Rick Rieder

The American economy is facing major structural issues that have the potential to thwart economic progress. The most important hurdle facing the US economy is an aging population.

Both the labor force participation rate, which came in at 62.8%, and the employment-population ratio, which came in at 59.7%, were unchanged in August.

There has been much focus over the past week on the August payroll growth slowdown and what it means for the timing of the next Fed hike. Rick Rieder sees a more interesting trend…

In the past three decades, emerging market (EEM) economies grew rapidly, led by exports, which shifted current account balances from a deficit to a huge surplus.

Over the past six decades, the world economy has expanded at a rapid pace—the average global growth rate was 3.8% from 1950–2014. The post-recession global growth has faltered to an average growth of just around 3%.

The US labor market has shown tremendous resilience amid concerns over various issues, like aging demographics.

The big theme of 2015 was the Chinese (FXI) (MCHI) economic transition from an investment- and manufacturing-led growth to a consumption- and services-driven economy.

For the last few years, the world has been in the midst of a major demographic transition, which has affected the world economy. The aging population is one of the most visible global trends

Liquidity hasn’t really deteriorated in some of the major segments of the bond market. Other direct liquidity measures suggest sufficient liquidity in the system.

Global equity markets (IEFA) have witnessed an intense bout of volatility in the past year. They’ve had corrections of more than 10% twice in 2015.

The pace of recent job and wage growth indicates that the labor market remained weak despite a decline in the unemployment rate. The labor force participation rate has not increased substantially in recent years with the improvement in the economy.

Labor productivity is an important tool to measure the strength of a country’s economy. Policymakers often use this indicator to compare output efficiency during a particular period.

One of the most prominent effects of technology is on the asset side of the balance sheet. Many technologies drive companies to employ fewer assets in order to generate higher returns.

The mystery of waning labor productivity in various developed economies is still unsettled. However, various economic literature offers plausible explanations.

In recent years, labor productivity growth has slowed down significantly in most of the OECD countries. This decline is broadly spread across sectors.

Last year wasn’t a great one for investors seeking solid returns. With 2016 off to a rocky start, will we see more of the same this year?

One of the big-picture shifts currently taking place is aging populations, especially in developed nations. Populations are rapidly aging in most developed countries.

While global growth is slowing down, the Indian economy seems to be chugging along.

Markets are likely to remain volatile for the rest of the year and beyond. Uncertainty about the rate hike could add to this volatility.

During the last few years, return dispersions within asset classes have been dramatic.

While I don’t have a crystal ball, here are three things I believe all investors need to know about returns in 2016.

Technology has revamped inventory management for companies in a big way. More and more companies are carrying less and less physical assets.

Technology (XLK) is advancing by leaps and bounds. The diffusion and adoption rates for new technologies have risen over the years as the population has become more tech-savvy.

So now that the Fed rate liftoff has finally arrived, should you flee to market sidelines? If you can believe history, the answer is an emphatic no.

The problem for the Fed is that the 5.1% unemployment rate has reached what many economists feel is full employment.

Headline payroll figures seem to have faded somewhat in significance, at least when it comes to foreshadowing action by the Fed.

The slack in the labor force has fallen significantly. The US economy has created a whopping ~4.5 million non-farm jobs since March 2014.

The Beveridge Curve is an indicator of the strength in the US labor market.

Forget the September versus December debate. The Fed may already be behind the curve, according to Rick Rieder.

A rise in wage growth may not negate the effect of debtless consumption. Although lower oil prices were expected to be a tailwind for consumption, households used this windfall to service debt.

The ECI grew at 0.2% in 2Q15—the lowest quarterly growth in 33 years. Wage inflation is critical from an economic point of view, leading to higher disposable income and consumption.

While the CPI is a measure of inflation in consumer prices, the ECI gives an indication of whether employment costs are rising or falling by measuring inflation in wages.

While the Japanese and the European economies seem to be improving, the US economy still seems to be in a better position than the rest.

Until recently, lower oil (USO) prices and a robust job market didn’t lead to greater consumer spending. Instead, the American consumer ramped up their savings and serviced their debts.

Changing demographics impact investors in many ways. The demand for bonds could increase, putting downward pressure on yields.

An aging population is likely to keep global economic growth muted in the years to come. This is primarily because the dynamics of the population are rapidly changing.

Lost in all the chatter about interest rates is a structural phenomenon that may be of far greater significance: demographics.

In the US, we would see a better GDP growth rate in 2Q15—compared to what we saw in 1Q15. However, the rebound is expected to be moderate.

The US economy is in decent shape. Low interest rates have been a boon for most families. Home affordability is close to a multi-decade high.

San Francisco Fed president John Williams noted that the Fed’s ability to hold off a liftoff in rates is “more limited” than its ability to tighten. A rate hike could be expected in September if the economy continues to grow in the next two months.

The core Consumer Price Index, excluding food and energy prices, shows some firming in inflationary conditions. The Core CPI has ticked upward for the last three straight months.

Solid employment growth seems to point to the improving health of the US economy. The US markets cheered the April jobs market report on Friday, May 8, 2015.

The possible delay in the Fed’s rate hike is causing a disconnect between indicators and stock markets.

