tag:blogger.com,1999:blog-669181985916115902024-03-06T01:51:51.431-05:00Dr. Ed's BlogDr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.comBlogger1156125tag:blogger.com,1999:blog-66918198591611590.post-32061946945501313002021-09-03T13:30:00.001-04:002021-10-04T14:57:26.468-04:00<div class="yrimain">
Dr. Ed’s Blog has moved to <a href="https://www.linkedin.com/in/edward-yardeni/detail/recent-activity/">LinkedIn<a href="https://www.linkedin.com/in/edward-yardeni/detail/recent-activity/"></a></a>.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-39716509926560539522021-06-06T21:08:00.000-04:002021-06-06T21:08:43.139-04:00Fast & Furious Business Cycle<div class="yrimain">
The current business cycle has been unprecedented. It has been fast and furious so far. Last year’s recession was among the worst in US history, but it lasted just two months. The V-shaped recovery in real GDP has been one of the fastest on record, with real GDP likely to surpass its previous Q4-2019 record high during the current quarter. That means that the full recovery in real GDP lasted five quarters, with the economy now in the expansion phase of the business cycle.
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Not surprisingly, this remarkable performance has been reflected in the unprecedented V-shaped recovery in corporate earnings, also to record highs, in recent months. That's propelled stock prices to record highs so far this year.
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Meanwhile, policymakers continue to step on their growth accelerators, hoping that inflation and financial stability remain under control. Monetary policymakers are still purchasing $120 billion per month in fixed-income securities. Some of them are starting to talk about talking about tapering these purchases. Tapering may be months away, and hiking the federal funds rate won't start until at least a few months after tapering is done. The Biden administration is pushing for more spending that will result in trillion dollar annual deficits in coming years even if taxes are raised to cover some of the spending.
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Here are some of the most recent fast and furious consequences of all the high-octane fuel provided by the policymakers:
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(1) <i>Prices-paid and prices-received indexes.</i> The prices-paid index included in May’s national survey of manufacturing purchasing managers (M-PMI) remained near April’s reading, which was the highest since July 2008 (<a href="https://www.yardeni.com/pub/blog_20210602_1.png" target="_blank">Fig. 1</a>). That’s not a surprise since the average of the May prices-paid indexes reported in the regional business surveys conducted by five Federal Reserve Banks jumped to the highest reading on record (<a href="https://www.yardeni.com/pub/blog_20210602_2.png" target="_blank">Fig. 2</a>). The average of the five regional prices-received indexes also jumped to a record high in May. All 10 regional prices-paid and prices-received indexes are at or near record highs (<a href="https://www.yardeni.com/pub/blog_20210602_3.png" target="_blank">Fig. 3</a>). (The data for the regional surveys start in 2005.)
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(2) <i>Backlogs for the record books.</i> May’s national M-PMI survey showed that supplier deliveries and backlog of orders rose to record highs last month (<a href="https://www.yardeni.com/pub/blog_20210602_4.png" target="_blank">Fig. 4</a>). In addition, the customer inventories index fell to another record low (<a href="https://www.yardeni.com/pub/blog_20210602_5.png" target="_blank">Fig. 5</a>). The average of the five regional indexes for either unfilled orders or delivery times rose to a record high in May (<a href="https://www.yardeni.com/pub/blog_20210602_6.png" target="_blank">Fig. 6</a>).
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(3) <i>Capital spending.</i> The good news is that the inflationary economic boom is great for corporate profits, which is great for capital spending. The y/y growth rate in weekly S&P 500 forward earnings is an excellent coincident indicator of the y/y growth rate in nondefense capital goods orders excluding aircraft (<a href="https://www.yardeni.com/pub/blog_20210602_7.png" target="_blank">Fig. 7</a>). Sure enough, the latter measure of capital spending on equipment and machinery jumped 0.9% m/m and 22.0% y/y to a fresh record high during April (<a href="https://www.yardeni.com/pub/blog_20210602_8.png" target="_blank">Fig. 8</a>).
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(4) <i>Bottom line.</i> What the economy is experiencing may simply be a business cycle set to “fast forward” by the insanely stimulative combination of fiscal and monetary policies. We had a terrible recession last year that lasted only two months. Twelve months later, the economy had fully recovered, based on most macroeconomic indicators. Booms usually occur at the tail ends of expansions. This time, one started during the tail end of the recovery and continues at the beginning of the expansion.
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That’s all great until it isn’t—because, as we all know, booms are followed by bananas. Economist Alfred Kahn, an economic adviser to former President Jimmy Carter, warned lawmakers in the ’70s that if they didn’t get inflation under control, the nation was heading for a recession or a depression. To avoid scaring the public during his testimony at the Capitol, instead of saying “recession” or “depression,” he simply said “banana.”
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-54641937749288064042021-06-01T14:54:00.000-04:002021-06-01T14:54:15.662-04:00Lots of Liquidity<div class="yrimain">
While the debate rages on over whether inflation is transitory or long lasting, there’s no debating that an enormous amount of liquid assets has piled up since the start of the pandemic.
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The accumulation began with a mad dash for cash by panicked individuals and businesses. But since “Modern Monetary Theory Week” (March 23-27, 2020), when the Fed and the Treasury (a.k.a. “T-Fed”) joined forces, the huge accumulation of liquid assets has been mostly attributable to “helicopter money.” Actually, “helicopters” don’t do the situation justice: It’s been more like T-Fed loaded up B-52 bombers with cash and has been carpet bombing the economy and financial system since then. How much cash has been dropped from the B-52s, so far? Let’s count it up:
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(1) <i>T-Fed’s B-52 money.</i> Since February 2020, the Fed’s balance sheet has increased $3.6 trillion to a record $7.7 trillion through April (<a href="https://www.yardeni.com/pub/tc_20210601_1.png" target="_blank">Fig. 1</a>). Over that same period, the Fed’s holdings of Treasuries increased $2.5 trillion (<a href="https://www.yardeni.com/pub/tc_20210601_2.png" target="_blank">Fig. 2</a>). So the Fed purchased 54% of the $4.6 trillion increase in the Treasury’s publicly held debt from February of last year through April 2021 (<a href="https://www.yardeni.com/pub/tc_20210601_3.png" target="_blank">Fig. 3</a>). The Fed now holds a record 25.7% of the Treasury’s outstanding publicly held debt (<a href="https://www.yardeni.com/pub/tc_20210601_4.png" target="_blank">Fig. 4</a>).
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Just as significant, the 12-month sum of federal government’s outlays increased $2.1 trillion y/y to a record $7.3 trillion during April (<a href="https://www.yardeni.com/pub/tc_20210601_5.png" target="_blank">Fig. 5</a>). This extraordinary jump was led by a $1.2 trillion increase in federal outlays on income security, which includes the Economic Impact Payments, i.e., the three rounds of checks sent to most Americans since the start of the pandemic (<a href="https://www.yardeni.com/pub/tc_20210601_6.png" target="_blank">Fig. 6</a>).
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(2) <i>M2 & velocity.</i> Total deposits at all commercial banks in the US rose a whopping $3.5 trillion from the March 18, 2020 week through the May 12 week of this year to a record $17.1 trillion (<a href="https://www.yardeni.com/pub/tc_20210601_7.png" target="_blank">Fig. 7</a>). The monetary aggregate, M2, is up $4.6 trillion since February 2020 through April to a record $20.1 trillion.
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Many economists track M2 velocity, which is the ratio of nominal GDP to M2. It remains near the record lows of the past year. We prefer to track the inverse of this ratio. It shows that over the past year, M2 has been equivalent to 89% of nominal GDP, a record high (<a href="https://www.yardeni.com/pub/tc_20210601_8.png" target="_blank">Fig. 8</a>). The potential for all this money to fuel higher consumer price and/or asset inflation is hard to ignore.
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(3) <i>Who is liquid?</i> Then again, it’s possible that the pandemic spooked lots of people, who’ve decided to hold more precautionary balances in liquid assets as a result.
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The Fed’s Distributional Financial Accounts shows that liquid assets held by households jumped by $3.3 trillion from Q4-2019 through Q4-2020 to a record $15.9 trillion (<a href="https://www.yardeni.com/pub/tc_20210601_9.png" target="_blank">Fig. 9</a>). This category is the sum of currency, checkable deposits, other deposits, and money market mutual funds. Over this same period, here are the increases and latest levels of liquid assets held by the bottom 50% wealth percentile group ($154 billion to $549 billion), the 50%-90% group ($0.9 trillion to $5.0 trillion), the 90%-99% group ($1.2 trillion to $6.0 trillion), and the top 1% group ($1.1 trillion to $4.4 trillion) (<a href="https://www.yardeni.com/pub/tc_20210601_10.png" target="_blank">Fig. 10</a>).The bottom half of households in terms of wealth undoubtedly needed to spend the cash they received from the government for pandemic relief, so they didn’t accumulate much in liquid assets. The top half might actually have raised some cash at the start of the pandemic by selling other assets. Much of the cash they received from the government was probably saved.
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The question is: What will these households do with all that cash they've accumulated since last year? Odds are they will continue to spend it on goods and services and to invest in financial assets.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-33397247557130301872021-05-12T18:58:00.001-04:002021-05-12T21:32:27.281-04:00Reagan & Volcker Killed Inflation. Will Biden & Powell Bring It Back From the Dead?<div class="yrimain">
President Joseph Robinette Biden Jr. (JRB) aspires to be as transformative a president as was FDR in expanding the scope and scale of the US social welfare state. Biden is also the anti-Reagan president. He loves Big Government as much as President Ronald Reagan hated it. Furthermore, he has as much faith in Big Unions as Reagan distrusted them.
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The Reagan Revolution didn’t last very long. President Ronald Reagan was a proponent of free-market capitalism. He was against big government. He championed the constitutional system of federalism and the republican system of checks and balances. Yet here we are three decades later with lots more crony capitalism and with the federal government bigger and more powerful than ever.
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Conservative presidents have had very little lasting impact on the course of our nation. Progressive ones have made much more progress at leaving their marks. The legacies of Theodore Roosevelt, Woodrow Wilson, Franklin Delano Roosevelt, Lyndon Baines Johnson, Bill Clinton, and Barack Obama have radically changed our country. They all expanded the social welfare state to varying degrees. Now President Joe Biden intends to build on their legacies.
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To some extent, the Reagan legacy was briefly revived by President Donald Trump. But now under Biden, the progressive agenda is back on the fast track. What is different this time is that Biden, unlike his progressive predecessors, seems to have no concerns about the deficits that will result from his mammoth spending programs. Sure, he is pushing to raise tax revenues to cover some of the costs of his spending plans. But revenues are very unlikely to come close to covering Biden’s ambitious expansion of the social welfare state.
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Furthermore, Biden and his economic advisers seem to have no concerns about the inflationary consequences of their policies. On the contrary, they are pushing for higher wages and more power for labor unions. Their regulatory policies, especially the ones aimed at climate change, are going to add lots to the cost of doing business. Their plan to raise the corporate tax rate will do the same. Yet just last week, Treasury Secretary Janet Yellen said, “I don’t think there’s going to be an inflationary problem, but if there is the Fed can be counted on to address it.”
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Reagan may not have been as transformative as other presidents, but he helped to end the Great Inflation of the 1970s by supporting Fed Chair Paul Volcker's tough monetary policies. He also accelerated the demise of the labor union movement in the private sector when on August 5, 1981 he fired more than 11,000 air traffic controllers who had ignored his order to return to work after their union, the Professional Air Traffic Controllers Organization (PATCO), had organized an illegal strike. That marked the end of the wage-price spiral of the 1970s, as many private-sector business executives, following in Reagan’s path, successfully pushed back against their labor unions.
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Biden loves labor unions and intends to do whatever he can to bring them back in the private sector. He is also pushing to raise wages. Consider the following:
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(1) <i>Raising wages at federal contractors.</i> On April 27, Biden signed an <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/04/27/executive-order-on-increasing-the-minimum-wage-for-federal-contractors/?utm_campaign=Morning%20Briefing&utm_medium=email&_hsmi=124972214&_hsenc=p2ANqtz--FbbQeyWOr-yChY7CQwxlITLiD2_PWNK38pv7pY-WQsGYCSK1dJ1afwXlTm3S88l8rTekQsCc3lC_hHClD9mxBNiWglGV0gROJ0VUF6pLCGSQnBsQ&utm_content=124972214&utm_source=hs_email" target="_blank">executive order</a> that requires federal contractors to pay a $15-an-hour minimum wage. Currently, the minimum wage for federal workers is $10.95 per hour, and the tipped minimum wage is $7.65 per hour. According to <a href="https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/27/fact-sheet-biden-harris-administration-issues-an-executive-order-to-raise-the-minimum-wage-to-15-for-federal-contractors/?utm_campaign=Morning%20Briefing&utm_medium=email&_hsmi=124972214&_hsenc=p2ANqtz-86JKYHipl0pw7jChaX2y8VFhbM9y4c_HfICTJQl2_HSo7bh3ViWe-MsiScZrYh8kFmAh_fRYFmxnRUz6uH4pjFiAc8LjpFjHydfrL6N73S5B-dfjY&utm_content=124972214&utm_source=hs_email" target="_blank">The White House Fact Sheet</a>, starting on January 30, 2022, all government agencies will need to incorporate a $15 minimum wage requirement into new contract solicitations, and by March 30, 2022 all agencies will need to implement the minimum wage into new contracts. Additionally, government agencies will need to implement the higher wage into existing contracts when contracts are extended each year.
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(2) <i>Promoting unions.</i> On April 26, Biden signed an <a href="https://www.whitehouse.gov/briefing-room/presidential-actions/2021/04/26/executive-order-on-worker-organizing-and-empowerment/?utm_campaign=Morning%20Briefing&utm_medium=email&_hsmi=124972214&_hsenc=p2ANqtz-_NKKfi4EXb11NgnYXcyLrNhc8oxdU6CPhGiehukxFxpWLSO2kvfxejKSEEc3GHEhIlYBqHYUTP_tjp3aQmTJDQKh6PkqB3sca5X8iqjAowBkxNDhE&utm_content=124972214&utm_source=hs_email" target="_blank">executive order</a> that will create a task force to promote labor organizing at a time when just over 6% of US private-sector workers belongs to unions (<a href="http://www.yardeni.com/pub/tc_20210504_1.png" target="_blank">Fig. 1</a>). The White House task force will be headed by Vice President Kamala Harris with Labor Secretary Marty Walsh serving as vice chair. The order is in the tradition of the National Labor Relations Act, which was passed in 1935 under FDR to encourage worker organizing.
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(3) <i>Powell's dovish Fed.</i> Meanwhile, last August, the Fed reworded its dual-mandate statement to prioritize “broad based and inclusive maximum full employment” ahead of maintaining price stability. It is now aiming to overshoot inflation above the official 2% target for a while to make up for undershooting it for so many years. Fed Chair Jerome Powell is the anti-Volcker, doing whatever it takes to bring back (some) inflation.
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What about a repeat of the Great Inflation of the 1970s as a result of the current administration's policies? It could happen. However, that decade was uniquely inflation prone. Nixon devalued the dollar on August 15, 1971. The resulting surge in commodity prices was exacerbated by a food price shock (1972-73) followed by two oil price shocks (1973 and 1979). During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. Productivity growth collapsed during the decade. The result was an inflationary wage-price spiral [1].
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This time may not be different. The dollar is down 12.3% since it peaked on March 18, 2020. Food, energy, and industrial commodity prices are soaring. Wages inflation may be starting to pick up. Labor unions in the private sector may still be weak, but the federal government under Biden is clearly on their side.
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Does all this mean that a comeback for inflation is inevitable? Or are there offsetting reasons why this might not happen? I am on the lookout for—but don’t expect—an inflationary wage-price spiral. I do expect to see wages rising more rapidly in coming months given all of the above. The main reason is that I believe that productivity growth is set to move higher during the Roaring 2020s as it did during the Roaring 1920s [2]. I expect that it will be strong enough to offset the inflationary consequences of the Biden administration's inflationary policies. So far, so good [3].
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So for now, I remain in the camp anticipating a transitory rebound in the inflation rate in the 3.0%-4.0% range in coming months before it settles back down to 2.0%-2.5%. Stay tuned.
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[1] See my <a href="https://www.linkedin.com/pulse/inflation-sooo-1970s-roar-back-2020s-edward-yardeni/" target="_blank">LinkedIn article</a>, "Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?" December 12, 2020.
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[2] See my <a href="https://www.linkedin.com/pulse/comparative-roaring-20s-edward-yardeni/" target="_blank">LinkedIn article</a>, "Comparative Roaring '20s," December 1, 2020.
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[3] See my <a href="https://www.linkedin.com/posts/edward-yardeni_economy-macroeconomics-markets-activity-6797221228492001280-wDPQ/" target="_blank">LinkedIn blog</a> on productivity.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-88659568627868738842021-05-04T19:47:00.000-04:002021-05-04T19:47:26.982-04:00The One Percent: Off With Their Heads!<div class="yrimain">
Socialists promote policies that they claim will lead to greater income equality. History shows that most countries that have embraced socialism have achieved income equality: Almost everyone is poorer than before socialism was imposed on them for their own good. Purchasing power is depressed for most people, and the quality of the goods and services they can purchase is poorer too.
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Socialists often declare that the rich don't pay their “fair share” of taxes and must pay more so that the proceeds can be redistributed to boost the incomes of the poor. The problem is that the fair share that the rich must pay never seems to be enough. Higher and higher taxes on the rich result in fewer and fewer of them. Eventually, the only fat cats left are the socialist elites, who always get richer as most of the rich in the private sector get poorer. Needless to say, the poor also get poorer as a result.
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In the US today, progressive politicians claim that the “One Percent” of taxpayers are compensated too much and don't pay their fair share of taxes. It's hard to deny that a few CEOs, especially the ones heading up technology and financial companies, get paid too much relative to the pay of their workers. Many professional athletes and Hollywood celebrities earn even more than top-paid CEOs. So the progressives could be right, but let’s see what the latest available data through 2018 show:
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(1) <i>Number of tax returns</i>. The total number of all the tycoons on Wall Street, in Silicon Valley, in Hollywood, and on the playing fields—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.65 million taxpayers in 2018, exactly 1.1% of the 153.8 million taxpayers who filed individual income tax returns that year, according to the latest available data from the Internal Revenue Service (IRS) (<a href="http://www.yardeni.com/pub/blog_20210504_1.png" target="_blank">Fig. 1</a>). Adjusted gross income is income from all sources before subtracting deductions and exemptions.
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By the way, the number of returns showing AGI of $500,000 and over has more than doubled since 2009. The rich have been getting richer, and there are more of them. What you won't hear from progressives is that the same can be said for all the other income groups other than taxpayers earnings less than $50,000, clearly showing that there are fewer low-income tax filers! Their headcount has dropped 6.1 million since they peaked at a record 95.0 million during 2011. Since 2009, the number of returns filed by taxpayers with AGI of $50,000-$100,000 rose 5.0 million, $100,000-$200,000 rose 7.6 million, and $200,000-$500,000 rose 3.7 million.
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(2) <i>Adjusted gross income.</i> During 2018, AGI in the US totaled $11.6 trillion. The AGI of the One Percent was $2.5 trillion during 2018, accounting for 21.7% of the total, up from 13.9% during 2009 and exceeding the previous high of 21.7% during 2007 (<a href="http://www.yardeni.com/pub/blog_20210504_2.png" target="_blank">Fig. 2</a> and <a href="http://www.yardeni.com/pub/blog_20210504_3.png" target="_blank">Fig. 3</a>). Over that same period, the share of taxpayers reporting less than $100,000 in AGI fell from 50.7% to 36.6% of total AGI.
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That’s outrageous: The One Percent earned over 20% of all national AGI during 2018! Off with their heads!
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Not so fast, Robespierre.
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(3) <i>Taxes.</i> Collectively, during 2018, the One Percent paid $639 billion in income taxes, or 25.3% of their AGI (<a href="http://www.yardeni.com/pub/blog_20210504_4.png" target="_blank">Fig. 4</a> and <a href="http://www.yardeni.com/pub/blog_20210504_5.png" target="_blank">Fig. 5</a>). That amount represented a record 41.5% of the $1.54 trillion in federal income taxes paid by all taxpayers (<a href="http://www.yardeni.com/pub/blog_20210504_6.png" target="_blank">Fig. 6</a>). That’s up from 29.8% in 2009. Meanwhile, the rest of us working stiffs, the “Ninety-Nine Percent,” picked up only 58.5% of the total tax bill during 2018.
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What should be the fair share for the One Percent? Instead of about 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless paying more in taxes caused the One Percent to work less hard or leave the country, sapping their incentive to keep creating new businesses, jobs, and wealth here in America.
