And that’s a bad thing, at least if you are Patrick Artus, chief economist at French investment bank Natixis. According to Artus, this spike in optimism is but one sign in many that the US economy is about to take a header (“Get ready for a substantial slowdown in the US economy, investment bank predicts). Other factors include “a (supposed) limit to the rise in the participation (labor?) rate and the decrease in the unemployment rate: real wages … slowing down … Investors should prepare for the consequences.” Who knows? This guy may be the ONE in the legion of pundits who over the past 8 years since the bottom of the financial crisis, have tried (and failed) to predict the next big downturn to actually get it right.
What about the participation rate and unemployment rate is so worrisome?
The September unemployment rate was 4.2% and the labor force participation rate was 63.1% (vs. a recent high of 66% in January 2007), very little improvement off historically low numbers (61% and change). Addressing the labor force participation rate (LFPR): that number has continued to be impacted by the number of baby boomers reaching retirement age (some 10,000 per day), all of whom are considered available for work, even though many have retired. Even if we move back down on the LFPR it should not be a source of concern based on people taking retirement.
As it pertains to the unemployment rate, it was once thought to be the economic Holy Grail that 5% unemployment was FULL employment and to take the rate lower than that would put upward pressure on wages, ergo inflation (higher interest rates). Maybe the wage pressure supplied by globalization turns that thought process upside down? Real wage growth has slowed and gone negative over the past 12 months. Again, this presents an interesting challenge to those worried about the inflationary impact of a lower or stagnant LFPR coupled with lower unemployment stats. Wages and inflation are not spiking despite a tightening labor market. To me lower unemployment without a spike in wage cost is a good thing.
What about all this optimism on the economy!
Normally a big jump in bullish opinion about anything (including record high optimism about the economy) is a real danger sign. Why isn’t it this time? To answer that question you have to ask what are the specifics of the survey quoted? Regarding the survey quoted in the above pronouncements from Netixis, it was originated by none other than CNBC at the economic peak before the collapse of the financial crisis (“American optimism about the economy hits an all-time high … “). It is very understandable to me why this survey might be showing people gaining confidence in the economy and that the so-called record may not be a real spike, considering where the survey was begun. The “high” is an all-time high for the last 8 years … not a convincing sample period to get a good fix on how high economic confidence could actually go.
Oh yes, and you know when the economy improves rates are headed North!
Game, set, match … it’s all over. Higher rates will sink the economy and the market. This has been a common theme (and forecast to be just around the corner) since I began posting, almost five years ago. Here’s an exemplary posting from CNBC on last week’s strong numbers (“Interest rates whipped higher in a perfect storm of stronger US data an Fed speculation). The “Fed speculation” part has to do with the kind of Fed chair the president will name to replace the comfortable choice, Janet Yellen. As of Friday (10/26/17) the smart money was betting on monetary policy dove, Jerome Powell (vs. previous trial balloon candidate, hawk John Taylor). The Treasury 10-year closed up on Friday at a 2.42% yield, .038% less than the previous close and down in yield 3 basis points from the 2.45% close January 3, 2017.
Nonetheless the bond market did manage to scare a few people last week (and for the past month and a half), with the yield on the 10-year moving up from 2.37% (up from a low of 2.05% 9/7/17) early in the week to 2.47% before settling back to 2.42% Friday. The Dow Jones Equity REIT index fell 4.3% during the period while the Alerian MLP index hit a new low for the year, down 15%. My take is the they are down for two reasons: 1) in a market that is in love with growth (higher growth) slower growth REITs and MLPs do not attract much love and 2) the obsession with higher interest rates continues to scare investors out of their shares. A third reason on the MLP front could be feared tinkering with the tax code might alter their favorable tax treatment. Even if the distributions of many MLPs were fully taxed the yields (potentially growing yields) would be very competitive with a fully taxed 2.42% 10-year US Treasury note.
Barron’s this week has a very favorable article on Enterprise Product Partners (EPD –NYSE) — “An MLP That Promises Both Growth and Income.” (you need a subscription)
Compared with other MLPs, Enterprise has better corporate governance and a stronger balance sheet. “Enterprise has been an excellent allocator of capital,” says Matthew Sallee, a portfolio manager at Tortoise Capital Advisors*, an Enterprise holder. “It has built a network that can’t be duplicated.” He says MLPs look appealing, with lower taxes and friendlier regulation than electric utilities.
My point here is that the lust for growth and fear of interest rates moving higher with the back-drop of an improving sentiment on the economy may be setting up some attractive opportunities for income investors.
With regard to my title, all-time high optimism on the economy is in the eye of the beholder (and the time frame).
What’s your take?
* I own shares of Tortoise MLP Fund (NTG–NYSE) as a long term investment in the sector. NTG owns shares of Enterprise Products Partners (EPD). I neither plan to buy or sell NTG or EPD in the next 72 hours following publication of this article. Please see the paragraph below for further information.
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