic news cycle. "We would be better off if the government stopped collecting the data, and stopped trying to stimulate, says Merkel. "Ultimately, it blows up."
As for Fed Chair Powell, Merkel has "some hope for the man, because he is not an economist, and as a financial businessman has a better structural understanding of the financial economy."
Economists, says Merkel, assume away all of the details, and those details matter when it comes to how the financial side of the economy works. "He (Powell) has the potential to be as good as (Paul) Volcker or (William) McChesney Martin," he says. "But we will see. He could be another failure like the past three Fed chairs, who only knew how to be loose."
As for income-seeking investors, Merkel offered the following: "Income seeking through dividend-paying common stocks has become too common."
"As such, when long Treasury bonds sell off, so do the high-quality dividend-paying common stocks, which are trading at very high multiples," he says.
"People are looking at all income as if it were always bond-like, rather than looking at the underlying business processes and asking 'will this grow value over time or not? How much value, and what is the downside risk?'"
So, Merkel's practical advice would be this: "Ladder your bonds, because you probably can't forecast interest rates. Stay high quality, because spreads are low. REITs look cheap, but look for things the Internet won't destroy. Give up yield and reduce stockholdings to preserve capital while the party still goes on. Safety is more important than yield now."
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