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(4) <i>Taxing math.</i> To repeat, during 2018 the One Percent reported $2.5 trillion in AGI, which accounted for 21.7% of total AGI. They paid $639 billion in income taxes, which was 25.3% of their AGI but accounted for 41.5% of total income taxes paid to the IRS.
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I’m sure there are plenty of progressives who believe that the One Percent should pay at least 50% of their AGI in income taxes. That would have amounted to an extra $600 billion in their tax bill for a total of $1.25 trillion in 2018. Total tax revenues would have been $2.1 trillion, with the One Percent’s fairer share of that at 60%. There would have been plenty more tax revenues for the government to spend and redistribute.
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So let’s tax the rich much more! But if their fair share is raised again and again by the progressives, what will we do when the rich are all gone?
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<i>(5) Trumped.</i> By the way, we can slice and dice the IRS data to see how President Trump’s tax reform affected individual income tax receipts during 2018 compared to 2017, i.e., before and after tax reform. The law retained the old structure of seven individual income tax brackets, but in most cases, it lowered the rates. The top rate fell from 39.6% to 37.0%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket was also unchanged.
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The number of tax returns increased 0.6% from 152.9 million to 153.8 million, while AGI rose 5.7% to $11.64 trillion (<a href="http://www.yardeni.com/pub/blog_20210504_7.png" target="_blank">Fig. 7</a> and <a href="http://www.yardeni.com/pub/blog_20210504_8.png" target="_blank">Fig. 8</a>). Total individual income taxes paid fell 4.3% to $1.54 trillion as the average tax rate fell from 14.6% during 2017 to 13.2% during 2018, which was the lowest since 13.1% during 2012 (<a href="http://www.yardeni.com/pub/blog_20210504_9.png" target="_blank">Fig. 9</a> and <a href="http://www.yardeni.com/pub/blog_20210504_10.png" target="_blank">Fig. 10</a>).
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The IRS data show the following declines in the average tax rates (based on AGI) for the following income groups:
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$0-$50,000 (down 0.1ppt from 0.7% to 0.6%)
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$50,000-$100,000 (down 1.4ppt from 8.9% to 7.5%)
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$100,000-$200,000 (down 1.5ppt from 12.6% to 11.1%)
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$200,000-$500,000 (down 2.6ppt from 19.2% to 16.6%)
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$500,000 and over (down 1.4ppt from 26.7% to 25.3%)
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(6) <i>Three cheers for the Five Percent!</i> These numbers suggest that the biggest winners were in the $200,000-$500,000 AGI group, accounting for 4.5% of all tax returns in 2018. They aren’t in the One Percent. They are in the “Five Percent,” the upper middle class with many of them owning their own businesses, which tend to employ lots of people. Arguably, their tax break provided them with more cash to expand their businesses, which certainly explains why the labor market was so strong in 2018 and 2019.
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The Biden administration has pledged that the tax increases it intends to enact will only hit taxpayers earning more than $400,000 per year. The problem is that lots of these people tend to have their own businesses. The latest data available show there were just under 32 million pass-through businesses in 2013, almost 20 times the number of C corporations. There are surely many more such proprietorships today. An increase in their tax bills reduces the cash that they have to invest in growing their businesses. One way or another, a tax increase on them will hurt the wages and employment opportunities of lots of people earning much less than $400,000. Tax increases on the rich inevitably trickle down to the rest of us.
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But at least there will surely be more income equality.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-34010360256669354682021-04-25T14:56:00.000-04:002021-04-25T14:56:28.272-04:00Running of the Bulls<div class="yrimain">
Prince, Bowie, or Metallica? I’m still trying to figure out what will be the theme song for 2021. I’d been thinking “<a href="https://www.youtube.com/watch?v=rblt2EtFfC4" target="_blank">Party Like It’s 1999</a>” by Prince until last week, when I suggested that “<a href="https://www.youtube.com/watch?v=iYYRH4apXDo" target="_blank">Space Oddity</a>” by David Bowie might be more relevant if stock prices continue to hurtle into outer space. Either song would be consistent with a continuation of the bull market in stocks. Alternatively, perhaps I need to consider a far more pessimistic theme song like “<a href="https://www.youtube.com/watch?v=eeqGuaAl6Ic" target="_blank">For Whom the Bell Tolls</a>” by Metallica.
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There’s an old stock market adage: “They don’t ring a bell at the top.” My study of financial history suggests that the adage isn’t true: Credit crunches serve as bells. More specifically, financial crises that trigger a widespread credit crunch tend to cause bear markets in stocks as investors correctly anticipate that the credit crisis will cause a recession (<a href="http://www.yardeni.com/pub/tc_20210420_1.png" target="_blank">Fig. 1</a>). During credit crunches, the S&P 500 VIX, a measure of stock market volatility, tends to soar along with the yield spread between high-yield bonds and the 10-year Treasury bond (<a href="http://www.yardeni.com/pub/tc_20210420_2.png" target="_blank">Fig. 2</a>).
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While the VIX doesn’t rise on a predictable schedule as does the sun, its rising can also shed light. In addition to rising during bear markets, it also rises during stock market corrections and minor panic attacks (<a href="http://www.yardeni.com/pub/tc_20210420_3.png" target="_blank">Fig. 3</a> and <a href="http://www.yardeni.com/pub/tc_20210420_4.png" target="_blank">Fig. 4</a>). Since the start of the bull market in 2009, Joe and I have counted 69 panic attacks. The latest one occurred when the Nasdaq fell 10.9% from February 12 through March 8, mostly on jitters over the backup in bond yields. By the way, we count last year’s selloff as a panic attack rather than an outright bear market. (See Table of <a href="https://www.yardeni.com/pub/sp500panicattacktable.pdf" target="_blank">S&P 500 Panic Attacks Since 2009</a>.)
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The unusual frequency of panic attacks during the current bull market suggests that investors have remained jittery ever since the last bear market during the Great Financial Crisis (GFC) and prone to hear warning bells. Ernest Hemingway, who wrote the novel <i>For Whom the Bell Tolls</i> (1940), suffered from tinnitus, a constant ringing in his ears as a result of injuries sustained in World War I. Similarly, investors traumatized by the GFC remain easily convinced that another bear market is imminent.
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Yet despite their propensity to panic, stock market investors are reveling in a festive mood with the bulls stampeding. Hemingway’s <i>The Sun Also Rises</i> (1926) portrays American and British expatriates who travel from Paris to the Festival of San Fermín in Pamplona, Spain, to watch the running of the bulls and the bullfights; merrymaking in the festive atmosphere provides them with an escape from reality, for the time being.
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Contrarians aren’t indulging in the stock market’s revelry; they see too many indicators flashing that stock market sentiment is unduly bullish. For them, the sun will soon set, providing a good reason to take profits before darkness.
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On the other hand, there is plenty of liquidity to drive stock prices higher without a significant correction. M2 is up by an unprecedented $4.2 trillion y/y through February (<a href="http://www.yardeni.com/pub/tc_20210420_5.png" target="_blank">Fig. 5</a>). Furthermore, over the past 12 months through February, personal saving totaled a record-shattering $3.1 trillion. All that occurred before the third round of relief checks ($1,400 per eligible person) was sent by the Treasury to over 250 million Americans since mid-March.
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MAMU, here we come! In my latest book, <a href="https://www.amazon.com/Great-Crisis-Predicting-Markets-Topical/dp/1948025108" target="_blank">The Fed and the Great Virus Crisis</a>, I predicted that MMT + TINA = MAMU, where MMT = Modern Monetary Theory, TINA = there is no alternative to stocks, and MAMU = the Mother of All Meltups. (See the relevant excerpt.)
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That might turn out to be the new adage for our times. Now let’s have a look at the latest running of the bulls:
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(1) <i>Party like it’s 1999.</i> The Nasdaq continues to party like its 1999 (<a href="http://www.yardeni.com/pub/tc_20210420_6.png" target="_blank">Fig. 6</a>). The tech-heavy index is up 104.8% since March 23, 2020 through Friday’s close. The Nasdaq bottomed on October 8, 1998 following the Russian debt and LTCM crisis. It was up 113.4% on a comparable temporal basis to the current bull run. If the Nasdaq’s bull run is about to turn into a stampede, as happened during the last leg of the 1999/2000 bull market, then it could double in value over the next six to nine months as it did back then. The S&P 500 is up 87.1% since March 23, 2020 through Friday’s close. That’s well ahead of 1999, when it was up 33.4% on a comparable temporal basis (<a href="http://www.yardeni.com/pub/tc_20210420_7.png" target="_blank">Fig. 7</a>).
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(2) <i>Stretched valuation.</i> The S&P 500’s forward P/E continues to fluctuate around 22.0, as it has over the past year. That’s not far off its record 25.7 valuation multiple during April 1999. On the other hand, the forward price-to-sales ratio of the S&P 500 has been setting new record highs for most of the past year, rising to 27.9 on Friday (<a href="http://www.yardeni.com/pub/tc_20210420_8.png" target="_blank">Fig. 8</a>).
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(3) <i>Bullish sentiment running wild.</i> The Bull/Bear Ratio compiled by Investors Intelligence was relatively elevated at 3.77 during the week of April 13 (<a href="http://www.yardeni.com/pub/tc_20210420_9.png" target="_blank">Fig. 9</a>). By historical standards, the percentage of bulls was particularly high at 63.4%. Bears are relatively scarce at 16.8%, as are investors expecting a correction at 19.8%.
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The running of the bulls is even more discernible in the Bull/Bear ratios based on survey data compiled by the American Association of Individual Investors (<a href="http://www.yardeni.com/pub/tc_20210420_10.png" target="_blank">Fig. 10</a>).
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(4) <i>Fun for almost everyone.</i> Measures of market breadth show that the bull market has broadened since early last September. The ratio of the equal-weighted to the market-cap weighted S&P 500 stock price indexes has been rising since it bottomed on September 1 (<a href="http://www.yardeni.com/pub/tc_20210420_11.png" target="_blank">Fig. 11</a>). The percentage of S&P 500 stock prices above their 200-day moving averages (dma) rose to 96.2% on April 16, exceeding the 96.0% reached on October 16, 2009 (<a href="http://www.yardeni.com/pub/tc_20210420_12.png" target="_blank">Fig. 12</a>). The S&P 500 was 15.4% above its 200-dma yesterday (<a href="http://www.yardeni.com/pub/tc_20210420_13.png" target="_blank">Fig. 13</a>). That’s a relatively high reading. During April 16, the percentage of S&P 500 companies with positive y/y stock prices changes was 93.1%, around previous cyclical highs (<a href="http://www.yardeni.com/pub/tc_20210420_14.png" target="_blank">Fig. 14</a>).
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(5) <i>Another adage.</i> Here’s another old stock market adage: “Sell in May and go away.” While doing so might make sense this year since bullish sentiment is so high, I’ve never been a fan of this adage. It doesn’t always work, and even when it does, the investor is left with the problem of determining when to get back into the market. Proponents of the adage say to come back after October, but there have been plenty of times when that advice would have meant missing a summer rebound that followed a selloff in May.
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(6) <i>Speed bumps.</i> The meltups in some asset prices are starting to run into some regulatory headwinds. We anticipated this might happen in the SPAC market. We last did so in the March 16 <i>Morning Briefing</i>. We wrote: “The bottom line is that a few of the speculative excesses in the market are under scrutiny by the regulators. The SEC is warning about SPACs with conflicts of interest, and the major central banks are warning about cryptocurrencies being used for illegal activities.”
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On April 21, CNBC posted an <a href="https://www.cnbc.com/2021/04/21/spac-transactions-come-to-a-halt-amid-sec-crackdown-cooling-retail-investor-interest.html" target="_blank">article</a> titled “SPAC transactions come to a halt amid SEC crackdown, cooling retail investor interest.” It noted: “After more than 100 new deals in March alone, issuance is nearly at a standstill with just 10 SPACs in April, according to data from SPAC Research. The drastic slowdown came after the Securities and Exchange Commission issued accounting guidance that would classify SPAC warrants as liabilities instead of equity instruments. If it becomes law, deals in the pipeline as well as existing SPACs would have to go back and recalculate their financials in 10-Ks and 10-Qs for the value of warrants each quarter.”
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Cryptocurrencies also have had a bad case of the jitters over the past week or so on rumors that the Treasury Department could be looking to crack down on financial institutions for money laundering using cryptocurrency. During her congressional nomination hearing on January 19, Treasury Secretary Janet Yellen suggested that lawmakers “curtail” the use of cryptocurrencies such as bitcoin. Her concern is that they are “mainly” used for illegal activities, including “terrorist financing” and “money laundering.”
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Adding to the jitters in most financial asset markets was President Joe Biden’s plan, announced Thursday, April 22, to raise the capital gains tax from 20.0% to 39.6% for taxpayers earning over a million dollars. Since capital gains are also subject to the 3.8% Medicare tax, the new capital gains rate would be 43.4%. Larry Lindsey, who worked for the Bush administration, described this proposed increase as a “punitive” tax on the wealth.
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On the other hand, Goldman Sachs opined on Friday, April 23 that the end version likely will be something considerably less severe, which explains why stock prices rebounded that same day following the previous day’s selloff on the Biden proposal.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-20941648606976314862021-04-15T10:42:00.000-04:002021-04-15T10:42:18.512-04:00Outcome Rather Than Outlook; Reacting Rather Than Preempting<div class="yrimain">
<b>The Fed I: Backward Looking.</b> Just in case we didn’t get the Fed’s memo on the change in its monetary framework, Fed Governor Lael Brainard explained it very clearly in a <a href="https://www.federalreserve.gov/newsevents/speech/brainard20210323b.htm" target="_blank">speech</a> on March 23 titled “Remaining Patient as the Outlook Brightens.” Throughout her talk, she stressed very important distinctions in meaning between “outlook” and “outcome” and between “preempting” and “reacting.” She concluded her speech with her punchline: “By taking a patient approach based on <i>outcomes</i> [emphasis added] rather than a preemptive approach based on the <i>outlook</i>, policy will be more effective in achieving broad-based and inclusive maximum employment and inflation that averages 2 percent over time.”
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Brainard acknowledged that the efforts of public health, fiscal, and monetary policymakers “have contributed to a considerably brighter economic outlook.” However, she stated that the Fed’s “reaction function” had changed in response to the pandemic. The Fed governor explained: “The FOMC has communicated its reaction function under the new framework and provided powerful forward guidance that is conditioned on employment and inflation outcomes. This approach implies resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance.”
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In effect, the Fed’s policy responses will be backward looking rather than forward looking. In an April 11 <a href="https://www.cbsnews.com/news/60-minutes-jerome-powell-federal-reserve-economy-update-2021-04-11/" target="_blank">interview</a> on <i>CBS 60 Minutes</i>, Fed Chair Jerome Powell reiterated this message as follows:
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(1) <i>Inflection point.</i> He started with a very upbeat outlook: “What we’re seeing now is really an economy that seems to be at an inflection point. And that’s because of widespread vaccination and strong fiscal support, strong monetary policy support. We feel like we’re at a place where the economy’s about to start growing much more quickly and job creation is coming in much more quickly.” He concluded the interview by saying “I’m in a position to guarantee that the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.”
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(2) <i>Recovery redefined.</i> Got that? The Fed will keep policy ultra-easy until the recovery is complete. But wait a minute—real GDP is likely to be back in record-high territory by the second quarter. It is on the verge of a complete recovery. That’s true, but Powell and Brainard said that “broad-based and inclusive maximum employment” is one of the outcomes they want to see before the Fed starts tightening. Both also want to see inflation moderately above 2%. Powell explained: “And the reason for that is we want inflation to average 2% over time.”
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(3) <i>Fed funds rate staying put.</i> Once the Fed achieves this outcome, “that’s when we’ll raise interest rates,” Powell said. When asked whether interest rates might remain unchanged around zero through year-end, Powell said, “I think it’s highly unlikely we would raise rates anything like this year, no.”
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<b>The Fed II: Ghost of Greenspan Past.</b> What about asset inflation? In his interview, Powell was asked about it and responded: “[W]e do look at asset prices. And I would say, you know, some asset prices are elevated by some historical metrics. Of course, there are people who think that the stock market is not overvalued, or it wouldn’t be at this level. We don’t think we have the ability to identify asset bubbles perfectly. So … what we focus on is having a strong financial system that’s resilient to significant shocks, including if values were to go down.”
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What about Archegos? This hedge fund, disguised as a “family office,” blew up earlier this month when its speculative bets in the stock market crashed and burned, leaving billion-dollar craters in the earnings of a few of its brokers. Powell’s response gave me an unsettling sense of déjà vu all over again. He said:
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“This is an event that we’re monitoring very carefully and working with regulators here and around the world to understand carefully. What’s concerning about it … and surprising, frankly, is that a single customer, client, of one of these large firms could result in such substantial losses to these large firms in a business that is generally thought to present relatively well understood risks.”
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That reminds me of the following remarks by Alan Greenspan for his October 23, 2008 <a href="https://oversight.house.gov/sites/democrats.oversight.house.gov/files/migrated/20081023100438.pdf" target="_blank">testimony</a> before the House Committee on Oversight and Government Reform at a hearing on the role of federal regulators in the Great Financial Crisis:
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“As I wrote last March: those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined.”
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During his Q&A exchange, Greenspan acknowledged the error of his ways: “I made a mistake in presuming that the self-interest of organizations, specifically banks and others, [was] such [that] they were best capable of protecting their own shareholders and their equity in the firms.”
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(For more thoughts regarding that testimony, see my 2020 book <a href="https://www.amazon.com/Fed-Watching-Fun-Profit-Investors/dp/194802506X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=" target="_blank">Fed Watching for Fun and Profit</a>, particularly Chapter 5 titled “Alan Greenspan: The Great Asset Inflator.” Chapter 8 is titled “Jerome Powell: The Pragmatic Pivoter.” When and if I write a second edition, I might have to change that to “Jerome Powell: Another Great Inflator.” His policies have the potential to inflate not only asset prices but also consumer prices.)
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<b>The Fed III: New Monetary Policy Approach.</b> All this amounts to a backward-looking, rather than a forward-looking, monetary policy approach. Ironically, all the talking Fed heads now are saying that their “forward guidance” is no longer relevant since that was based on their <i>outlook</i>, which has not been relevant since the pandemic started. What matters now is the <i>outcome</i>, which can only be known after it happens!
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Forward-looking guidance has now morphed into backward-looking guidance. In effect, Fed officials are saying, “We’ll let you know when we are ready to raise interest rates after we get the outcome we were seeking.”
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Confused? If not, you should be. Now take a deep breath and try to fathom the following Fed speak from a March 25 <a href="https://www.federalreserve.gov/newsevents/speech/clarida20210325a.htm" target="_blank">speech</a> by Fed Vice Chair Richard Clarida:
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“The changes to the policy statement that we made over the past few FOMC meetings bring our policy guidance in line with the new framework outlined in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that the Committee approved last August. In our new framework, we acknowledge that policy decisions going forward will be based on the FOMC’s estimates of ‘<i>shortfalls</i> [emphasis added] of employment from its maximum level’—not ‘deviations.’ This language means that going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels. With regard to our price-stability mandate, while the new statement maintains our definition that the longer-run goal for inflation is 2 percent, it elevates the importance—and the challenge—of keeping inflation expectations well anchored at 2 percent in a world in which an effective-lower-bound constraint is, in downturns, binding on the federal funds rate. To this end, the new statement conveys the Committee’s judgment that, in order to anchor expectations at the 2 percent level consistent with price stability, it will conduct policy to achieve inflation outcomes that keep long-run inflation expectations anchored at our 2 percent longer-run goal.”
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You can come up for air now.
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<b>The Fed IV: By the Numbers. </b>The Fed’s balance sheet continues to expand to infinity and beyond. That’s been happening since the Fed adopted QE4ever on March 23, 2020. Here are the mind-boggling relevant stats since then through the April 7 week:
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(1) <i>Assets.</i> The assets side of the Fed’s balance sheet is up $3.0 trillion over this period to a record $7.7 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_1.png" target="_blank">Fig. 1</a>). The Fed’s holdings of securities is up $3.2 trillion to a record $7.1 trillion. The difference between these two series is composed mostly of the assets held by the Fed’s emergency liquidity facilities, which has declined $167 billion since March 23, 2020 (<a href="http://www.yardeni.com/pub/tc_20210413_2.png" target="_blank">Fig. 2</a>). It remains $260 billion above last year’s low during the week of February 26.