There are no free lunches. The risks involved in fixed income investing are two-fold.

Corporate bonds, especially high yield corporate bonds, correlate to equities and hence, so they don’t provide great diversification benefits.

The relative value within fixed income lies in corporate bonds with solid balance sheets.

Higher equity volatility will support bonds going forward. This year, so far, the VIX has been generally higher than last year.

Recently, the number of jobs created in the US economy has led to a lot of optimism. A better economy will cause bond yields to rise.

Invest in fixed income for diversification benefits. Treasuries are also less correlated within fixed income, which makes them a good diversifying tool.

A rate hike could cause a flatter yield curve. With the US economy on strong footing, the Fed is poised to hike interest rates later this year.

Despite headwinds in the form of soft wage growth, low inflation, and a falling labor participation rate, the labor market looks robust.

The trend of soft wage growth persisted in February. Wage growth hasn’t been able to break out of its rut. It continues to stay at a YoY level of 2%.

The stronger-than-expected data is good news for the economy. However, Friday’s jobs report sent the markets into a tizzy.

Wage rates have a direct impact on disposable income and by extension, consumption. Consumption is an important part of the GDP.

The slide in the unemployment rate is partly due to the workers getting discouraged, that is, getting out of the labor force.

The wage rate today is around the same level as it was 12 months back, which means wage growth is absent. This has had a dampening effect on consumer spending, as disposable income is an important determinant of spending.

Select areas of the EM debt sector hold good potential, as many of these countries exhibit low leverage levels and are currently funded through year-end.

Given all of the noise in the fixed income market over the last week, however, you may be wondering what my interpretation of this latest report means for your bond portfolio.

Maintaining monetary policy accommodation at “emergency levels” appears both unnecessary and potentially disruptive to the proper functioning of financial markets today.

Given all the fixed income headlines over the last week, you may be wondering what the latest jobs report means for your bond portfolio. Rick Rieder shares three investing implications of the September employment numbers.

While munis are no longer cheap on an absolute basis, they remain relatively attractive, especially long-end muni bonds. Plus, the sector looks compelling given improving issuer credit conditions and higher tax revenues.

The 10-year Treasury yield’s recent move has high yield bonds looking more attractive on a relative basis. Earlier in the year, high yield levels sat at 5% vs. 2.5% for the 10-year Treasury.

The 10-year Treasury yield still appears attractive relative to sovereign rates elsewhere in the world. In addition, longer-dated Treasuries also look more attractive than those with two- to five-year durations.

It’s clear that yields are likely in for a rocky ride as seasonal factors and technical unwinds of crowded positions play out in the weeks ahead, and as we get closer to a Fed rate hike.

A number of market watchers attributed Wednesday’s 10-year Treasury yield move to fears about a global economic slowdown, heightened geopolitical unrest, growing worry over the Ebola health risk and uncertainty about Fed policy.

And though the 10-year yield recovered somewhat Thursday as Treasury prices dropped, Wednesday’s dip below 2% came as a surprise.

Finally, unconventional monetary policy of recent years has encouraged significant bouts of capital misallocation, resulting in crowded trades, correlated risks and the overly stretched valuations seen in markets today.

Like quantitative easing before it, the Fed’s zero interest rate policy may actually be inhibiting economic growth and job creation in unintended ways. Rick Rieder explains.

The most recent statement made it clear that there’s increasingly active debate within the FOMC over the appropriate path of interest-rate policy given how far the economy has come.

While Fed officials believe real gross domestic product (or GDP) will come in lower than expected in 2014 and 2015, the FOMC members acknowledged that the unemployment rate is likely to decline more rapidly than anticipated.

I anticipate that the weak August payroll report will be revised higher and that inflation should firm. Along with their revised expectation of the path of policy rates, Fed officials seem to be on the same page as me.

Back in March, Chair Yellen, perhaps mistakenly, said that a “considerable time” was six months. Then, at her September press conference, she said “a considerable time” isn’t mechanical.

If I had to weigh in on the debate, I’d say the September Federal Open Market Committee (or FOMC) policy statement was “hawkish.”

More importantly than whether the Fed’s recent policy statement was “dovish” or “hawkish,” the statement provided five signs that a Fed rate hike is likely to come earlier than many expect, writes Rick Rieder.

Rates at the “belly” of the yield curve will rise more dramatically than long-term rates: This might seem counter intuitive since shorter-term rates are generally less sensitive to rising rates (lower duration = lower rate sensitivity)…

Forecasting is always a tricky business, but we do believe there are some important factors that will shape the future direction of the bond market and that will have an impact on the way investors should approach fixed income.

With interest rates volatile and market conditions changing, these are tricky times for bond markets. Rick Rieder outlines three ways markets are evolving, and suggests that staying flexible will be critical.

Lastly, as I mentioned in an earlier post, the Fed’s zero interest rate policy may actually be inhibiting economic growth and job creation in unintended ways.

These comments from Chair Yellen, along with the recently released minutes from the FOMC’s July meeting, show a Fed that is clearly angling toward more near-term policy normalization.

The United States seems to be in the process of departing a regime of financial repression, i.e. one where a government takes measures to channel funds into its own debt.