By Rick Glaze
The third-quarter Gross Domestic Product was revised up to 2.2 percent, pegging the whole year’s growth at a 3 percent rate. This solid growth continued despite spiking oil prices, a precipitous rise in interest rates and a housing market that slowed to a crawl.
The growth rate in the economy has slowed from the fast pace in the first quarter, which clocked in at a sizzling 5.6 percent. The rate hikes by the Federal Reserve Bank were designed to slow the economy and protect it from inflationary pressures - and the success of that technique is evident.
For bond investors, the landscape is somewhat abnormal. We are in an inverted yield curve - that is, the income on a 1-year U.S. Treasury bond is about 5 percent, while the yield on a 10-year bond is 4.47 percent. In a “normal” environment, the yields would be reversed. If the bond market could talk, it would be saying that inflation is not a big worry in the foreseeable future. Municipal, tax-free bonds and corporate and Treasury bonds can be structured in a portfolio to maximize benefits from today’s unusual market.
I have pointed out the economy’s strength since 2003, specifically how job growth, higher wages and low inflation and interest rates have created a backdrop for all to compete and prosper. There seems to be some confusion in Washington as to what that means for citizens, workers and taxpayers across the country. A playing field with green, freshly mowed grass tilted downward slightly so that walking or running is a little easier does not shower touchdown and easy-catch passes on everyone who is suited up. It does mean that more passes are thrown, there are more running opportunities and the offensive line is a bit bigger and faster than the defensive line. That is the definition of opportunity.
Do sharp, smart, well-dressed, harder-working people reap rewards in excess of those without these traits? Probably so. But rewards are not equal for entrepreneurs and those taking chances. Simply put, for the folks in Congress, a positive economy does not shower rewards equally on people. Karl Marx, responding to the early industrial revolution, fantasized that the means of production were a given, and they should be harnessed and taken over by the collective people so that everyone would share equally and the world would consequently be a better place. The Soviet Union gave it a try and they ended up with totalitarianism, poverty, starvation and corruption.
Rick Glaze is president of Glaze Capital Management Inc. of Los Altos and a General Securities Principal offering securities through First Allied Securities Inc. He can be reached at Rick@Glazecapital.com.