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(2)<i> MMT.</i> Over the past 12 months through March, the US federal budget deficit totaled $4.1 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_3.png" target="_blank">Fig. 3</a>). The Fed financed 51% of this deficit by purchasing $2.1 trillion in US Treasury securities over this period. As of March, the Fed held a record 25.6% of the total of marketable US Treasury debt (<a href="http://www.yardeni.com/pub/tc_20210413_4.png" target="_blank">Fig. 4</a>). That’s Modern Monetary Theory (MMT) on speed and steroids.
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(3) <i>Notes and bonds.</i> Over the past 12 months through March, the Treasury issued $2,081 billion in notes and bonds (<a href="http://www.yardeni.com/pub/tc_20210413_5.png" target="_blank">Fig. 5</a> and <a href="http://www.yardeni.com/pub/tc_20210413_6.png" target="_blank">Fig. 6</a>). Over that same period, the Fed purchased $1,615 billion in the Treasury’s notes and bonds. It bought them in an effort to keep a lid on bond yields. The 10-year Treasury bond yield has rebounded nonetheless, but it would probably be higher today but for the Fed’s purchases.
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(4) <i>Reserve balances.</i> As a result of the Treasury’s record budget deficit and the Fed’s record purchases of securities, the total deposits at all US commercial banks has increased $2.4 trillion y/y to a record $16.7 trillion through the March 31 week (<a href="http://www.yardeni.com/pub/tc_20210413_7.png" target="_blank">Fig. 7</a>). Another result of T-Fed’s MMT on speed and steroids is that reserve balances with the Fed has jumped $1.2 trillion y/y to a record $3.9 trillion during the April 7 week (<a href="http://www.yardeni.com/pub/tc_20210413_8.png" target="_blank">Fig. 8</a>). That well exceeds the impact of the previous three QE programs on reserve balances.
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(5) <i>The others.</i> Meanwhile, the assets on the ECB’s balance sheet also continue to soar. During the April 2 week, this series was up €2.3 trillion y/y to a record €7.5 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_9.png" target="_blank">Fig. 9</a>). The BOJ’s assets rose 18% y/y to a record ¥714 trillion during the March 26 week (<a href="http://www.yardeni.com/pub/tc_20210413_10.png" target="_blank">Fig. 10</a>).
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I also track the assets of the People’s Bank of China (PBOC). However, we believe that China’s bank loans data are a more useful measure of the PBOC’s ultra-easy monetary policy since the Great Financial Crisis. From the end of 2008 through March 2021, they are up a staggering $23.3 trillion from $4.4 trillion to a record $27.7 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_11.png" target="_blank">Fig. 11</a>). Over the past 12 months through March, these loans are up a record $3.1 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_12.png" target="_blank">Fig. 12</a>).
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All together in US dollars, the assets of the Fed, ECB, and BOJ are up $6.9 trillion y/y through the March 26 week to a record-high $23.1 trillion (<a href="http://www.yardeni.com/pub/tc_20210413_13.png" target="_blank">Fig. 13</a> and <a href="http://www.yardeni.com/pub/tc_20210413_14.png" target="_blank">Fig. 14</a>).
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-21180119337378156522021-04-09T09:25:00.000-04:002021-04-09T09:25:11.078-04:00The Myth of Stagnating Real Wages<div class="yrimain">
In the past, I often have observed that, contrary to popular belief, inflation-adjusted wages have been expanding rather than stagnating for many years. Wage stagnation has been a popular myth perpetuated by progressives bemoaning workers’ plight to promote their own political agenda.
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Naturally, progressives want even more progressive income taxes on higher-income workers and more social benefits for lower-income ones. Their goal is to redistribute income to reduce income inequality. They’ve actually succeeded in doing so, but they never seem to be satisfied. They always want more taxes and more benefits. The result is more “big government.” For now, let’s update the data that belie their basic claims:
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(1) <i>The wrong measure of inflation-adjusted wages.</i> One measure of real wages seems to confirm the progressives’ stagnation thesis. Inflation-adjusted wages—defined as AHE divided by the CPI—peaked at a then-record high of $23.49 per hour during January 1973 (<a href="http://www.yardeni.com/pub/blog_20210409_1.png" target="_blank">Fig. 1</a>). It remained below that level until April 2020. That’s over 47 years! As of February 2021, it was only 1.4% above the 1973 peak. That’s pathetic.
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I mean that analysis is pathetic. The CPI is widely known to be biased to the upside. A far better measure of consumer prices is the PCED. When we use that series to deflate the AHE series, we find that inflation-adjusted wages did stagnate during most of the 1970s through the mid-1990s. But it started moving higher around 1995 and has been achieving new highs since January 1999, rising along a trend line of 1.2% per year (<a href="http://www.yardeni.com/pub/blog_20210409_2.png" target="_blank">Fig. 2</a>).
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(2)<i> Rising standard of living.</i> That represents a very solid increase in the purchasing power of consumers and in their standards of living! The real wage has increased 38% over the past 26 years from $16.18 during February 1995 to $22.34 during February 2021. Keep in mind that I am using AHE for production and nonsupervisory workers, who account for roughly 80% of private payrolls. This series certainly isn’t upwardly biased by the earnings of higher-wage workers.
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Data available since 2006 show that AHE for higher-wage workers, on an inflation-adjusted basis using the PCED, rose 12.0% from the start of that year through February of this year (<a href="http://www.yardeni.com/pub/blog_20210409_3.png" target="_blank">Fig. 3</a>). Over the same period, AHE rose 19.5% for lower-wage workers.
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Any way we slice or dice the data, the conclusion is the same: The income stagnation story is a myth. Standards of living have been rising for most Americans most of the time.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-39763218257831395172021-03-29T11:08:00.000-04:002021-03-29T11:08:13.667-04:00High-Octane Earnings<div class="yrimain">
I am raising my S&P 500 operating earnings forecast for 2021 from $175 per share to $180, a 27.8% y/y increase from 2020. I am also raising my 2022 forecast from $190 to $200, an 11% increase over my new earnings target for this year. I would have raised my 2022 estimate more but for my expectation that the Biden administration will raise the corporate tax rate next year.
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As I've observed, the economy was hot before the third round of “relief” checks started going out around mid-March. Now it is likely to turn red hot as the Treasury sends $1,400 checks or deposits to 285 million Americans in coming weeks.
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I have also observed that the average of the business activity indexes compiled by the Federal Reserve Banks (FRBs) of New York and Philadelphia for their districts jumped from 17.6 during February to 34.6 during March, the highest reading since July 2004 (<a href="http://www.yardeni.com/pub/tc_20210323_1.png" target="_blank">Fig. 1</a>). This is a very significant development for the following reasons:
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(1)<i> Regional and national business surveys.</i> Their average tends to be a good leading indicator for the average of the five surveys conducted by these two FRBs along with the ones in Richmond, Kansas City, and Dallas. The average of the five business activities indexes is highly correlated with the national M-PMI (<a href="http://www.yardeni.com/pub/tc_20210323_2.png" target="_blank">Fig. 2</a>). That means that the average of the New York and Philly indexes also is highly correlated with the national M-PMI and is signaling a solid number for the latter’s March reading (<a href="http://www.yardeni.com/pub/tc_20210323_3.png" target="_blank">Fig. 3</a>).
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(2) <i>Business indexes and S&P 500 revenues growth.</i> “What does this have to do with S&P 500 earnings?,” you might be wondering. Good question. I won’t keep you in suspense. Previously, I’ve observed that the M-PMI is highly correlated with the y/y growth rate in S&P 500 aggregate revenues (<a href="http://www.yardeni.com/pub/tc_20210323_4.png" target="_blank">Fig. 4</a>). February’s M-PMI reading of 60.8 matches some of the best readings in this indicator since 2004! The March reading could be stronger, implying that S&P 500 revenues may be set to grow 10%-15% this year. That’s certainly confirmed by the similar relationship between the growth in revenues and the average of the New York and Philly business activity indexes (<a href="http://www.yardeni.com/pub/tc_20210323_5.png" target="_blank">Fig. 5</a>).
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(3)<i> Profit margin.</i> That strong outlook for revenues growth provides a very good tailwind for earnings growth, which will also get a lift from a rising profit margin. I think that the profit margin, which averaged 10.4% last year, could increase both this year and next year. Profit margins tend to rebound after recessions and during recoveries along with productivity.
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(4) <i>Bottom line on the bottom line.</i> Let’s put it all together now. I am raising my S&P 500 revenues forecast by $50 to $1,550 per share this year, up 14.0% from the 2020 level (<a href="http://www.yardeni.com/pub/tc_20210323_6.png" target="_blank">Fig. 6</a>). For next year, I am sticking with my $1,600 revenues estimate, representing just a 3.2% increase. That’s because I believe that the relief checks, besides relieving pent-up demand, will pull forward some of next year’s demand. Also, individual tax rates are likely to go up next year along with corporate ones.
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I am projecting that the S&P 500 profit margin will increase from 10.4% last year to 11.6% this year and 12.5% next year (<a href="http://www.yardeni.com/pub/tc_20210323_7.png" target="_blank">Fig. 7</a>). The result would be S&P 500 earnings of $180 per share this year and $200 next year (<a href="http://www.yardeni.com/pub/tc_20210323_8.png" target="_blank">Fig. 8</a>). (See <a href="https://www.yardeni.com/pub/yriearningsforecast.pdf" target="_blank">YRI S&P 500 Earnings Forecast</a>.)
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<b>Analysts Bullish on S&P 500 Fundamentals</b>
<br /><br />
I am not the only one turning even more bullish on the fundamentals driving the stock market. Industry analysts also are raising their estimates for revenues, earnings, and profit margins for the S&P 500 for this year and next year. Consider the following:<br /><br />
(1) <i>Quarterly consensus earnings estimates for 2021.</i> The analysts’ consensus estimates for quarterly S&P 500 earnings per share this year have been rising since mid-2020 (<a href="http://www.yardeni.com/pub/tc_20210323_9.png" target="_blank">Fig. 9</a>). As of the March 18 week, they were projecting the following y/y growth rates for S&P 500 operating earnings: Q1 (20.0%), Q2, (50.1), Q3 (18.0), and Q4 (12.5) (<a href="http://www.yardeni.com/pub/tc_20210323_10.png" target="_blank">Fig. 10</a>).
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(2) <i>Annual consensus earnings estimates for 2021 and 2022.</i> As of the March 18 week, the consensus predicted that S&P 500 earnings per share will be $175.54 this year and $202.11 next year (<a href="http://www.yardeni.com/pub/tc_20210323_11.png" target="_blank">Fig. 11</a>). Currently, industry analysts are expecting that S&P 500 earnings will increase 25.5% this year compared to last year (<a href="http://www.yardeni.com/pub/tc_20210323_12.png" target="_blank">Fig. 12</a>). For 2022, they are anticipating a 15.2% growth rate.
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(3) <i>Annual consensus revenues and margin estimates for 2021 and 2022.</i> Industry analysts are currently projecting that revenues will total $1,459.08 this year and $1,558.19 next year (<a href="http://www.yardeni.com/pub/tc_20210323_13.png" target="_blank">Fig. 13</a>). In other words, they are expecting revenues per share to grow 9.4% in 2021 and 6.8% during 2022 (<a href="http://www.yardeni.com/pub/tc_20210323_14.png" target="_blank">Fig. 14</a>).<br /><br />
Interestingly, their estimate for 2021 revenues growth has been increasing since the week of November 19, undoubtedly reflecting expectations that President Biden’s American Rescue Plan would be enacted early this year and be very stimulative, adding roughly two percentage points to revenues growth. The expected growth rate for 2022 hasn’t changed much since late last year.
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I calculate the implied profit margins from the consensus estimates for earnings and revenues. The results show that margin estimates have been improving since last summer for 2020, 2021, and 2022. The latest readings for these in 2021 and 2022 are 11.8% and 12.7% (<a href="http://www.yardeni.com/pub/tc_20210323_15.png" target="_blank">Fig. 15</a>).<br /><br />
(4) <i>Forward ho!</i> Both S&P 500 forward revenues and forward earnings have now fully recovered what they lost during the first few months of the pandemic (<a href="http://www.yardeni.com/pub/tc_20210323_16.png" target="_blank">Fig. 16</a>). Both took much longer to recover during the Great Financial Crisis. The same can be said for the forward profit margin. The weekly forward revenues, earnings, and profit margin series are all excellent coincident indicators of the comparable actual comparable data (<a href="http://www.yardeni.com/pub/tc_20210323_17.png" target="_blank">Fig. 17</a>). All three of the weekly series remain bullish on the underlying fundamentals for the S&P 500.<br /><br />
I am raising my year-end 2021 and 2022 forward earnings forecasts by $5 each to $200 and $210 (<a href="http://www.yardeni.com/pub/tc_20210323_18.png" target="_blank">Fig. 18</a>). Think of these as my best guess of what industry analysts will be projecting earnings will be in 2022 and 2023 at the end of 2021 and 2022. (See our 2020 study titled <a href="https://www.amazon.com/500-Earnings-Valuation-Pandemic-Predicting/dp/1948025086/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=" target="_blank">S&P 500 Earnings, Valuation, & the Pandemic</a> for a thorough explanation of forward earnings.)
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(5) <i>S&P 500 targets and valuation</i>. Even though I am raising my forward earnings targets, I am keeping my S&P 500 stock price targets at 4300 and 4800 by the end of this year and next year. That buys me a bit more wiggle room on our valuation multiple assumptions, which are now 21.5 and 22.9 for the end of this year and next year (<a href="" target="_blank">Fig. 19</a>). The multiple is currently 21.6.<br /><br />
One of my accounts asked me whether I should lower my outlook for the forward P/E given that I am predicting that the 10-year US Treasury bond yield is likely to rise back to its pre-pandemic range of 2.00%-3.00% over the next 12-18 months.
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Normally in the past, I would have lowered my estimates for forward P/Es in a rising-yield environment. However, these are not normal times. In the “New Abnormal,” valuation multiples are likely to remain elevated around current elevated levels because fiscal and monetary policies continue to flood the financial
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-7415427733835645672021-03-11T17:56:00.001-05:002021-03-15T17:09:32.099-04:00Rent: From Headwind To Tailwind<div class="yrimain">
Rent is one of the major components of both the Consumer Price Index (CPI) and the personal consumption expenditures deflator (PCED). Rent inflation has been falling since the start of the pandemic. So it has helped to keep a lid on overall consumer price inflation. Rent disinflation has offset price increases resulting from the stimulative monetary and fiscal policies implemented by the government to shore up the financial system and to revive economic growth. So far, rent disinflation has provided a headwind for overall inflation.
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However, a shortage of houses for sale combined with rapidly rising home prices and mortgage rates could soon boost rent inflation, providing a tailwind for overall inflation. Consider the following:
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(1) <i>Housing market.</i> The pandemic triggered a wave of deurbanization. City dwellers, especially those renting apartments, suddenly decided it was time to buy a house in the suburbs. They wanted big yards with swimming pools for their kids, home offices, and more distance from their neighbors. At the same time, the Fed’s ultra-easy monetary policies caused mortgage rates to fall to record lows. That only stoked demand for houses.
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During the lockdowns at the start of the pandemic, the sum of existing plus new single-family homes plunged from 5.83 million units (saar) in February 2020 to 4.35 million units in May (<a href="http://www.yardeni.com/pub/tc_20210309_1.png" target="_blank">Fig. 1</a>). As the lockdown restrictions were lifted, home sales soared to a high of 6.98 million units during October, the best reading since April 2006. They remained around that pace through January.
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The problem is that the inventory of existing and new homes for sale fell to a record low of 1.19 million units during January (<a href="http://www.yardeni.com/pub/tc_20210309_2.png" target="_blank">Fig. 2</a>). Demand is seriously outstripping supply. So home prices are soaring. The median and average prices of existing single-family homes rose 14.8% y/y and 12.3% y/y through January to fresh record highs (<a href="http://www.yardeni.com/pub/tc_20210309_3.png" target="_blank">Fig. 3</a>). Median home prices are up at double-digit rates in the Northeast (18.4%), West (17.5), Midwest (15.1), and South (14.7) (<a href="http://www.yardeni.com/pub/tc_20210309_4.png" target="_blank">Fig. 4</a>).
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The backup in bond yields has caused the 15-year fixed-rate mortgage yield to rise from a record low of 2.32% on January 4 to 2.54% on Friday (<a href="http://www.yardeni.com/pub/tc_20210309_5.png" target="_blank">Fig. 5</a>). It’s likely to keep rising along with bond yields. The combination of low inventories of homes, soaring home prices, and rising mortgage rates may already be weighing on mortgage applications to purchase homes (<a href="http://www.yardeni.com/pub/tc_20210309_6.png" target="_blank">Fig. 6</a>).
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Building a new home has become more expensive as lumber prices have soared (<a href="http://www.yardeni.com/pub/tc_20210309_7.png" target="_blank">Fig. 7</a>). We’ve heard that many builders are so busy that they tell prospective new homebuyers that they won’t be able to start on their projects for 12-18 months.
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(2) <i>Rental market.</i> In other words, the lack of availability and the declining affordability of homes could convince urban dwellers to stay put in their rental apartments. For now, some might be able to negotiate a better rental deal with their landlord. However, the rental market could tighten later this year if the availability and affordability of homes discourages would-be homebuyers.
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The inflation rate of the CPI for tenant rent fell to 2.1% y/y during January, down from 3.8% a year ago (<a href="http://www.yardeni.com/pub/tc_20210309_8.png" target="_blank">Fig. 8</a>). Following the Great Financial Crisis (GFC) of 2008, tenant rent inflation plunged to a low of -0.1% during May 2010, down from 4.6% during March 2007.
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During the GFC and for a few years following this calamity, there was a glut of distressed homes for sale. Home prices fell, and so did rents. The Great Virus Crisis boosted the demand for homes and their prices, sending rent inflation downward. But rent inflation may not have much lower to go and could be on the way up again later this year for the reasons discussed above.
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(3) <i>Rent in consumer prices.</i> In the CPI, rent of shelter includes tenant rent and owners’ equivalent rent. The latter closely tracks the former. Rent of shelter accounts for 33.3% of the headline CPI, 41.8% of the core CPI, and 53.1% of CPI services. Rent of shelter accounts for 16.6% of the PCED, 18.8% of the core PCED, and 25.3% of PCED services.
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(4) <i>Phillips curve.</i> Fed officials seem to be running monetary policy under the influence of the notion that the Phillips curve is dead. It wasn’t too long ago that they believed that inflation is inversely correlated with the unemployment rate. The only question in their minds was whether this relationship had flattened in recent years given that record-low unemployment prior to the pandemic wasn’t heating up inflation after all, as they previously had feared.
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Now Fed officials believe that they should continue to overheat the economy with monetary policy to achieve maximum employment by next year; yet any pickup in inflation will be transient. I tend to agree with them. However, for the record, there still is an inverse relationship between the jobless rate and the inflation rate of rent of shelter in the CPI (<a href="http://www.yardeni.com/pub/tc_20210309_9.png" target="_blank">Fig. 9</a>). Furthermore, there is a direct relationship between wage inflation and rent inflation (<a href="http://www.yardeni.com/pub/tc_20210309_10.png" target="_blank">Fig. 10</a>).
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During February, the unemployment rate remained high at 6.2%. However, average hourly earnings rose at a fast pace of 5.3% y/y during the month. We’ve previously suggested that generous government unemployment benefits are keeping people from seeking jobs, resulting in labor shortages. That would explain why wage inflation might remain high. If so, then that could soon cause rent inflation to stop falling and start moving higher. The headwind for overall inflation could turn into a tailwind!
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-90361105012448172312021-03-05T09:26:00.000-05:002021-03-05T09:26:34.821-05:00Checks Without Balances<br><div class="yrimain">
Washington’s lawmakers have discovered the joys of sending checks to their constituents during bad times. They’ve done it twice so far since the start of the pandemic and are likely to do it a third time shortly. The $1,200-per-person checks sent during April did work to revive the economy from last year’s two-month recession during March and April. The $600 checks sent during January certainly averted any stalling in economic growth in the face of the third wave of the pandemic. It’s not hard to guess what another round of $1,400 checks will do to the economy. Consider the following:
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(1) <i>Pandemic.</i> On a 10-day moving average basis, Covid-19 hospitalizations have plunged 55% from a record high of 130,386 during January 15 to 58,394 during February 26 (<a href="http://www.yardeni.com/pub/tc_20210302_1.png" target="_blank">Fig. 1</a>). That’s the lowest pace since November 12, 2020. The Food and Drug Administration on February 27 authorized Johnson & Johnson’s single-shot Covid-19 vaccine for emergency use. J&J will provide the US with 100 million doses by the end of June. When combined with the 600 million doses from the two-shot vaccines made by Pfizer-BioNTech and Moderna slated to arrive by the end of July, there will be more than enough shots to cover any American adult who wants one this summer.
