(James Saft is a Reuters columnist. The opinions expressed are his own)
By James Saft
July 12 (Reuters) - Investors see an economy a one percenter Goldilocks would love: strong job creation but with factors like Brexit and the U.S. election stopping the Federal Reserve from raising rates.
Much better-than-forecast U.S. employment data on Friday helped send bond yields to record lows and stocks to record highs. That stocks would love an environment in which bonds are predicting little growth or inflation seems odd, but only before you take account of the impact of monetary policy.
An economy which doesn't crater but one in which the Fed can't hike is very supportive of the value of financial assets.
Yet in this story it is hard not to fear that rather than eating porridge Goldilocks is eating her seed corn, consuming asset price gains from far in the future rather than discounting future strong growth. The Fed seems better at raising asset prices than creating a thriving economy, one with strong investment and productivity growth. That bodes poorly for long-term equity returns while bonds at these historically low yields will only prove good value if things remain truly grim.
Add to this concerns about the dearth of investment in corporate America, where managers are prioritizing dividends and share buybacks over investment, and the whole enterprise seems less than sustainable.
Key is that while the U.S. economy carries on creating jobs at a respectable pace, wage growth remains sub-par and overall labor market conditions, which peaked in December, are steadily deteriorating.
No wonder then, looking all the way out to June of 2017 traders see a less than 50 percent chance of even a single interest rate increase.
Fed policy is intended to spur consumption and investment; the latter by making financing cheap and the former by tempting investors to spend a bit of their paper wealth. The investment part isn't working so well - there are many political and economic risks and growth seems to have shifted to a permanently lower plateau.
That leaves asset markets and the "wealth effect," which can only help sustain consumption so long as the owners of assets believe values to be built on a solid foundation.
BONDS AND EQUITIES BOTH VULNERABLE
The vast majority of portfolios, individual or collective ones, are built on a mixture of bonds and equities. Despite recent market movements higher in both stocks and bonds, there are reasons to think both are vulnerable, if not to a sharp fall then to a sustained period of below-normal returns.