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The new vaccine’s 72% efficacy rate in US clinical trials falls short of the roughly 95% rate found in studies testing the Moderna and Pfizer-BioNTech vaccines. Across all trial sites, the Johnson & Johnson vaccine also showed 85% efficacy against severe forms of Covid-19 and 100% efficacy against hospitalization and death. That sounds like a winner for sure! To repeat: 100% efficacy against hospitalization and death. That should turn the plague into a pest by the second half of this year.
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In his February 23 <a href="https://www.federalreserve.gov/newsevents/testimony/powell20210223a.htm" target="_blank">congressional testimony</a> on monetary policy, Fed Chair Jerome Powell said, “While we should not underestimate the challenges we currently face, developments point to an improved outlook for later this year. In particular, ongoing progress in vaccinations should help speed the return to normal activities.” I think that both monetary and fiscal policymakers underestimate the stimulative impact of the end of the pandemic.
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(2) <i>Real GDP.</i> The V-shaped recovery in real GDP will remain V-shaped during the first half of this year and probably through the end of the year. However, it will no longer be a “recovery” beyond Q1 because real GDP will have fully recovered during the current quarter. Thereafter, GDP will be in an “expansion” in record-high territory.
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Last year, real GDP rebounded 33.4% (saar) during Q3 and 4.1% during Q4 (<a href="http://www.yardeni.com/pub/tc_20210302_2.png" target="_blank">Fig. 2</a>). We are projecting 7.0% during Q1. On Monday, we raised our Q2 estimate from 4.5% to 9.0%, mostly because we expect that President Biden’s American Rescue Plan will be enacted in the next few weeks.
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The plan will provide checks of $1,400 per eligible person, mostly during April, we reckon, providing another big boost to consumer incomes and spending. Last year, consumer spending in real GDP rose 41.0% during Q3 and 2.4% during Q4. The Atlanta Fed’s <a href="https://www.frbatlanta.org/cqer/research/gdpnow" target="_blank">GDPNow</a> model showed an 8.8% increase in such spending during Q1 as of March 1 (with real GDP up 10.0%). We forecast that real consumer spending will increase 7.9% during Q1 and 11.3% during Q2.
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(3) <i>Personal income.</i> In current dollars, personal income jumped by a record 12.4% m/m during April 2020 as a result of a $3.3 trillion (saar) increase in government social benefits that month, thanks to the $1,200 checks and generous unemployment benefits (<a href="http://www.yardeni.com/pub/tc_20210302_3.png" target="_blank">Fig. 3</a> and <a href="http://www.yardeni.com/pub/tc_20210302_4.png" target="_blank">Fig. 4</a>). January’s 10.0% increase in personal income was the second biggest ever in a month, as a result of a $2.0 trillion increase in benefits attributable to the $600 checks.
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If the next round of $1,400 checks goes out in April, it will undoubtedly boost personal income by a new record amount to another record high! The “other” component of government social benefits in personal income includes an item for “Economic Impact Payments” (<a href="http://www.yardeni.com/pub/tc_20210302_5.png" target="_blank">Fig. 5</a>). At an annual rate, these checks from the Treasury boosted benefits and total personal income by $2.6 trillion and $0.6 trillion, respectively, during April and May of last year. They boosted them both by $1.7 trillion during January. So they accounted for virtually the entire $1.9 trillion increase in personal income during January!
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(4) <i>Personal consumption.</i> The government checks certainly contributed to the V-shaped recovery in consumer spending (<a href="http://www.yardeni.com/pub/tc_20210302_6.png" target="_blank">Fig. 6</a>). Another round of checks will do the same this spring. In current dollars, consumer spending rose 2.4% m/m during January, led by a 5.8% m/m increase in consumption of goods to a new record high. In coming months, consumers should be able to spend much more on services that have been limited by the pandemic’s social-distancing protocols.
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(5) <i>Personal saving.</i> During last year’s lockdowns, consumers couldn’t spend either their paychecks or government benefits as readily as usual since most stores and restaurants were closed. So personal saving soared to a record $6.4 trillion (saar) during April (<a href="http://www.yardeni.com/pub/tc_20210302_7.png" target="_blank">Fig. 7</a>). It then fell to $2.3 trillion by December, which was still well above the $1.3 trillion pace of personal saving at the start of last year.
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Interestingly, January’s $2.0 trillion jump in government social benefits coincided with a $1.6 trillion increase in personal saving to $3.9 trillion, suggesting that much of the month’s stimulus hasn’t been spent yet. After the year-end holiday season, January is not a prime month for shopping.
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So there is plenty of stimulus left over. In addition, consumer revolving credit outstanding dropped $118 billion y/y through December to $976 billion (<a href="http://www.yardeni.com/pub/tc_20210302_8.png" target="_blank">Fig. 8</a>). The ratio of consumer revolving credit to personal consumption (both in current dollars) dropped from 7.4% to 6.7% over this period (<a href="http://www.yardeni.com/pub/tc_20210302_9.png" target="_blank">Fig. 9</a>). This suggests that consumers aren’t as reliant on their credit cards because they have plenty of cash. Moreover, once they spend their extra cash, they can always tap into their credit cards again.
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(6) <i>Unemployment benefits.</i> The Biden plan will extend temporary pandemic relief programs for unemployed workers, expiring on March 14, to August 26. Benefit recipients would also get an extra $400 a week. More than 19 million Americans were collecting benefits as of early February, according to the Labor Department. Last year, unemployment benefits in personal income totaled $550.2 billion, up from $27.7 billion during 2019.
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Our February 9 Morning Briefing was titled “The Government Is Here To Help.” We reviewed the recent Washington Post <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/" target="_blank">op-ed</a> by economist Larry Summers in which he trashed President Biden’s American Rescue Plan as too stimulative and too inflationary. He also strongly implied that the plan included overly generous unemployment benefits that would discourage the unemployed from taking jobs. In fact, there is mounting evidence that the pandemic-related unemployment benefits provided last year have been doing the same.
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Our February 10 Morning Briefing was titled “Help Wanted.” We wrote, “There actually seem to be lots of job openings, but fewer people willing to take them. That would explain why wages have been rising at a faster pace in recent months.”
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(7) <i>Bottom line.</i> There is plenty of stimulus left in the pipeline from last year’s pandemic rescue programs. More rounds of government stimulus programs this year are likely to cause a boom that overheats the post-pandemic economy, which might result in higher inflation. The government’s overly generous extended unemployment benefits could frustrate policymakers’ goal of achieving full employment while driving up wage inflation.
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Too much of a good thing is often just too much. The economy is hot and will get hotter with the bonfire of the fiscal and monetary insanities.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-71916221531301120952021-02-21T16:01:00.000-05:002021-02-21T16:01:50.298-05:00S&P 500 Earnings: V-Shaped Recovery<div class="yrimain">
On the health front of the world war against the virus (WWV), the third wave of the pandemic, which started around Halloween, has been the worst by far (<a href="http://www.yardeni.com/pub/tc_20210217_1.png" target="_blank">Fig. 1</a>). However, it crested on January 15, when the 10-day moving average of hospitalizations peaked at 232,583. This series was down 56% to 101,407 on February 15. That’s encouraging. Hopefully, there won’t be another wave related to the Super Bowl. Meanwhile, the pace of vaccinations is picking up, which should change Covid-19 from a plague to a pest.
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Notwithstanding the severity of the third wave of the pandemic during the fourth quarter of last year and early this year, a great deal of progress has been made on the economic front of WWV. The US continues to trace out a V-shaped recovery. The same can be said about the global economy. That’s showing up in the V-shaped recovery in S&P 500 earnings. So the V-shaped rebound in the S&P 500 stock price index has been justified by the rebound in earnings. The index hasn’t been disconnected from the economy as widely believed.
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Of course, the remarkable progress made on the financial front of WWV in both the stock and credit markets has been largely driven by the unprecedented stimulus provided by fiscal and monetary policies around the world. Credit-quality yield spreads have narrowed, and corporate and municipal bond yields have dropped to pre-pandemic readings. The financial system and global economy are awash in liquidity, resulting in elevated valuation multiples.
<br /><br />
Let’s review the V-shaped recovery in S&P 500 revenues, earnings, and profit margins:
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(1) <i>Q4 earnings season.</i> Let’s start with the Q4 reporting season. So far, 369 of the S&P 500 companies have reported. During the week of February 11, S&P 500 earnings for the quarter came in at $42.26 per share using the blend of actual and estimated earnings (<a href="http://www.yardeni.com/pub/tc_20210217_2.png" target="_blank">Fig. 2</a>). That’s up 14.6% from the estimate during the week of December 31, just prior to the latest season. Remarkably, the latest blended earnings number for Q4 is up 0.6% y/y! That follows the following declines during the previous three quarters: Q1 (-15.4%), Q2 (-32.3), and Q3 (-8.2) (<a href="http://www.yardeni.com/pub/tc_20210217_3.png" target="_blank">Fig. 3</a>).
<br /><br />
That certainly was a V-shaped recovery in the quarterly earnings-per-share numbers last year, although 2020’s total was down 14% to $140 per share from $163 in 2019. We are predicting $175 for this year, which would be a 25% rebound from last year’s total.
<br /><br />
(2) <i>Forward revenues and earnings.</i> Also showing V-shaped recovery formations are S&P 500’s forward revenues and forward earnings, i.e., the time-weighted average of consensus estimates for this year and next year (<a href="http://www.yardeni.com/pub/tc_20210217_4.png" target="_blank">Fig. 4</a>). Both certainly stand out as V-shaped compared to their U-shaped recoveries during the Great Financial Crisis.[1]
<br /><br />
Forward revenues per share is a great weekly coincident indicator of actual S&P 500 revenues per share (<a href="http://www.yardeni.com/pub/tc_20210217_5.png" target="_blank">Fig. 5</a>). During the week of February 4, the former was only 0.5% below its record high during the week of March 5.
<br /><br />
Forward earnings per share is a great weekly year-ahead leading indicator of actual S&P 500 operating earnings on a four-quarter trailing basis (<a href="http://www.yardeni.com/pub/tc_20210217_6.png" target="_blank">Fig. 6</a> and <a href="http://www.yardeni.com/pub/tc_20210217_7.png" target="_blank">Fig. 7</a>). Admittedly, it doesn’t see recessions coming, but it works very well during economic recoveries and expansions. It was $176.78 during the week of February 11, only 1.2% below its record high during the week of January 30, 2020. That latest number is about the same as our forecast for the year.
<br /><br />
(3) <i>Profit margin</i>. Apparently, companies scrambled to cut their costs when the pandemic hit only to find that their sales recovered sooner than expected. That explains why the S&P 500 forward profit margin plunged from 12.0% at the start of 2020 to 10.3% during the week of May 28 and rebounded back to 11.9% during the week of February 4 (<a href="http://www.yardeni.com/pub/tc_20210217_8.png" target="_blank">Fig. 8</a>). Here are the latest analysts’ consensus profit margin estimates for 2020 (10.2%), 2021 (11.7%), and 2022 (12.7%) (<a href="http://www.yardeni.com/pub/tc_20210217_9.png" target="_blank">Fig. 9</a>).
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-33562536728988199752021-02-10T13:32:00.000-05:002021-02-10T13:32:16.217-05:00Help Wanted<div class="yrimain">
In a recent Washington Post <a href="https://www.washingtonpost.com/opinions/2021/02/04/larry-summers-biden-covid-stimulus/?campaign_id=9&emc=edit_nn_20210207&instance_id=26877&nl=the-morning&regi_id=73958040&segment_id=51209&te=1&user_id=0b569222beaf626d92349c8566b7cc7c" target="_blank">op-ed</a>, Larry Summers trashed President Joe Biden’s American Rescue Plan as too stimulative and too inflationary. He also strongly implied that the plan included overly generous unemployment benefits that would discourage the unemployed from taking jobs. In fact, there is mounting evidence that the unemployment benefits provided by the CARES (Coronavirus Aid, Relief, and Economic Security) Act have been doing the same.
<br /><br />
There actually seem to be lots of job openings, but fewer people willing to take them. That would explain why wages have been rising at a faster pace in recent months. At the start of the pandemic, many low-wage workers lost their jobs, while most high-wage workers could work from home. That explained the jump in average hourly earnings during March and April, for sure. But now, wages may be getting a boost from a shortage of workers. Of course, contributing to the problem may be a mismatch between the skills required for the available jobs and the skills of available workers.
<br /><br />
This is obviously a controversial subject. Undoubtedly, there are many people who have lost their jobs and can’t find new ones. It makes sense to target government stimulus support to them until the pandemic is over. Now let’s see what the data have to say on this subject:
<br /><br />
(1) <i>Wages and salaries.</i> Despite January’s disappointing payrolls report, our Earned Income Proxy (EIP) for wages and salaries in the private sector rose 1.1% m/m and 0.6% y/y, its first positive reading since last March. It had bottomed at -8.9% y/y last April (<a href="http://www.yardeni.com/pub/tc_20210210_1.png" target="_blank">Fig. 1</a>). Private-sector wages and salaries in personal income already rose to a record high during December and probably did so again in January according to our EIP!
<br /><br />
How can this be? Payroll employment in January was still down 9.6 million y/y, with 10.1 million people still unemployed, i.e., 4.3 million more than at the start of 2020. And the labor force was down 4.3 million from a year ago. Yet private wages and salaries in personal income rose 3.2% y/y in December (<a href="http://www.yardeni.com/pub/tc_20210210_2.png" target="_blank">Fig. 2</a>).
<br /><br />
(2) <i>Hourly wages.</i> The measures of hourly wages all jumped during March and April as low-wage workers bore the brunt of the job losses from the lockdowns (<a href="http://www.yardeni.com/pub/tc_20210210_3.png" target="_blank">Fig. 3</a>). That might still explain the solid y/y percent increases in average hourly earnings for all workers (5.4% through January), average hourly earnings for production and nonsupervisory workers (also 5.4% through January), and hourly compensation in nonfarm business (7.8% through Q4).
<br /><br />
However, there is mounting evidence that wages may be starting to get a boost from a shortage of workers willing to take jobs, perhaps because they can make more with government unemployment benefits, as Summers suggested.
<br /><br />
(3) <i>Payroll tax receipts.</i> Allow me to keep you in suspense while I also observe that despite the terrible numbers of unemployed workers and labor market dropouts, total payroll taxes rose to a record high of $1.48 trillion (saar) in personal income, more than reversing its Covid-related decline and exceeding the previous record high during October 2008 by 48%! The 12-month sum of just federal payroll tax receipts rose to a record $1.34 trillion during December, up 6.2% y/y (<a href="http://www.yardeni.com/pub/tc_20210210_4.png" target="_blank">Fig. 4</a>). Both had declined sharply during the Great Financial Crisis (GFC) and remained weak during the subsequent recovery.
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How can this be? Perhaps many of the job losses have occurred for low-wage workers who were paid off the books in cash. In addition, unemployment income is taxable, and many beneficiaries may have elected to have the payroll taxes withheld from their benefit checks.
<br /><br />
(4) <i>Income tax receipts.</i> Individual income tax receipts in personal income have rebounded along with personal income and were down only 2.4% during December from last February’s record high (<a href="http://www.yardeni.com/pub/tc_20210210_5.png" target="_blank">Fig. 5</a>). The 12-month sum of federal income tax receipts also rebounded but was still down 10.9% during December compared to the record high last March.
<br /><br />
(5) <i>Small businesses.</i> Yesterday, the National Federation of Independent Business (NFIB) released its January survey of small business owners. Overall, it was a downbeat report, with the Small Business Optimism Index taking a dive during January (<a href="http://www.yardeni.com/pub/tc_20210210_6.png" target="_blank">Fig. 6</a>). Many of the small business owners in the NFIB survey reported being depressed about poor sales and higher taxes (<a href="http://www.yardeni.com/pub/tc_20210210_7.png" target="_blank">Fig. 7</a>).
<br /><br />
Yet remarkably, when asked about their staffing, 33.0% of respondents said they have job openings (<a href="http://www.yardeni.com/pub/tc_20210210_8.png" target="_blank">Fig. 8</a>). The net percent of small businesses hiring over the next three months was 17.0% last month. The percent with few or no qualified applicants for job openings was 46.0%. All these readings are within shouting distance of their pre-pandemic peaks. They rebounded dramatically following the lockdowns. Truly amazing!
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(6) <i>Indeed.</i> Yesterday, The Wall Street Journal <a href="https://www.wsj.com/articles/job-openings-pick-up-in-pandemic-resilient-industries-11612866601" target="_blank">reported</a>, “The number of help-wanted ads returned to pre-pandemic levels in January, particularly among industries that have weathered the pandemic relatively well, a sign that hiring could pick up from its sluggish pace at the start of the year. Available jobs on job-search site Indeed were up 0.7% at the end of January from Feb. 1, 2020, according to the company’s measure of job posting trends. The number of postings to the site has grown since hitting a low in May, though the pace of new openings has slowed in recent months, Indeed said.”
<br /><br />
(7) <i>JOLTS.</i> I saved the best for last. Yesterday’s JOLTS report for December provided plenty of jolts on developments in the labor market. JOLTS is the <a href="https://www.bls.gov/news.release/pdf/jolts.pdf" target="_blank">Job Openings and Labor Turnover Survey</a> compiled monthly by the Bureau of Labor Statistics.
<br /><br />
For starters, total job openings rebounded from last year’s low of 5.0 million during April to 6.6 million during December (<a href="http://www.yardeni.com/pub/tc_20210210_9.png" target="_blank">Fig. 9</a>). It’s up 1.4% y/y. That represents a V-shaped recovery, especially compared to the experience during and after the GFC.
<br /><br />
The number of unemployed workers as a ratio of job openings fell to a record low of 0.81 during October 2019 (<a href="http://www.yardeni.com/pub/tc_20210210_10.png" target="_blank">Fig. 10</a>). It jumped to peak last year at 4.63 during April. It was back down to 1.62 during December. The conclusion is that there are more jobs available and fewer unemployed workers competing for them in recent months.
<br /><br />
(8) <i>Causalities.</i> By pointing out the above, I don’t mean to diminish the pain and suffering experienced by lots of people on the health, financial, and economic fronts of the world war against the virus. Our labor market has too many unemployed people and too many people who have been forced out of the labor force by the pandemic’s lockdowns of schools and businesses.
<br /><br />
On a y/y basis through January, the labor force is down 4.3 million, with women accounting for 58% of the drop. Many no doubt had to quit jobs to take care of children whose schools were operating online only. Also, many individuals in the high-risk age group may have decided to retire early, especially those in face-to-face jobs like teaching.
<br /><br />
We can see that in the JOLTS report, where the number of quits jumped from last year’s low of 1.9 million in April to 3.3 million in December (<a href="http://www.yardeni.com/pub/tc_20210210_11.png" target="_blank">Fig. 11</a>). The quit rate is especially high in the leisure & hospitality industry (<a href="http://www.yardeni.com/pub/tc_20210210_12.png" target="_blank">Fig. 12</a>). Usually quits rise during good times as people find better jobs. This time, many of the quitters may be dropping out of the labor force.
<br /><br />
(9) <i>Bottom line.</i> The data do support Summers' notion that the government’s unemployment benefits were helpful at first but now may be contributing to a shortage of workers and may continue to do so under the Biden plan.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-38921997731480318252021-02-03T13:55:00.001-05:002021-02-03T14:09:57.844-05:00Inflation Is Up for Discussion<div class="yrimain"><br
<b><b>Inflation I: Prices Paid vs Prices Received</b></b>
<br /><br />
In recent Zoom calls with accounts, I am spending more time discussing the outlook for inflation. For investors, this may very well be among the most important, if not the most important, issue to get right in 2021 and beyond. If inflation looks likely to remain subdued, then we can “keep walking because there is nothing to see here, folks.” If inflation looks likely to make a modest comeback, then overweighting inflation hedges in portfolios would make sense. In recent months, there has certainly been some comeback-like action in the prices of assets that might benefit from higher inflation. If inflation were to make a big comeback, bond yields would soar. That could cause a credit crunch, a recession, and a bear market. I am inclined to keep walking.
<br /><br />
Nevertheless, by popular demand, I will be returning on a regular basis to see what I can see on the inflation front.
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I am counting on four deflationary forces to keep a lid on inflation. They are Détente (a.k.a. Globalization), Disruption (a.k.a. Technological Disruption), Demography (as in aging populations), and Debt (as in too much propping up zombie companies). I discussed the “4Ds” in my 2020 <a href="https://www.amazon.com/Fed-Watching-Fun-Profit-Investors/dp/194802506X" target="_blank">Fed Watching</a> book (here is the <a href="http://www.yardeni.com/pub/mb_210203_4dsexcerpt.pdf" target="_blank">excerpt</a>). These forces are on one side of the tug of war over inflation. On the other side are the world’s economic policymakers. They’ve responded to the Great Virus Crisis with massive fiscal and monetary stimulus. In other words, they embraced Modern Monetary Theory. They certainly haven’t let this crisis go to waste! Let’s see what we can see in the latest price indicators:
<br /><br />
(1)<i> Regional prices.</i> Five of the 12 Fed district banks conduct monthly business surveys. In addition to compiling business activity indexes, all five report prices-paid and prices-received indexes (<a href="http://www.yardeni.com/pub/tc_20210203_1.png" target="_blank">Fig. 1</a>). All 10 price indexes have recovered from their early-pandemic lows a year ago through January of this year. The average of the five regional prices-paid indexes is up from last year’s low of -3.6 during April to 48.4 during January, the highest since July 2018 (<a href="http://www.yardeni.com/pub/tc_20210203_2.png" target="_blank">Fig. 2</a>). The average of the prices-received indexes rose from -9.4 to 21.1 over this same period.
<br /><br />
The prices-paid indexes tend to be more volatile than the prices-received indexes. That’s because the former tend to be correlated with the inflation rate of the intermediate goods Producer Price Index, or PPI (on a y/y basis), while the latter tend to be correlated with the inflation rate for the goods Consumer Price Index, or CPI (<a href="http://www.yardeni.com/pub/tc_20210203_3.png" target="_blank">Fig. 3</a> and <a href="http://www.yardeni.com/pub/tc_20210203_4.png" target="_blank">Fig. 4</a>). Intermediate goods producer prices tend to be more volatile than consumer goods prices because they are more highly correlated with commodity prices. The spread between the averages of the regional prices-paid and prices-received indexes is highly correlated with the spread between the inflation rates of the intermediate goods PPI and the goods CPI (<a href="http://www.yardeni.com/pub/tc_20210203_5.png" target="_blank">Fig. 5</a>).
<br /><br />
So what do we see? Since the start of the data in 2005, the regional price indexes have been this high before at least four times. Over that same period, the core PCED (personal consumption expenditures deflator), which is the Fed’s preferred measure of consumer price inflation, hovered just above 2.0% from 2005 through most of 2008, and has remained below 2.0% from 2009 through 2020 every month with the exception of only 14 months.
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(2)<i> M-PMI prices</i>. January’s <a href="https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/january" target="_blank">national survey</a> of purchasing managers in manufacturing was released on Monday. This M-PMI survey also includes a price index, but only for prices paid. It is highly correlated with the average of the regional prices-paid indexes (<a href="http://www.yardeni.com/pub/tc_20210203_6.png" target="_blank">Fig. 6</a>). The M-PMI prices-paid index rebounded from last year’s low of 35.3 during April to 82.1 last month, the highest reading since April 2011. Again, this index is more reflective of commodity-related costs at the intermediate PPI level than consumer goods prices. It has been this high before a few times since 2005 without leading to a pickup in CPI inflation.
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<b>Inflation II: Commodity Prices, the Dollar, and Import Prices</b>
<br /><br />
The latest M-PMI report included a long list of rising commodity prices with only one down, for caustic soda. Commodities in short supply included copper, corrugated boxes, electrical components, electronic components, semiconductors, and steel. All of these are included in the intermediate goods PPI.
<br /><br />
The core intermediate goods PPI tends to be more closely correlated with the CRB raw industrials spot price index (<a href="http://www.yardeni.com/pub/tc_20210203_7.png" target="_blank">Fig. 7</a>). A broader measure is the CRB all commodities price index, which includes energy and food commodities (<a href="http://www.yardeni.com/pub/tc_20210203_8.png" target="_blank">Fig. 8</a>). Both CRB indexes have rebounded significantly since early last year, with y/y gains of 13.7% for the broader index and 16.8% for the raw materials index.
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Some of this strength in commodity prices is attributable to the 3.4% y/y drop in the trade-weighted dollar (<a href="http://www.yardeni.com/pub/tc_20210203_9.png" target="_blank">Fig. 9</a>). The weak dollar has certainly contributed to the rebound in the inflation rate of the nonpetroleum import price index from last year’s low of -1.1% during April to 1.8% during December. In turn, rising import prices are putting upward pressure on the intermediate goods PPI (<a href="http://www.yardeni.com/pub/tc_20210203_10.png" target="_blank">Fig. 10</a>).
<br /><br />
So what do we see? The rebound in commodity prices is partly attributable to the weaker dollar, but the rebound in global economic activity has also boosted these prices. In any event, while the weak dollar and strong commodity prices are boosting import prices and the intermediate goods PPI, there’s no sign that those cost pressures are boosting consumer prices.
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Inflation III: CPI Inflation Here & Over There
<br /><br />
The core CPI inflation rate in the US was only 1.6% y/y during December. The comparable measures for the Eurozone and Japan were close to zero at 0.2% and -0.5% (<a href="http://www.yardeni.com/pub/tc_20210203_11.png" target="_blank">Fig. 11</a>). Over the same period, the headline CPI inflation rate in China was 0.2%, while the industrial products PPI was -0.4% (<a href="http://www.yardeni.com/pub/tc_20210203_12.png" target="_blank">Fig. 12</a>). We are startled by the latter given that China’s economic recovery since early last year has been so strong.
<br /><br />
So what do we see? The same as you can see: not much inflation for consumer price inflation in the US and around the world. The rebound in commodity prices, import prices, intermediate PPI prices, and prices paid could put some upward pressure on consumer prices in the US. However, the 4Ds still have a lot of pull in the tug of war over inflation.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-91499397806041118592021-01-16T17:22:00.001-05:002021-01-16T17:53:53.959-05:00Party Like There's No Tomorrow!<div class="yrimain">
After listening to the lyrics of “<a href="https://www.youtube.com/watch?v=B9gTcX0egMY" target="_blank">Party Like There’s No Tomorrow</a>,” I think it might be a more fitting theme song for our current milieu than “<a href="https://www.youtube.com/watch?v=iI2fRPmEZ6A" target="_blank">Party Like It’s 1999</a>.” The former was released in 2008 by an acid-rock band while the latter was released during 1982 by the rock star Prince. The former starts with: “Tonight we’re gonna party like there's no tomorrow / Forget about our woes and drown our sorrows.” The rest of the song is sprinkled with lots of expletives belted out by the nutty band.
<br /><br />
While tomorrow will undoubtedly occur on schedule, the Covid-19 pandemic is raging like never before. Yet investors are partying with abandon: The S&P 500 and Nasdaq continue their meltups in record-high territory. On Friday, January 8, they were up 70.9% and 92.4%, respectively, from their March 23, 2020 lows. Previously, I have observed that these two widely followed stock indexes soared 59.6% and 236.7% from their LTCM-crisis lows on August 31, 1998 through their blowoff tops in March 2000—so the Prince song came to mind (<a href="http://www.yardeni.com/pub/tc_20210111_1.png" target="_blank">Fig. 1</a> and <a href="http://www.yardeni.com/pub/tc_20210111_2.png" target="_blank">Fig. 2</a>).
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The S&P 500 forward P/E rose to a record 25.7 during the week of July 16, 1999 (<a href="http://www.yardeni.com/pub/tc_20210111_3.png" target="_blank">Fig. 3</a>). It rose to 22.9 on Friday, January 8. The forward P/E of the S&P 500 Technology sector peaked at an all-time record high of 48.3 during March 2000. It was up to 27.7 on Friday, January 8.
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I am still targeting the S&P 500 to rise to 4300 by the end of this year (up 14.5% y/y) and 4800 by the end of 2022 (up 11.6% y/y). I am increasingly concerned that the market could get to those levels much sooner, leaving valuation multiples even more stretched than they are today. That would make the stock market increasingly vulnerable to a meltdown. In any event, the bull market stampede has been trampling not only the bears but also even bulls like me since March 23, 2020!
<br /><br />
While today’s multiples can be justified by near-record low bond yields, the 10-year US Treasury yield has been trending higher since it bottomed at a record-low 0.52% on August 4 last year (<a href="http://www.yardeni.com/pub/tc_20210111_4.png" target="_blank">Fig. 4</a>). Here are the new year’s firsts: First thing during the morning of the very first trading day of the new year, the yield rose just above 1.00% for the first time since March 19. It rose to 1.13% on Friday, January 8. The ratio of the price of copper to the price of gold suggests that the bond yield should be closer to 2.00% than to 1.00% (<a href="http://www.yardeni.com/pub/tc_20210111_5.png" target="_blank">Fig. 5</a>). It certainly seems headed in that direction so far this year.
<br /><br />
Now, as in 1999, there are mounting signs of irrational exuberance in the stock market. This time, there are also more signs of ultra-stimulative fiscal and monetary policies than there were back then. The combination could be fueling MAMU—the Mother of All Meltups. Consider the following:
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(1) <i>The Blue Wave is coming.</i> Now that the Democrats have control of the White House and both chambers of Congress for at least the next two years (until the mid-term elections), federal government spending is likely to continue growing faster than federal revenues, even if taxes are raised on upper-income taxpayers and on corporations (<a href="http://www.yardeni.com/pub/tc_20210111_6.png" target="_blank">Fig. 6</a>). The resulting increase in federal debt could be nutty.
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The Democrats plan on sending another round of stimulus checks to households. The next package of support is bound to also include hundreds of billions of dollars to bolster the finances of state and local governments. The Biden administration is expected to use early legislation to push hundreds of billions of dollars in renewable energy spending as part of its stimulus and infrastructure measures, potentially including efforts to promote the construction of high-speed rail, 500,000 electric vehicle charging stations, and 1.5 million energy-efficient homes. In the fiscal follies, a billion here, a billion there can add up to trillions very rapidly. (We first discussed the incoming administration's agenda in our July 21, 2020 Morning Briefing titled “Meet the New, Improved Joe Biden.")
<br /><br />
(2) <i>The Bond Vigilantes are stirring.</i> While the bond yield was higher in 1999 than it is today, the federal budget was actually in surplus back then (<a href="http://www.yardeni.com/pub/tc_20210111_7.png" target="_blank">Fig. 7</a>). Over the past 12 months through November, the budget deficit was a record $3.2 trillion. The Fed has helped to keep bond yields down by purchasing $2.4 trillion in Treasury securities over the 12 months through December (<a href="http://www.yardeni.com/pub/tc_20210111_8.png" target="_blank">Fig. 8</a>).
<br /><br />
Those purchases have been concentrated in the longer end of the yield curve more so than in the past (<a href="http://www.yardeni.com/pub/tc_20210111_9.png" target="_blank">Fig. 9</a> and <a href="http://www.yardeni.com/pub/tc_20210111_10.png" target="_blank">Fig. 10</a>). That certainly explains why the bond yield remained below 1.00% during the second half of 2020 even as the economy staged a V-shaped recovery.
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However, the Bond Vigilantes are starting to stir. If they succeed in pushing yields higher, stock investors might have second thoughts about the nutty idea that even higher equity valuations are justified. Then again, I can’t rule out the possibility that the Fed would do something nutty like officially adopt a policy of yield-curve targeting to keep a lid on the bond yield. The Bank of Japan’s monetary madness has included doing that since September 2016. If the Fed started to officially target the bond yield, the result would almost certainly be a 1999-style meltup.
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(3) <i>The virus is mutating.</i> What could possibly go wrong, causing the meltup to be followed by a meltdown? In my forthcoming book, <i>The Fed and the Great Virus Crisis</i>, my central theme is don’t fight the Fed when it is fighting a pandemic. That worked well in 2020. In 2021, investors need to have the vaccines win the world war against the virus (WWV) and its mutant variants.
<br /><br />
While we humans have been celebrating the end of 2020’s <i>annus horribilis</i>, anticipating that 2021 will be a better year for humankind, the virus couldn’t care less. It continues to party like its 1919, which was the second year of the much deadlier Spanish flu pandemic. The near-term outlook on the health front is discouraging, but hopefully the tide of WWV will change meaningfully in our favor in coming months as more of us get inoculated.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-89269971714462997772021-01-10T13:30:00.000-05:002021-01-10T13:30:34.040-05:00Blue Wave Makes a Splash in DC. Will Joe Manchin Be 'Senator Gridlock'?<div class="yrimain">
The Blue Wave made a big splash as Tuesday’s Georgia election results, reported late Wednesday afternoon, showed that both of the state’s seats for the US Senate were won by the two Democratic candidates. A tsunami of socialist policies implemented by progressives in the Democratic party is now likely. A Blue Wave led by the incoming Biden administration, unimpeded by gridlock, certainly represents a radical regime change from the Trump administration. It is likely to be much more radical than the regime change led by the Obama administration. That’s because the Democrats in Congress are much more radical in their left-leaning political views than ever before.
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The Democrats’ win in Georgia could be bad news for entrepreneurial capitalism. It could also be bearish for the stock market if the radical regime change causes a recession. That’s unlikely to be the case in 2021. Granted, the 10-year US Treasury bond yield pushed above 1.00% at the start of the week on preliminary news that the Republicans lost one of the two contested elections. I previously argued, even before last year’s elections, that the yield would be closer to 2.00% than 1.00% but for the Fed’s intervention in the bond market.
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My analysis was based on the strong post-lockdown rebound in economic activity and the swelling post-CARES Act federal budget deficit rather than on a prediction of a regime change in Washington, DC. Now that the Blue Wave has prevailed, government spending will continue to boost economic activity, and federal deficits will continue to mount. And, most importantly, the Fed is likely to continue to buy notes and bonds in an effort to keep bond yields from rising too rapidly.
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In other words, the Fed is likely to enable our deficit-financed government to get bigger under the Blue Wave regime. The Clinton administration was famously checked and balanced by the Bond Vigilantes. The Fed is implicitly assuring the incoming Biden administration that monetary policy will keep them buried as much as possible.
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Now consider the following related observations about the stock market:
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(1) <i>Socialism isn’t necessarily bearish.</i> Significant declines in stock prices are caused by recessions, not by socialist regime changes, unless they are so radical that they cause a recession. Socialism may be bad for entrepreneurial capitalism, but it provides fertile ground for crony capitalism. That’s as long as it doesn’t lead to communism. Under socialism, private property remains mostly private. Under communism, there is no private property; everything is owned by the state. In either system, the government gets bigger. Under socialism, the ruling regime enacts more laws and regulations that force businesses to manage their affairs increasingly to satisfy their socialist overseers rather than their capitalist shareholders.
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(2) <i>Betting on crony capitalists.</i> In other words, making deals with the government matters as much as or more than competing in the market. That’s the fundamental nature of crony capitalism. Businesses become bigger and more politicized as the government gets bigger and more radicalized.
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That’s not necessarily bearish for the stock market. However, it does mean that assessing the impact of government policymaking on business becomes as important or more important than traditional analysis of company fundamentals. Spreadsheets for individual corporations need to include columns for the number of lobbyists employed, percentage of business done with the government, cost of regulation, and so on.
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(3) <i>And the winner is ...</i> Previously, in my November 2, 2020 LinkedIn newsletter titled “<a href="https://www.linkedin.com/pulse/gridlock-more-bullish-than-blue-red-waves-edward-yardeni/" target="_blank">Gridlock Is More Bullish Than Blue or Red Waves</a>,” I observed that gridlock tends to be more bullish for stocks than a united government. I analyzed the performance of the S&P 500 under unified and divided government since FDR took office (<a href="http://www.yardeni.com/pub/tc_20210107_1.png" target="_blank">Fig. 1</a>). I calculated the percentage increases in the index from January-through-December periods during the two alternative regimes. I found that during the previous six Blue Waves, the S&P 500 increased 56% on average. During the previous three Red Waves, the index rose 35% on average. During the seven periods of divided government, the S&P 500 rose 60% on average. This suggests that gridlock is more bullish than the two unified alternatives, which are also bullish, but less so, with Blue Waves more bullish than Red Waves.
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So not surprisingly, on Monday, stock prices fell because the Blue Wave is coming. Yet on Wednesday, they rose because the Blue Wave is even more likely to come! Go figure. While gridlock was the loser in Georgia’s elections on Tuesday, the winner will surely be $2,000 stimulus checks. That's probably bullish for the economy and the stock market during the first half of 2021.
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(4) <i>Meet the other Joe, again.</i> Perhaps investors figure Senator Joe Manchin (D-WV) will defend gridlock to the death. We first introduced him to our subscribers in our November 16 <i>Morning Briefing</i>. We wrote: “If the Democrats pull an upset and get both seats, Joe Manchin could be the most important person in America. He is the Democratic senator from West Virginia. He is viewed as a conservative Democrat and has championed bipartisanship.
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On Monday, November 9, Joe Manchin was <a href="https://www.foxnews.com/politics/sen-joe-manchin-if-democrats-win-senate-i-wont-support-crazy-stuff-like-court-packing.amp" target="_blank">interviewed</a> by Fox News. He said: “50-50 [control] means that if one senator does not vote on the Democratic side, there is no tie and there is no bill.’ He added: ‘I commit to tonight and I commit to all of your viewers and everyone else that’s watching, I want to allay those fears, I want to rest those fears for you right now because when they talk about, whether it be packing the courts or ending the filibuster, I will not vote to do that.’
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“He continued saying that the ‘Green New Deal’ and ‘all this socialism’ was ‘not who we are as a Democratic Party.’ He remarked: ‘We’ve been tagged if you’ve got a D by your name, you must be for all the crazy stuff and I’m not.’”
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-14718672526372160812020-12-12T13:12:00.000-05:002020-12-12T13:12:42.605-05:00Inflation Was Sooo 1970s! Will It Roar Back in the 2020s?<div class="yrimain">
<b>Inflation I: Post-Pandemic Worry.</b> I was an early believer in “disinflation.” I first used that word, which means falling inflation, in my June 1981 commentary titled “Well on the Road to Disinflation.” The Consumer Price Index (CPI) inflation rate was 9.6% that month. I predicted that Federal Reserve Chair Paul Volcker would succeed in breaking the inflationary uptrend of the 1960s and 1970s, which he did.
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Nevertheless, throughout my career, I’ve often fielded questions about the likelihood of a rebound in inflation from accounts who were worried that it just might make a comeback. After all, the Fed chairs who followed Volcker tended to favor stimulative monetary policies. This year, as a result of the unprecedented monetary and fiscal policy stimulus provided by governments around the world to offset the adverse financial and economic consequences of the Great Virus Crisis (GVC), I’m hearing more concern that inflation could come roaring back once the pandemic is over.
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In this widely feared scenario, interest rates might soar. That would create all sorts of trouble. The mountains of debt accumulated by the public and private sectors would compound at a faster pace. The credit markets could seize up, causing a credit crunch and a recession, possibly worse than those of the Great Financial Crisis (GFC). Stock markets would fall into bear markets as earnings declined and valuation multiples tumbled. If inflation were to come roaring back, my upbeat Roaring 2020s outlook would be its biggest casualty.
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Given the consequences of getting their expectations for inflation wrong, it’s no wonder investors are worried about this bad-case scenario even if they aren’t ready to do anything in response to it, other than talk about it more often. In any event, while I’m still a disinflationist, our YRI team is focused on watching out for signs of trouble on the inflation front. Before I review what we are seeing, let’s briefly recount what happened during the Great Inflation of the 1970s.
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<b>Inflation II:</b> A Brief History of Inflation in the 1970s. Almost everything that could go wrong did so back then. I reviewed what happened in my 2020 book titled <a href="https://www.amazon.com/Fed-Watching-Fun-Profit-Investors/dp/194802506X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=" target="_blank">Fed Watching for Fun and Profit</a>. For starters, on August 15, 1971, President Richard Nixon suspended the convertibility of the dollar into gold, which ended the Bretton Woods system that had kept the dollar’s value at a constant $35 per ounce of gold since the system was established in 1944. The value of the dollar in foreign exchange markets suddenly plummeted, causing spikes in import prices as well as the prices of most commodities priced in dollars.
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During the summer of 1971, Nixon imposed wage and price controls. They didn’t work, and the controls were lifted in 1973. During 1972 and 1973, for the first time since the Korean War, farm and food prices began to contribute substantially to inflationary pressures in the economy. Also, there was a major oil price shock during 1973 and again in 1979 (<a href="http://www.yardeni.com/pub/tc_20201209_1.png" target="_blank">Fig. 1</a>).
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Together, the two oil price shocks of the 1970s caused the price of a barrel of West Texas crude oil to soar 11-fold from $3.56 during July 1973 to a peak of $39.50 during mid-1980, using available monthly data (<a href="http://www.yardeni.com/pub/tc_20201209_2.png" target="_blank">Fig. 2</a>). As a result, the CPI inflation rate soared from 2.7% during June 1972 to a record high of 14.8% during March 1980. Even the core inflation rate (i.e., the rate excluding food and energy) jumped from 3.0% to 13.0% over this period as higher energy costs led to faster wage gains, which were passed through into prices economy-wide. During the 1970s, strong labor unions in the private sector succeeded in quickly boosting wages through cost-of-living clauses in their contracts. The result was an inflationary wage-price spiral (<a href="http://www.yardeni.com/pub/tc_20201209_3.png" target="_blank">Fig. 3</a>).
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It’s my view that the 1970s were uniquely inflation prone. Paul Volcker stopped the inflationary wage-price spiral by tightening monetary policy significantly during the late 1970s and early 1980s, causing a severe recession. However, inflation continued to trend lower since then through today, mostly because of the four deflationary forces (i.e., the “4Ds”), which we have discussed many times along the way. (For a summary, see the excerpt from my 2020 book titled <a href="http://www.yardeni.com/pub/mb_200518_excerpt.pdf" target="_blank">Four Deflationary Forces Keeping a Lid on Inflation</a>.)
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<b>Inflation III:</b> Will the 4Ds Drown in M1’s Tsunami? The question for us today is whether the 4Ds are still relevant or whether they’ve met their inflationary match in the extraordinary monetary and fiscal policy responses to the pandemic. The 12-month federal deficit rose to a record high of $3.3 trillion through October, while the Fed’s purchases of Treasury securities totaled a record $2.4 trillion over the same period (<a href="http://www.yardeni.com/pub/tc_20201209_4.png" target="_blank">Fig. 4</a>). Most of those expansions occurred since the week of March 23, when the Fed and the Treasury essentially embraced Modern Monetary Theory and morphed into “T-Fed” in response to the GVC.
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Contrary to Milton Friedman’s claim that inflation is essentially a monetary phenomenon, it has remained subdued ever since the GFC notwithstanding the ultra-easy monetary policies of the major central banks. We soon should find out if money matters to the inflation outlook given that the GVC has resulted in ultra-easy monetary policies on steroids and speed combined! In the US, M1 has increased by $2.3 trillion since the last week of February to a record $6.2 trillion during the week of November 23 (<a href="http://www.yardeni.com/pub/tc_20201209_5.png" target="_blank">Fig. 5</a>). It is up an astonishing and unprecedented $498 billion during the latest week and 57% y/y! MZM and M2 are up 28% and 25% y/y (<a href="http://www.yardeni.com/pub/tc_20201209_6.png" target="_blank">Fig. 6</a>).
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Our money is on the 4Ds. They should continue to keep a lid on inflation. Here is our current bottom lines on each of the 4Ds:
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(1) <i>Détente.</i> In the grand sweep of economic history, inflation tends to occur during relatively short and infrequent episodes, i.e., during war times. The more common experience has been either very low inflation or outright deflation during peacetimes.
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Periods of globalization follow wartimes. During peacetimes, national markets become increasingly integrated through trade and capital flows. The result is more global competition, which is inherently deflationary. The worsening Cold War between the US and China is a threat to globalization, but probably won’t heat up to the point of causing inflation now that a regime change is coming to Washington. In any event, China’s exports during November edged back up to the record high hit during July notwithstanding Trump’s trade war with that country (<a href="http://www.yardeni.com/pub/tc_20201209_7.png" target="_blank">Fig. 7</a>).
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(2) <i>Technological Disruption.</i> Nevertheless, recent global trade tensions and the pandemic are likely to cause businesses to diversify their offshore supply chains away from China and to onshore more of them. That could be costly and inflationary. It could also be cost effective now that labor shortages attributable to global demographic trends are stimulating technological innovations in automation, robotics, artificial intelligence, and 3D manufacturing. These all enable onshoring and boost productivity to boot.
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Nonfarm productivity jumped 4.0% y/y during Q3, the fastest pace since Q1-2010. We are expecting a secular rebound in productivity growth during the Roaring 2020s. So far, so good: The 20-quarter growth rate of productivity (at an annual rate) is up from a recent low of 0.6% during Q4-2015 to 1.7% during Q3 (<a href="http://www.yardeni.com/pub/tc_20201209_8.png" target="_blank">Fig. 8</a>). I believe that the pandemic accelerated the pace of applying new technologies to boost efficiency and profit margins, as we will discuss more fully tomorrow.
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(3) <i>Demographics.</i> Fertility rates have plunged below population replacement in recent decades around the world as urbanization has changed the economics of having children. Instead of being an important source of labor and elder care, as they were in agrarian communities, children are all cost in urban settings. Nursing homes have few vacancies, while maternity wards have plenty. Increasingly geriatric demographic profiles are inherently deflationary.
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4)<i> Debt.</i> During the 1960s through the 1980s, debt was stimulative; more of it stimulated more demand and added to inflationary pressures. Now, easy credit conditions aren’t as stimulative to demand as in the past because so many consumers have so much debt already. However, easy monetary conditions are a lifeline to zombie companies, enabling them to raise funds to stay in business and add to global supplies of goods and services, which is deflationary.
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<b>Inflation IV:</b> By the Numbers. Now let’s review the latest inflation data around the world. Inflation remains remarkably subdued, as it has been since the mid-1990s. Consider the following:
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(1)<i> G7.</i> The core CPI inflation rate among the seven major industrial economies has fluctuated in a flat range between a high of 2.2% and a low of 0.7% since 1997 (<a href="http://www.yardeni.com/pub/tc_20201209_9.png" target="_blank">Fig. 9</a>). The core rate was only 1.1% during October. Here are the latest core CPI inflation rates for the US (1.6%), Eurozone (0.2), and Japan (-0.4) (<a href="http://www.yardeni.com/pub/tc_20201209_10.png" target="_blank">Fig. 10</a>).
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(2) <i>China.</i> While China’s economy has staged a significant recovery from its lockdown recession at the start of the year, the CPI inflation rate dropped from a recent peak of 5.8% during February to only 0.5% during October. The Producer Price Index was down 2.1% y/y during October.
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(3) <i>US.</i> The pandemic has had a dramatic inflationary impact on only one component of the CPI: Used car and truck prices are up 11.5% y/y through October (<a href="http://www.yardeni.com/pub/tc_20201209_11.png" target="_blank">Fig. 11</a>). (They are up 14.4% in the PCED, or personal consumption expenditure deflator, measure.) This is a category with little weight in the CPI.
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Rent of shelter has a much bigger weight, and its inflation rate has been falling sharply as a result of the pandemic because of two phenomena: people unable to pay their rent and renters becoming homeowners. This CPI item’s inflation rate is down from 3.4% at the start of the year to 2.1% during October (<a href="http://www.yardeni.com/pub/tc_20201209_12.png" target="_blank">Fig. 12</a>). It does include hotel and motel fees, which should reflate once a vaccine is widely distributed.
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<b>Inflation V: Bonds, the Dollar & Commodity Prices.</b> Notwithstanding all the above, the financial markets seem to be signaling that inflationary pressures are making a comeback of sorts. More likely, in our opinion, is that they’re simply signaling that the deflationary pressures initially unleashed by the pandemic are abating as the global economy continues to recover. Consider the following:
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(1) <i>Expected inflation rebounds.</i> The 10-year US Treasury bond yield has been relatively flat just below 1.00% recently, while the comparable TIPS yield has been edging lower again following a smallish and shortish rebound from its fall earlier this year (<a href="http://www.yardeni.com/pub/tc_20201209_13.png" target="_blank">Fig. 13</a>). As a result, the yield spread between the two, which is widely used as a proxy for the average annual 10-year expected inflation rate, has rebounded from this year’s low of 0.5% on March 19 to 1.9% on Monday (<a href="http://www.yardeni.com/pub/tc_20201209_14.png" target="_blank">Fig. 14</a>).
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(2) <i>Copper is red hot.</i> The price of copper has rebounded dramatically along with China’s economy as auto sales in China rose for a fourth straight month in October. The price of the red metal is up 65.5% since the year’s low on March 23 from $2.12 per pound to $3.51 on Monday (<a href="http://www.yardeni.com/pub/tc_20201209_15.png" target="_blank">Fig. 15</a>). The two previous rebounds that exceeded the current one since 2004 were not associated with rising CPI inflation.
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Meanwhile, the ratio of the nearby futures prices of copper to gold continues to signal that the bond yield should be closer to 2.00% than to 1.00% (<a href="http://www.yardeni.com/pub/tc_20201209_16.png" target="_blank">Fig. 16</a>). There’s been a tight fit between the ratio (multiplied by 10) and the yield since 2004. Without the Fed’s open market purchases of Treasury notes and bonds, the yield would probably be higher, boosting the expected inflation proxy over 2.00%.
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By the way, the reason why the copper/gold ratio tracks the nominal yield so closely is that the price of copper is highly correlated with the yield spread inflation proxy, while the price of gold is highly correlated with the inverse of the 10-year TIPS yield (<a href="http://www.yardeni.com/pub/tc_20201209_17.png" target="_blank">Fig. 17</a> and <a href="http://www.yardeni.com/pub/tc_20201209_18.png" target="_blank">Fig. 18</a>).
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(3) <i>The dollar’s descent. </i>Yet another interesting set of correlations is the ones between the inverse of the dollar versus the price of copper and versus expected inflation (<a href="http://www.yardeni.com/pub/tc_20201209_19.png" target="_blank">Fig. 19</a> and <a href="http://www.yardeni.com/pub/tc_20201209_20.png" target="_blank">Fig. 20</a>). All three variables are consistent with rising inflation pressures. However, similar past episodes in recent years signaled that deflationary pressures were abating rather than inflation rebounding.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-7485093953773349182020-12-05T19:46:00.000-05:002020-12-05T19:46:25.048-05:00The Carrie Trade: From Bond Vigilantes to Bond Zombies<div class="yrimain">
Carrie is a horror novel by Stephen King. It was his first published novel, released on April 5, 1974. It was turned into a movie in 1976 starring Sissy Spacek and John Travolta. Carrie is a misfit bullied in her high school and dealing with an abusive, religious fanatic mother at home. She finds that she can channel her angst into telekinetic powers, which she uses to exact revenge on her tormenters. Much blood is spilt along the way, including Carrie’s. In the final scene, she seems to rise from the dead but that’s just a bad dream.
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The Bond Vigilantes have been buried by the Fed. However, in our nightmare scenario, they could rise from the dead like Carrie. It isn’t likely to happen if inflation also remains buried, as I expect.
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Meanwhile, there are other vigilantes in the financial markets. The Dow Vigilantes sent out a blood-curdling scream when the S&P 500 plunged 33.9% in 33 days earlier this year (<a href="http://www.yardeni.com/pub/tc_20201202_1.png" target="_blank">Fig. 1</a>). The Fed responded with QE4ever on March 23. The Dollar Vigilantes are threatening a crash in the currency if US fiscal and monetary policies continue to placate the Dow Vigilantes by swelling the federal budget deficit and the money supply (<a href="http://www.yardeni.com/pub/tc_20201202_2.png" target="_blank">Fig. 2</a>, <a href="http://www.yardeni.com/pub/tc_20201202_3.png" target="_blank">Fig. 3</a>, and <a href="http://www.yardeni.com/pub/tc_20201202_4.png" target="_blank">Fig. 4</a>). A plunge in the dollar could revive inflation and unleash a plague of Bond Zombies.
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It’s hard to get a clear signal from the financial markets since their price mechanisms have been so distorted by the Fed and the other major central banks. The one clear signal may be coming from the commodity markets. Consider the following:
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(1) <i>CRB raw industrials.</i> The CRB raw industrials spot price index continues to signal rebounding global economic activity (<a href="http://www.yardeni.com/pub/tc_20201202_5.png" target="_blank">Fig. 5</a>). It is highly inversely correlated with the trade-weighted dollar. The rising CRB index is bullish for the Emerging Markets MSCI stock price index, the Australian and Canadian dollars, and the S&P 500 Materials sector. (See our <a href="https://www.yardeni.com/pub/mktcorrcrb.pdf" target="_blank">Market Correlations: CRB Raw Industrials Spot Price Index</a>.)
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The CRB index is also highly correlated with expected inflation as measured by the yield spread between the 10-year nominal Treasury bond and the comparable TIPS (<a href="http://www.yardeni.com/pub/tc_20201202_6.png" target="_blank">Fig. 6</a>). This spread has rebounded from this year’s low of 0.50% on March 19 to a range of 1.6%-1.8% in recent weeks.
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(2) <i>Copper.</i> The price of copper is one of the 13 components of the CRB raw industrials spot price index (<a href="http://www.yardeni.com/pub/tc_20201202_7.png" target="_blank">Fig. 7</a>). (Petroleum and lumber products are not included in the index.) The copper price has been leading the overall CRB index higher since this year’s bottom. On Monday, copper closed at the highest price since January 2, 2014. Driving the price of the red metal higher has been China’s M-PMI, which has recovered solidly over the past six months through November (<a href="http://www.yardeni.com/pub/tc_20201202_8.png" target="_blank">Fig. 8</a>).
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(3)<i> Copper/gold ratio.</i> When I multiply the ratio of the nearby futures prices of copper to gold by 10, the resulting series has shown a remarkably close fit with the 10-year Treasury bond yield since 2004 (<a href="http://www.yardeni.com/pub/tc_20201202_9.png">Fig. 9</a>). The ratio currently suggests that the bond yield should be closer to 2.00% than to 1.00%. As I discussed on Monday in my Morning Briefing, the yield has remained under 1.00% since March 20, as the Fed has been buying Treasury notes and bonds faster than the Treasury has been issuing them:
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“From the last week of February through the last week of October, the Fed’s holdings of Treasury securities increased $2.1 trillion as follows by maturities: One year or less ($421 billion), 1-10 years ($1,281 billion), and over 10 years ($351 billion) (<a href="http://www.yardeni.com/pub/tc_20201130_9.png" target="_blank">Fig. 9</a>). From the end of February to the end of October, the Treasury increased its outstanding marketable debt by $3.4 trillion as follows: bills ($2,420 billion), notes ($735 billion), and bonds ($284 billion) (<a href="http://www.yardeni.com/pub/tc_20201130_10.png" target="_blank">Fig. 10</a>). In other words, the Fed financed 62% of the Treasuries financing needs across all maturities, and purchased $613 billion more notes and bonds than were issued over that period!”
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That’s the “Carrie trade.” As long as it continues, the Bond Vigilantes will remain buried.
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(1) The July 27, 1983 issue of my weekly commentary was titled “Bond Investors Are the Economy’s Vigilantes.” I concluded: “So if the fiscal and monetary authorities won’t regulate the economy, the bond investors will. The economy will be run by vigilantes in the credit markets. During the 1980s and 1990s, there were a few episodes when rising bond yields slowed the economy and put a lid on inflation.”
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-29097669713225885322020-12-01T18:58:00.000-05:002020-12-01T18:58:15.670-05:00Comparative Roaring '20s<div class="yrimain">
This should be the first and last holiday season requiring us all to socially distance from one another. Apparently, we will have a cornucopia of vaccines and treatments available for mass distribution early next year. If so, then 2020 may mark the beginning of the Roaring 2020s, as I've discussed in previous LinkedIn articles. Let’s compare the current situation to the one before and during the Roaring 1920s:
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(1) <i>World War I.</i> Recall that the years leading up to the Roaring 1920s included World War I from July 28, 1914 through November 11, 1918. The total number of military and civilian casualties in World War I was about 40 million, with estimates ranging from around 15-22 million deaths and about 23 million wounded military personnel—ranking World War I among the deadliest conflicts in human history.
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(2) <i>Spanish flu.</i> That was followed by the Spanish flu pandemic from February 1918 through April 1920. It infected 500 million people—about a third of the world's population at the time—in four successive waves. The death toll is typically estimated to have been somewhere between 17 million and 50 million, and possibly as high as 100 million, making it one of the deadliest pandemics in human history.
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(3) <i>Depression of 1920–21.</i> There was a severe deflationary recession in the US, the UK, and other countries beginning 14 months after the end of World War I. It lasted from January 1920 to July 1921. How depressing! The Great War (as it was called back then) and the pandemic of 1918-20 killed between 32 million and 72 million people. That was followed by a global depression (as recessions were called back then). No one at the start of the decade could have anticipated the technology-led revolution of the Roaring 1920s or the resulting prosperity of that period. Thanksgiving during 1920 must have been extremely depressing indeed.
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(4) <i>The high-tech revolution of the 1920s.</i> As I reviewed in my August 12 <a href="https://www.linkedin.com/pulse/another-roaring-twenties-may-ahead-edward-yardeni/" target="_blank">article</a>, the 1920s was a decade of amazing technological innovations. Some of them sped up activities that were too slow when done by horses and automated activities that required lots of workers. Assembly lines required fewer workers, and their productivity increased. The revolution allowed for a greater division of labor. The focus was mostly on brawn.
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The automobile produced on assembly lines revolutionized transportation. The bulldozer did the same for construction. The standard of living improved dramatically for everyone as electric grids provided clean, bright light without emitting smoke. Urban water networks supplied clean water, and sewer systems removed waste without the pungent odors of chamber pots and outhouses. Telephones allowed people to converse with distant friends. National food brands proliferated, as did restaurants. Department stores and mail order retailers provided goods to a rapidly growing consumer market. Penicillin was discovered.
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(5) <i>The trade wars of 2018-19.</i> The 2020s were preceded by a trade war between the US and China. President Donald Trump started and escalated it during 2018 and 2019. The Biden administration is likely to deescalate the resulting Cold War. Nevertheless, as a consequence of both ongoing tensions between the two countries and the pandemic, manufacturers are likely to move more of their operations and supply chains to the US. That could be inflationary. More likely is that some of the technological innovations discussed below will boost productivity and reduce energy and transportation costs.
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(6) <i>The pandemic of 2020.</i> So far, the Covid-19 virus has killed 1.5 million people worldwide including 276,000 in the US. That’s a terrible outcome, but nowhere near the Spanish flu’s lethal toll. The biotech revolution is likely to deliver effective vaccines against the Covid-19 virus this time.
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(7) <i>The high-tech revolution of the 2020s.</i> Today’s “Great Disruption,” I like to call it, is increasingly about technology doing what the brain can do, but faster and with greater focus. Given that so many of the new technologies supplement or replace the brain, they lend themselves to many more applications than did the technologies of the past, which were mostly about replacing brawn. Today’s innovations produced by the IT industry are revolutionizing lots of other ones, including manufacturing, energy, transportation, healthcare, and education. My friends at BCA Research dubbed it the “BRAIN Revolution,” led by innovations in biotechnology, robotics, artificial intelligence, and nanotechnology. That’s clever, and it makes sense.
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The current pandemic seems to be speeding up the pace at which these and other technologies are proliferating. I believe that productivity growth has been heading toward a secular rebound during the post-pandemic Roaring 2020s. Even before the Great Virus Crisis (GVC), companies had been moving to incorporate into their businesses a host of state-of-the-art technologies in the areas of computing, telecommunications, robotics, artificial intelligence, 3-D manufacturing, the Internet of Things, among others. The GVC is accelerating that trend as companies rethink how to do business ever more efficiently in the post-pandemic era. See my September 2 article titled “<a href="https://www.linkedin.com/pulse/future-coming-technology-revolution-roaring-2020s-edward-yardeni/" target="_blank">The Future Is Coming: The Technology Revolution of the Roaring 2020s</a>.”
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(8) <i>One major difference.</i> The one major difference between the 1920s and the early 2020s (post the November 3 election) is the political persuasion of the presidency. During the 1920s, the White House was occupied by two very conservative Republican presidents: Warren G. Harding (March 4, 1921–August 2, 1923) and Calvin Coolidge (August 2, 1923–March 4, 1929). Coolidge advocated smaller government and laissez-faire economics.
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Andrew Mellon was secretary of the Treasury from March 9, 1921 through February 12, 1932. One of his achievements was the Revenue Act of 1926, which reduced the top marginal rate to 25%. In addition to cutting taxes on top earners, the act raised the personal exemption for federal income taxes, abolished the gift tax, reduced the estate tax rate, and repealed a provision that had required the public disclosure of federal income tax returns.
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The incoming Biden administration has promised to raise numerous taxes including on corporations and on taxpayers earning more than $400,000 annually. I remind the incoming administration that trickle-down economics works both ways: Higher taxes on the rich and on corporations inevitably trickle down to everyone else.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-70139973753639854422020-11-22T16:28:00.000-05:002020-11-22T16:28:08.336-05:00S&P 500 EARNINGS, VALUATION, AND THE PANDEMIC: Introduction<div class="yrimain">
<i>The following is the Introduction to our latest study in our "Predicting the Markets" series. The paperback and e-book are available on Amazon <a href="https://www.amazon.com/dp/B08NXYYVHQ/" target="_blank">here</a>. The other studies in this series are available on my Amazon author's page <a href="https://www.amazon.com/Edward-Yardeni/e/B07B1NHNHQ?ref_=dbs_p_pbk_r00_abau_000000" target="_blank">here</a>.</i>
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I started my career on Wall Street in 1978. I spent the prior year at the Federal Reserve Bank of New York in the economics research department after receiving my undergraduate degree in economics and government from Cornell University in 1972 and my PhD in economics from Yale University in 1976. Over the past 40-plus years, I’ve worked as both the chief economist and the chief investment strategist at several firms on Wall Street. Since January 2007, I’ve been the president of my own consulting firm, Yardeni Research, Inc.
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My job continues to be to predict the financial markets, particularly the major stock, bond, commodity, and foreign exchange markets around the world. I’ve learned a lot about these markets over the years. I recently started sharing what I’ve learned in a series of books and studies.
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In this study, I will focus on the S&P 500 stock price index, examining how it is determined by the earnings of the 500 companies that are included in the index and the valuation of those earnings by the stock market.
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Why pick the S&P 500?
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The S&P 500 is a stock market index that measures the stock price performance of 500 large companies listed on stock exchanges in the United States. It is one of the most widely followed equity indexes. The stocks in this index are a representative sample of leading companies in leading industries. Many equity managers benchmark the performance of their portfolios to the S&P 500. Among the largest exchange-traded funds are those that track the S&P 500. The S&P 500 represents more than 83% of the total domestic US equity market capitalization.[1]
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The widely followed Dow Jones Industrials Average (DJIA) has only 30 companies. It was launched in 1896 and was a spin-off of the Dow Jones Transportation Average, which was first compiled in 1884 by Charles Dow, the co-founder of Dow Jones & Company. The S&P 500 dates back to 1923. That year, the Standard Statistics Company (founded in 1906 as the “Standard Statistics Bureau”) developed its first stock market index, consisting of the stocks of 233 US companies and 26 industries, computed weekly. (The company also began rating mortgage bonds in 1923.) In 1926, it developed a 90-stock index, computed daily. In 1941, Poor’s Publishing merged with Standard Statistics Company to form Standard & Poor’s (S&P). On March 4, 1957, the index was expanded to its current 500 companies and was renamed the “S&P 500 Stock Composite Index.”
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The components of the S&P 500 index and other S&P indexes are selected by the firm’s US Index Committee, which meets monthly. All committee members are full-time professional members of the firm’s Indices staff. At each meeting, committee members review pending corporate actions that may affect the indexes’ constituent companies, statistics comparing the indexes’ composition to the broad stock market, candidate companies under consideration for addition to an index, and the bearing of any significant market events on the indexes.
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The committee identifies important industries within the US equity market, approximates the relative weight of these industries in terms of market capitalization, and then allocates a representative sample of stocks within each industry of the S&P 500. There are 11 sectors according to the Global Industry Classification Standard (GICS): Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, and Utilities.[2] These sectors are further divided into 24 industry groups, 69 industries, and 158 subindustries.
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Candidates for inclusion in the S&P 500 index must meet specific criteria in eight areas: market capitalization, liquidity, domicile, public float, GICS, financial viability, length of time publicly traded, and stock exchange listing. The index is reconstituted quarterly, though changes are made infrequently.
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The S&P 500 index is a free-float, capitalization-weighted index. That means that companies are weighted in the index in proportion to their market capitalizations. To determine the market-capitalization weight of a company, only the number of shares available for public trading (free float) is used. Shares held by insiders or by controlling shareholders that are not publicly traded are excluded from the calculation. The largest companies (based on market capitalization) in the S&P 500 account for a substantial portion of its total market capitalization. Since the index is market-capitalization weighted, these companies have the greatest influence on the index’s price performance.
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Notwithstanding occasional bear markets, the S&P 500 has been a great investment over the years—so much so that “S&P” could stand for “Success & Profit.” Since January 1, 1955, through September 2, 2020, the index has been down in bear markets during 3,029 of the 16,535 trading days—i.e., just 18.3% of the time. It has risen at a compounded annual rate of 6%, a rate that doubles the value of this portfolio every 12 years. And that doesn’t include the dividend return provided by many of the S&P 500 companies.
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The first chapter in our study covers the various measures of earnings for the S&P 500 and why we favor forward earnings among them. The second chapter discusses various models of valuation, again focusing on the S&P 500. The final chapter uses the resulting analytical framework to review how it has worked in good times and bad, focusing on the Great Financial Crisis and the Great Virus Crisis.
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[1] See S&P Global, S&P 500: The Gauge of the Market Economy and S&P U.S. Indices Methodology, August 2020. See <a href="https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview" target="_blank">S&P Dow Jones Indices</a>.
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[2] The Global Industry Classification Standard is jointly developed and maintained by S&P Dow Jones Indices and MSCI.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-85617402852618791112020-11-14T17:19:00.000-05:002020-11-14T17:19:08.777-05:00INCOME & WEALTH IN AMERICA: Who Owns Equities?<div class="separator" style="clear: both;"><a href="https://media-exp1.licdn.com/dms/image/C5612AQHNQ0mq9AlUWQ/article-inline_image-shrink_1000_1488/0?e=1610582400&v=beta&t=PBdT1KZ5luvAbS6ZBlk2zDHq7fuZskFVkE_Iyw0aZ6o" style="display: block; padding: 1em 0; text-align: center; "><img alt="" border="0" width="320" data-original-height="464" data-original-width="800" src="https://media-exp1.licdn.com/dms/image/C5612AQHNQ0mq9AlUWQ/article-inline_image-shrink_1000_1488/0?e=1610582400&v=beta&t=PBdT1KZ5luvAbS6ZBlk2zDHq7fuZskFVkE_Iyw0aZ6o"/></a></div><br><div class="yrimain">
A large team of the Fed’s researchers have been busy constructing a new database containing quarterly estimates of the distribution of US household wealth since 1989. They launched it with the release of a March 2019 working paper titled “<a href="https://www.federalreserve.gov/econres/feds/introducing-the-distributional-financial-accounts-of-the-united-states.htm" target="_blank">Introducing the Distributional Financial Accounts of the United States</a>.” The Distributional Financial Accounts (DFA) is an impressive accomplishment combining quarterly aggregate measures of household wealth from the <a href="https://www.federalreserve.gov/releases/z1/20200921/html/default.htm" target="_blank">Financial Accounts of the United States</a> (FA) and triennial wealth distribution measures from the <a href="https://www.federalreserve.gov/econres/scfindex.htm" target="_blank">Survey of Consumer Finances</a> (SCF).
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<b>I. A much more comprehensive database. </b>We believe that the new database can be used to resolve lots of controversial issues about wealth distribution in the US. The DFA’s balance sheet of the household sector is much more comprehensive and timely than previously existing sources. The Fed’s researchers observe that their “approach produces rich and reliable measures of the distribution of the Financial Accounts’ household-sector assets and liabilities for each quarter from 1989 to the present.” The data can be used to study the distribution of wealth in America by wealth and income percentiles, education, age, generation, and race. Melissa and I intend to do just that in coming months with the goal of assembling a comprehensive study tentatively titled “Income & Wealth in America: Myths & Realities.”
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<b>II. Who owns equities in America, according to FA?</b> Aggregate data are available in <a href="https://www.federalreserve.gov/apps/FOF/Guide/L223.pdf" target="_blank">Table L.223</a> in the FA for corporate equities held by each of the major sectors in the accounts. Unlike the DFA, the household sector in the FA includes nonprofit organizations, and this sector’s data are calculated residually from the other accounts. Let’s review our findings:
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(1) <i>The supply side of equities.</i> The total market value of equities held in the US during Q2-2020 was $52.0 trillion, with domestic issues totaling $43.5 trillion and foreign issues totaling $8.5 trillion (<a href="http://www.yardeni.com/pub/tc_20201110_1.png" target="_blank">Fig. 1</a>). Domestic issues included $33.5 trillion of nonfinancial issues and $10.0 trillion of financial issues and consisted of $37.2 trillion of publicly traded and $6.3 trillion of closely held equities (<a href="http://www.yardeni.com/pub/tc_20201110_2.png" target="_blank">Fig. 2</a> and <a href="http://www.yardeni.com/pub/tc_20201110_3.png" target="_blank">Fig. 3</a>). The $6.3 trillion of closely held equity consisted of $4.7 trillion in S corporations and $1.6 trillion in C corporations (<a href="http://www.yardeni.com/pub/tc_20201110_4.png" target="_blank">Fig. 4</a>).
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(2) <i>Ownership by sectors.</i> During Q2-2020, of the $52.0 trillion in equities, the major sectors directly held the following amounts and percentage shares: household sector ($19.5 trillion, 37.6%), mutual funds and exchange-traded funds (ETFs) ($14.5 trillion, 27.8%), rest of the world ($8.2 trillion, 15.8%), and institutional investors ($7.0 trillion, 13.4%) (<a href="http://www.yardeni.com/pub/tc_20201110_5.png" target="_blank">Fig. 5</a> and <a href="http://www.yardeni.com/pub/tc_20201110_6.png" target="_blank">Fig. 6</a>).
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(3) <i>Directly and indirectly held by households. </i>The FA includes a <a href="https://www.federalreserve.gov/apps/FOF/Guide/B101e.pdf" target="_blank">Table B.101e</a> titled “Balance Sheet of Households and Nonprofit Organizations with Debt and Equity Holdings Detail.” It provides extraordinary insight into the indirect equity holdings of households through life insurance companies, private and public pension funds, and mutual funds. During Q2-2020, households and nonprofits directly held $19.5 trillion (37.6% of all equities) and indirectly held $12.4 trillion (23.8% of the total) (<a href="http://www.yardeni.com/pub/tc_20201110_7.png" target="_blank">Fig. 7</a>). In other words, their direct and indirect holdings of equities totaled $31.9 trillion, or 61.4% of all equities (<a href="http://www.yardeni.com/pub/tc_20201110_8.png" target="_blank">Fig. 8</a>). Interestingly, this percentage has been remarkably stable around 65% since the early 1980s.
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<b>III. Which households own equities, according to DFA?</b> The link between the household sector in the FA and in the DFA is <a href="https://www.federalreserve.gov/apps/FOF/Guide/B101h.pdf" target="_blank">Table B.101.h</a> titled “Balance Sheet of Households,” which unlike Table L.223 excludes nonprofit organizations from the household sector. On the other hand, this balance sheet shows the household sector’s combined holdings of corporate equities and mutual fund shares, which include bond funds but not money market mutual funds or ETFs. The assets and liabilities in this version of the household balance sheet are the ones for which the DFA provides all the data needed for analyzing the distribution of household net worth. (See “<a href="http://www.yardeni.com/pub/ts86-appendix1.pdf" target="_blank">Household Balance Sheet</a>” from our forthcoming study on income and wealth in America.)
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Now, let’s analyze the distribution of the DFA’s various series for corporate equites and mutual fund shares held by households, sliced and diced by wealth percentile, generation, and education:
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(1) <i>DFA by wealth percentiles.</i> We repeat: The DFA is based on the FA’s Table B.101.h, which is the “Balance Sheet of Households” excluding the assets and liabilities of nonprofit organizations. It shows only annual data and reveals that corporate equities and mutual funds held by households at the end of 2019 totaled $29.1 trillion (<a href="http://www.yardeni.com/pub/tc_20201110_9.png" target="_blank">Fig. 9</a>). In the DFA, this series is shown on a quarterly basis. By the way, we can derive a similar quarterly series as the sum of corporate equities held by households and nonprofits plus mutual fund shares held by them, as reported in FA <a href="https://www.federalreserve.gov/apps/FOF/Guide/L224.pdf" target="_blank">Table L.224</a>, which excludes money market funds and ETFs (<a href="http://www.yardeni.com/pub/tc_20201110_10.png" target="_blank">Fig. 10</a>).
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The DFA shows that corporate equities and mutual fund shares held by households was down slightly to $26.8 trillion during Q2-2020, with the following ownership and percentage shares of the total among wealth percentile groups: top 1% ($14.1 trillion, 52.4%), 90%-99% ($9.5 trillion, 35.8%), 50%-90% ($3.0 trillion, 11.2%), and bottom 50% ($0.2 trillion, 0.6%) (<a href="http://www.yardeni.com/pub/tc_20201110_11.png" target="_blank">Fig. 11</a> and <a href="http://www.yardeni.com/pub/tc_20201110_12.png" target="_blank">Fig. 12</a>).
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The bottom 50% never owned more than 1.6% of this asset category. The 50%-90% crowd’s share peaked at 21.4% during Q3-2002 and since has fallen to 11.2% currently. The 90%-99% group has held a fairly steady share around 35% since the early 1990s. The top 1% has ranged between a low of 40.2% and a high of 52.8%.
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The widespread notion that the very rich own a disproportionate share of corporate equities is true, but their collective share is more like 50% of the total held by households than the urban legend of 80%-90%.
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(2)<i> DFA by generations.</i> The DFA allows us to compare the amount of an asset or liability held and the percentage shares by four generations: Silent (born before 1946), Baby Boomer (1946-1964), GenX (1965-1980), and Millennial (1981-96).
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Here are the values of corporate equities and mutual funds held by the four generations and their percentage shares during Q2-2020: Silent ($5.1 trillion, 19.0%), Baby Boomer ($14.8 trillion, 55.3%), GenX ($6.3 trillion, 23.4%), and Millennial ($0.6 trillion, 2.2%) (<a href="http://www.yardeni.com/pub/tc_20201110_13.png" target="_blank">Fig. 13</a> and <a href="http://www.yardeni.com/pub/tc_20201110_14.png" target="_blank">Fig. 14</a>).
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Since the start of the data in 1989, the percentage share held by the Silent generation has dropped from around 80%-90% to 19% currently, while the percentage share of the Baby Boom generation increased from 10%-20% to 55% currently. The GenX share was close to zero in early 2009 and has been trending up; it’s around 23% currently. The Millennials’ share remains close to zero.
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(3) <i>DFA by education.</i> Finally for now, let’s have a look at the impact of education on the ownership of corporate equities and mutual fund shares. The DFA data show that households headed by college-educated persons held 82.9% of corporate equities and mutual fund shares during Q2-2020 (<a href="http://www.yardeni.com/pub/tc_20201110_15.png" target="_blank">Fig. 15</a> and <a href="http://www.yardeni.com/pub/tc_20201110_16.png" target="_blank">Fig. 16</a>). That percentage has been trending higher since Q1-1995, when it fell to a series low of 60.2%. Households with heads who had some college, high school, and no high school owned only 9.9%, 6.3%, and 0.8%. Education is clearly a vitally important determinant of financial well-being.
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<b>IV. What's the bottom line? </b>Since the early 1960s, the household sector (including nonprofit organizations) has directly and indirectly held 65% of equities in America. Of the equities held by households (excluding nonprofit organizations), the “1%” hold around 50% of this asset class. Older people with college educations tend to own more equities than younger ones with less education.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-66275047253442757962020-11-02T14:25:00.000-05:002020-11-02T14:25:19.109-05:00Gridlock Is More Bullish Than Blue or Red Waves<div class="yrimain">
I’ve often observed that the US economy has performed remarkably well over the years despite Washington. Presidents like to take credit for the millions of jobs they have created or boast about the number of jobs they will create. Presidential candidates make similar promises about how their policies will boost employment by millions if they are elected or re-elected.
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The reality is that it is businesses that create jobs, not politicians. Businesses tend to do a better job of creating jobs when they aren’t burdened by Washington’s meddling in their affairs. Since Washington almost always meddles to varying degrees with the economy, it’s amazing how so many businesses in so many industries continue to be profitable and to expand their capacity and payrolls, with only recessions briefly tripping them up.
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This line of thinking leads to the widely held notion that the economy and the stock market do best when Washington’s politicians are stymied from meddling as much as they would like by political gridlock, i.e., when the party of the president doesn’t have majorities in the House and/or the Senate. Divided government is bullish, while unified government is bearish, or less bullish.
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Our governing system of “checks and balances” is the core principle that guided the nation’s founders when they wrote the US Constitution. In addition, many of them signed the Declaration of Independence, which declared: “Governments are instituted among Men, deriving their just powers from the consent of the governed.” They were mostly lawyers, and they designed a system that worked best when it didn’t allow any majority party to have too much power for too long.
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By the way, Abraham Lincoln, who was a lawyer as well as a president, famously restated the founding principle in his Gettysburg Address: “that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government of the people, by the people, for the people, shall not perish from the Earth.”
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Today, many investors fear that a Blue Wave on Election Day could happen, giving the Democrats’ unfettered power to implement their expansive and expensive agenda, including increasing federal spending, raising federal taxes, imposing more regulations, packing the Supreme Court, and so on. Wall Street strategists, including yours truly, countered that the bearish impact of higher taxes and more regulations should be offset by more spending in the Blue Wave scenario.
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At my firm, we recently analyze the performance of the S&P 500 under unified and divided government since FDR took office (<a href="http://www.yardeni.com/pub/tc_20201102_1.png" target="_blank">Fig. 1</a>). We calculated the percentage increases in the index from January-through-December periods during the two alternative regimes. We found that during the previous six Blue Waves, the S&P 500 increased 56% on average. During the previous three Red Waves, the index rose 35% on average. During the seven periods of divided government, the S&P 500 rose 60% on average.
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This suggests that gridlock is more bullish than the two unified alternatives, which are also bullish, but less so, with Blue Waves more bullish than Red Waves. Perhaps the market figures that government is less likely to grow much bigger when the government is divided rather than unified. In any event, the government has been getting bigger and more meddlesome for years, as evidenced by ever-widening federal budget deficits and mounting federal government debt (<a href="http://www.yardeni.com/pub/tc_20201102_2.png" target="_blank">Fig. 2</a>). (The founders generally disapproved of debt and believed that the amount the country owed should be limited.)
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Alternatively, could it be that the White House and the Congress don’t matter as much to the stock market as does the Fed? I think so, and so does Barron’s, which chose to run a <a href="https://www.barrons.com/?mod=BOL_LOGO" target="_blank">cover story</a> on Fed Chair Jerome Powell with the title “This Is Jerome Powell’s Moment, No Matter Who Wins” this week. The <a href="https://www.barrons.com/articles/why-jerome-powell-is-the-winner-no-matter-the-2020-presidential-election-results-51604093341" target="_blank">article</a>, written by Nick Jasinski, observed: “Tuesday’s election will be a critical one for the nation. But for those nervous about the economy, the Fed’s chairman may just be the most important man in Washington.”
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I was quoted in the piece as follows: “He’s a pragmatic pivoter. He’s done what he set out to do, and [shown a willingness to] change his mind depending on what the situation demands, but not be totally inconsistent.” Chapter 8 of my book <a href="https://www.amazon.com/Fed-Watching-Fun-Profit-Investors/dp/194802506X/ref=tmm_pap_swatch_0?_encoding=UTF8&qid=&sr=" target="_blank">Fed Watching for Fun & Profit</a> is titled “Jerome Powell: The Pragmatic Pivoter.”
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I previously have observed that no matter who wins the White House on Tuesday (or before Inauguration Day), he won’t be as important as Powell, whose first term doesn’t end until early 2022. Powell has made it very clear that he intends to keep the yield curve close to zero. The federal funds rate was lowered to zero on March 15 (<a href="http://www.yardeni.com/pub/tc_20201102_3.png" target="_blank">Fig. 3</a>).
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The 10-year US Treasury bond yield has been below 1.00% since March 20 (<a href="http://www.yardeni.com/pub/tc_20201102_4.png" target="_blank">Fig. 4</a>). From February through September, the Treasury issued $670 billion in notes and $259 billion in bonds (<a href="http://www.yardeni.com/pub/tc_20201102_5.png" target="_blank">Fig. 5</a> and <a href="http://www.yardeni.com/pub/tc_20201102_6.png" target="_blank">Fig. 6</a>). Over the same period, the Fed purchased $1,223 billion in notes and $338 billion in bonds. Previously, I’ve argued that if the bond yield rises above 1.00%, the Fed will most likely announce an official target range below 1.00%, a.k.a. “yield-curve targeting.”
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Finally, since Halloween coincided with a full moon this weekend, all the more reason to fear the front cover curse. What could possibly go wrong for Powell?
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-70299124747162751662020-10-14T18:46:00.000-04:002020-10-14T18:46:28.037-04:00Don't Fight T-Fed<div class="yrimain">
<b>The Fed I: Birth of T-Fed.</b> What a difference a pandemic makes. Prior to the Great Virus Crisis (GVC), Fed officials were either dismissive of Modern Monetary Theory (MMT) or remained silent on the subject since it crosses into the realm of fiscal policy. Fed officials have had a very long tradition of never crossing that line. They do monetary policy. Congress and the White House do fiscal policy. Period! Nothing to see here. Move on.
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Since the GVC, Fed officials repeatedly and frantically have been exhorting the fiscal authorities to do much more to support the economy. They’ve made it very clear that they will continue to help finance the resulting federal deficits by purchasing most, if not all, of the Treasury debt issued to pay for more fiscal stimulus. They’ve certainly been doing so since March 23, when they implemented QE4ever, which has already mostly financed the $2.2 trillion CARES Act signed by President Donald Trump on March 27. Consider the following:
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(1) <i>Consolidating the Treasury & the Fed.</i> Over the past 12 months through August, the federal budget deficit totaled a record $2.92 trillion (<a href="http://www.yardeni.com/pub/tc_20201012_1.png" target="_blank">Fig. 1</a>). Over the same period, the Fed’s holdings of Treasuries is up by a record $2.26 trillion. Now that the Treasury and the Fed have joined forces in the MMT crusade to drown the virus in liquidity, we might as well consolidate the two of them into “T-Fed.” The result is that the federal government needed to borrow just $663 billion from the public over the past 12 months through August (<a href="http://www.yardeni.com/pub/tc_20201012_2.png" target="_blank">Fig. 2</a>)!
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(2) <i>The Fed’s portfolio of Treasuries.</i> The Fed held a record $4.45 trillion in US Treasuries at the end of September (<a href="http://www.yardeni.com/pub/tc_20201012_3.png" target="_blank">Fig. 3</a>). That amounts to 24.2% of the Treasury’s marketable debt outstanding (<a href="http://www.yardeni.com/pub/tc_20201012_4.png" target="_blank">Fig. 4</a>). The Fed owns 20.0% and 36.9% of US marketable Treasury notes and bonds, respectively (<a href="http://www.yardeni.com/pub/tc_20201012_5.png" target="_blank">Fig. 5</a>).
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(3) <i>Good ol’ Feddie.</i> During the Great Financial Crisis, mortgage giants Fannie Mae and Freddie Mac were placed in conservatorship on September 7, 2008. The Fed rose to the occasion and was transformed by then-Fed Chair Ben Bernanke into “Feddie.” QE1 was introduced on November 25, 2008. In this first round of quantitative easing, the Fed committed to purchase $1.24 trillion in mortgage-backed securities and agency debt (<a href="http://www.yardeni.com/pub/tc_20201012_6.png" target="_blank">Fig. 6</a>). Since QE4ever, the Fed has purchased $618 billion in such securities, bringing their total to a record $1.98 trillion during September. The result has been record-low mortgage rates, which has contributed to the housing boom caused by de-urbanization in response to the pandemic and mounting urban crime (<a href="http://www.yardeni.com/pub/tc_20201012_7.png" target="_blank">Fig. 7</a>).
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<b>The Fed II: De Facto Yield-Curve Targeting.</b> What if another big round of deficit-financed fiscal spending pushes up bond yields and mortgage rates? That would be a big setback for MMT crusaders. The 10-year Treasury bond yield has averaged 0.68% since MMT Day (March 23) through Friday’s close. It rose to 0.79% on Friday, up from the record low of 0.52% on August 4 (<a href="http://www.yardeni.com/pub/tc_20201012_8.png" target="_blank">Fig. 8</a>).
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Have no fear; the Fed is here with YCT (yield-curve targeting), which it will use if necessary to supplement MMT by keeping a lid on bond yields. Actually, the remarkable stability of the bond yield near record lows since March 23 suggests that the Fed may be capping the bond yield below 1.00% without officially saying so.
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Ever since March 23, Powell repeatedly has stated that the Fed intends to keep interest rates close to zero for a very long time. At his June 10 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200610.pdf" target="_blank">press conference</a>, he famously said: “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates.” He reiterated that policy in his July 29 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200729.pdf" target="_blank">press conference</a>, saying: “We have held our policy interest rate near zero since mid-March and have stated that we will keep it there until we are confident that the economy has weathered recent events and is on track to achieve our maximum employment and price stability goals.”
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Remember that the Fed lowered the federal funds rate by 100bps to zero on March 15. No target was set for the bond yield at that time or has been since then—so far. At the June 10 presser, Nick Timiraos of the WSJ asked Powell about the possibility of “yield caps.” Powell revealed that at the latest meeting of the Federal Open Market Committee (FOMC), the participants received a briefing on the historical experience with YCT and said that they would evaluate it in upcoming meetings. Here is the excerpt on YCT from the June 10 FOMC meeting <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20200610.pdf" target="_blank">Minutes</a>:
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“The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. … [T]hese three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances … and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.”
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So how might the Fed be keeping a lid on the 10-year bond yield? Simple: The Fed has been buying all the bonds that the Treasury has been issuing in recent months and then some. From February through September, the Treasury issued $259 billion in bonds with maturities exceeding 10 years. Over that same period, the Fed purchased $338 billion of such bonds.
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<b>The Fed III: How To Print Money.</b> Fed Chair Jerome Powell’s important <a href="https://www.cbsnews.com/news/full-transcript-fed-chair-jerome-powell-60-minutes-interview-economic-recovery-from-coronavirus-pandemic/" target="_blank">interview</a> on 60 Minutes with Scott Pelley was aired on May 17. Pelley asked where Powell got the trillions of dollars that the Fed spent on purchasing bonds since March 23: “Did you just print it?” Powell forthrightly responded: “We print it digitally. So as a central bank, we have the ability to create money digitally. And we do that by buying Treasury bills or bonds or other government guaranteed securities. And that actually increases the money supply. We also print actual currency, and we distribute that through the Federal Reserve banks.”
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Powell also acknowledged that there was no precedent for the scale of QE4ever: “The asset purchases that we’re doing are a multiple of the programs that were done during the last crisis.” Let’s review how T-Fed’s actions since MMT Day have boosted the M2 monetary aggregate:
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(1) <i>US Treasury’s deposit account at the Fed.</i> The Treasury has been borrowing at a record pace in the Treasury market to fund the various government support programs aimed at reducing the economic damage and pain resulting from the GVC. The federal budget deficit has totaled a record-shattering $1.9 trillion from March through September. As a result, the US Treasury General Account at the Fed has jumped from $439 billion at the end of February to $1.7 trillion during the October 7 week (<a href="http://www.yardeni.com/pub/tc_20201012_9.png" target="_blank">Fig. 9</a>).
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(2) <i>The Fed’s US Treasury purchases.</i> Over that same period, the Fed facilitated the Treasury’s massive borrowing with massive purchases of US Treasuries, totaling $1.99 trillion. The Fed now owns a record $4.46 trillion in US Treasuries as of the October 7 week (<a href="http://www.yardeni.com/pub/tc_20201012_10.png" target="_blank">Fig. 10</a>).
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(3) <i>Commercial bank deposits and cash.</i> The Fed also facilitated the mad dash for cash that started during February as the viral pandemic triggered a widespread pandemic of fear. The Fed’s purchases of Treasuries and agency securities from the public boosted commercial bank deposits by $2.28 trillion from the end of February through the September 30 week as the public sold securities to raise cash (<a href="http://www.yardeni.com/pub/tc_20201012_11.png" target="_blank">Fig. 11</a>).
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The huge 20% y/y jump in this liability item on banks’ balance sheets was offset on the asset side by “cash” assets, which are basically the banks’ reserve balances at the Fed (<a href="http://www.yardeni.com/pub/tc_20201012_12.png" target="_blank">Fig. 12</a>). They really aren’t cash per se, since the banks can’t make loans with these deposits at the Fed. They can make more loans by lending out the increase in their deposits less reserve requirements, which were lowered to zero on March 15. When they do so, the banks also create more deposits. That’s the way a fractional-reserve banking system works. (By the way, the answer to the oft-asked question of why the banks don’t lend out all that cash on their balance sheets is that they can’t, because it is a balancing item determined totally by the Fed’s balance sheet!)
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(4) <i>Commercial bank loans.</i> The Fed’s MMT maneuvers also facilitated the $781 billion jump in commercial bank loans from the end of February through the May 13 week (<a href="http://www.yardeni.com/pub/tc_20201012_13.png" target="_blank">Fig. 13</a>). Commercial and industrial loans soared $715 billion over this same period as businesses cashed in their lines of credit, fearing a cash crunch (<a href="http://www.yardeni.com/pub/tc_20201012_14.png" target="_blank">Fig. 14</a>). The surge in loan demand was easily funded by the increase in deposits. Indeed, the brief surge in borrowing by banks during the weeks of February 12 through March 25 has been more than reversed subsequently (<a href="http://www.yardeni.com/pub/tc_20201012_15.png" target="_blank">Fig. 15</a>).
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(5) <i>Companies issuing bonds and paying down lines of credit.</i> Now many businesses that had rushed to draw their lines of credit during the mad dash for cash earlier this year are paying them down. Nonfinancial corporations raised a record $1.44 trillion over the past 12 months through August at record-low yields, thanks to the Fed’s backstopping the corporate bond market as part of QE4ever (<a href="http://www.yardeni.com/pub/tc_20201012_16.png" target="_blank">Fig. 16</a>). And what are the banks doing with the cash from the loan paydowns? They are buying Treasuries and agencies to the tune of $527 billion since the start of this year through the September 30 week (<a href="http://www.yardeni.com/pub/tc_20201012_17.png" target="_blank">Fig. 17</a>).
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<b>The Fed IV: MMT Junkies.</b> T-Fed was born on March 23, the day that the Fed adopted QE4ever. Ever since then, Fed officials have been basically saying: “More, more, more!” They want another round of MMT. They don’t call it that, but that’s what they are asking for.
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Fed Chair Jerome Powell was asked about MMT during congressional testimony on February 26, 2019. He hated it back then: “The idea that deficits don’t matter for countries that can borrow in their own currency I think is just wrong,” the Fed chair said. The “US debt is fairly high to the level of GDP—and much more importantly—it’s growing faster than GDP, really significantly faster. We are going to have to spend less or raise more revenue.”
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Powell rejected the notion that the Fed should enable fiscal spending: “[T]o the extent that people are talking about using the Fed—our role is not to provide support for particular policies,” he said. “Decisions about spending, and controlling spending and paying for it, are really for you.” In effect, he told Congress: “Fiscal policy is your domain. Leave us out of it.”
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Again: What a difference a pandemic makes! Consider the following:
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(1) <i>March.</i> In his <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200303.pdf" target="_blank">March 3</a> and <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200315.pdf" target="_blank">March 15 </a>unscheduled press conferences, Powell said it wasn’t the Fed’s “role to give advice to the fiscal policymakers” and that fiscal policy would need to be handled on a “discretionary” basis.
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(2) <i>April.</i> Powell’s fiscal pivot occurred during his April 29 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200429.pdf" target="_blank">press conference</a> Q&A, when he said: “I have longtime been an advocate for the need for the United States to return to a sustainable path from a fiscal perspective at the federal level. We have not been on such a path for some time, which means … that the debt is growing faster than the economy. This is not the time to act on those concerns. This is the time to use the great fiscal power of the United States to … do what we can to support the economy and try to get through this with as little damage to the longer-run productive capacity of the economy as possible.”
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(3) <i>June.</i> During his June 10 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200610.pdf" target="_blank">press conference</a>, in prepared remarks, Powell said: “I would stress that [the Fed has] lending powers, not spending powers. The Fed cannot grant money to particular beneficiaries. … Elected officials have the power to tax and spend and to make decisions about where we, as a society, should direct our collective resources. The CARES Act and other legislation provide direct help to people and businesses and communities. This direct support can make a critical difference not just in helping families and businesses in a time of need, but also in limiting long-lasting damage to our economy.”
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(4)<i> July.</i> During his July 29 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200729.pdf" target="_blank">press conference</a> Q&A, Powell stated: “Fiscal policy … can address things that we can’t address. If there are particular groups that need help, that need direct monetary help—not a loan, but an actual grant as the PPP program showed—you can save a lot of businesses and a lot of jobs with those in a case where lending a company money might not be the right answer. The company might not want to take a loan out in order to pay workers who can’t work because there’s no business.”
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(5) <i>September.</i> In prepared remarks at his September 16 <a href="https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20200916.pdf" target="_blank">presser</a>, Powell said: “The path forward will also depend on the policy actions taken across all parts of the government to provide relief and to support the recovery for as long as needed.” In the Q&A, he warned that “as the months pass … if there isn’t additional support and there isn’t a job for some of those people who are from industries where it’s going to be very hard to find new work, then that will start to show up in economic activity. It will also show up in things like evictions and foreclosures and, you know, things that will scar and damage the economy.”
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(6) <i>October.</i> At the National Association for Business Economics virtual annual meeting on October 6, Powell <a href="https://www.federalreserve.gov/newsevents/speech/powell20201006a.htm" target="_blank">reiterated</a> his call for more MMT: “By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”
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An October 7 WSJ <a href="https://www.wsj.com/articles/the-fiscal-federal-reserve-11602112823" target="_blank">editorial</a> commented: “It’s important to understand how unusual this is. The Fed’s job is monetary policy and financial regulation. Yet here is a Fed chief lobbying Congress, and the public, on behalf of one side of a fiscal debate.”
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(7) <i>Other talking Fed heads.</i> And the beat goes on … On Thursday, Dallas Fed President Robert Kaplan said in a Bloomberg Television interview: “I think the Fed can do more, and I’m sure we’ll look at all our options, but those aren’t substitutes for fiscal policy.”
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The same day, Boston Fed President Eric Rosengren emphasized in an <a href="https://www.bloombergquint.com/global-economics/fed-officials-maintain-calls-for-fiscal-aid-to-protect-recovery" target="_blank">interview</a> with Bloomberg News: “There’s a limit to how far we can push the 10-year Treasury rate or the mortgage-backed rate down.” He added: “That’s not to say we shouldn’t do it. It just says the magnitude of the impact, when rates are already so low, is probably much less than what we want, which is why I think you’re hearing Federal Reserve speakers call out for more fiscal policy.”
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<b>The Fed V: MMT’s Best Friends Forever.</b> The Fed isn’t the only central bank that has embraced MMT. Arguably, the Bank of Japan (BOJ) led the way with its zero-interest-rate policy, which has been in place since the late 1990s. The People’s Bank of China certainly has enabled China’s commercial banks to finance lots of government spending since 2008.
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In her September 4, 2019 speech as the new president of the European Central Bank (ECB), Christine Lagarde called on “the other economic policy makers” to do “what they had to do” to stimulate economic growth. And that was before the pandemic. Since the World Health Organization declared the pandemic on March 11, the ECB’s assets have soared by €2.0 trillion to a record €6.7 trillion (<a href="http://www.yardeni.com/pub/tc_20201012_18.png" target="_blank">Fig. 18</a>). This past July, the European Union approved a €750 billion economic recovery fund, which will be financed by issuing common debt, providing more bonds for the ECB to buy.
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On Thursday, September 17, BOJ Governor Haruhiko Kuroda pledged to work closely with the country's new Prime Minister Yoshihide Suga to support the economy. So far, Suga has indicated that he is not focused on the inflation target. Instead, a top priority of his administration is protecting jobs, reported <a href="https://www.reuters.com/article/japan-economy-boj/boj-backs-new-premiers-focus-on-jobs-signals-readiness-to-ease-more-idUSKBN26805S" target="_blank">Reuters</a>. Suga’s emphasis on jobs may influence Kuroda to deemphasize the importance of the inflation target, as Powell’s Fed has recently done. Since the last week of February through the September 25 week, the BOJ’s balance sheet has soared 18% in yen (<a href="http://www.yardeni.com/pub/tc_20201012_19.png" target="_blank">Fig. 19</a>).
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The three major central banks are all MMT’s BFFs (best friends forever).Their combined balance sheet has jumped $6.8 trillion to a record $21.2 trillion since the February 21 week through the September 25 week (<a href="http://www.yardeni.com/pub/tc_20201012_20.png" target="_blank">Fig. 20</a>). Here in dollars are each of their increases over this period and their most current record highs: Fed ($3.0 trillion $7.0 trillion), ECB ($2.5 trillion, $7.6 trillion), and BOJ ($1.3 trillion, $6.6 trillion).
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It’s good to have friends.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-28534528967967025282020-10-09T15:05:00.000-04:002020-10-09T15:05:44.574-04:00Tale of Two Economies: Housing-Related Boom vs Pandemic-Challenged-Services Bust<div class="yrimain">
<i>“E pluribus unum”</i> certainly doesn’t apply to our highly partisan political discourse these days. The phrase is Latin for “Out of many, one.” It is a traditional motto of the US, appearing on the Great Seal. Its inclusion on the seal was approved by an Act of Congress in 1782. Another motto is <i>“Novus ordo seclorum,”</i> which is Latin for "New order of the ages.” That doesn’t seem to apply these days either given our political and social disorder.
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Then again, we all seem to be united when it comes to shopping. While the country remains bitterly divided politically, we are united in our drive to thrive. That certainly helps to explain the remarkable economic recovery in recent months from the two-month lockdown recession during March and April.
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American consumers almost never disappoint us. I often have observed that when Americans are happy, they spend money and when they are depressed, they spend even more money—because shopping releases dopamine in our brains, which makes us feel good. Obviously, the Great Virus Crisis (GVC) is writing a new chapter in the history of consumer behavior. I’m not a virologist, but one widespread side effect of the virus is evident: Most consumers have been suffering from cabin fever, which can be depressing, and weren’t able to seek relief through shopping during the lockdown recession.
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In our May 21 Morning Briefing, we predicted that “US consumers will open their wallets and spend once some semblance of normalcy returns.” So far, so good. As the lockdown restrictions were gradually lifted during May, consumers rushed to spend lots of the cash they had saved up during the lockdown.
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Housing-related spending has been especially strong, as consumers have decided it’s time to remodel their cabins if they are going to spend more time working, learning, and entertaining at home. They’ve also rushed to buy more new and existing cabins in suburban and rural areas in a broad-based wave of de-urbanization triggered by the pandemic. In addition, the pandemic may have convinced many Millennials (who are currently 24 to 39 years old) that now is the time to buy a house rather than to rent an apartment. The Fed is contributing to the resulting housing-related boom by keeping mortgage rates at record-low levels.
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All these developments were confirmed on October 1, when the Bureau of Economic Analysis (BEA) released the August personal income report. The next day, the employment report for September released by the Bureau of Labor Statistics (BLS) suggested that consumers continued to gain purchasing power from their participation in the labor market—i.e., working—which should more than offset the decline in purchasing power provided by the government with pandemic-support benefits.
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If Washington provides another round of such support anytime soon, that will unleash even more dopamine, adding to the economic “V is for Victory” victory over the pandemic’s economic impact. Consider the following:
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(1) Consumer-led V-shaped recovery. The October 2 update of the Atlanta Fed’s <a href="https://www.frbatlanta.org/cqer/research/gdpnow" target="_blank">GDPNow</a> model showed that Q3’s real GDP is tracking at a record jump of 34.6% (at a seasonally adjusted annual rate, or saar) following the record 31.4% drop during Q2. That’s certainly a V-shaped recovery so far.<br /><br />
Leading the way up during Q3 is a 36.8% projected rebound in real consumer spending, following the 33.2% drop during Q2. Consumers contributed 24.0 percentage points to the freefall in real GDP during Q2, when lockdown restrictions held them back (<a href="http://www.yardeni.com/pub/tc_20201005_1.png" target="_blank">Fig. 1</a>). They are likely to contribute more to the Q3 upswing. By the way, spending on consumer services was hit hardest by the lockdown during Q2, as evidenced by the -22.0ppt contribution of this component to the drop in real GDP!<br /><br />
In current dollars, personal consumption expenditures has rebounded 18.6% from April through August (<a href="http://www.yardeni.com/pub/tc_20201005_2.png" target="_blank">Fig. 2</a>). It is only 3.4% below its record high during January. Interestingly, consumer spending on goods is up 24.0% over this period to a new record high. Spending on services is up 16.1% since April but still 7.4% below its record high during February. During August, consumer spending totaled $14.4 trillion (saar) with services at $9.5 trillion and goods at $4.8 trillion.
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(2) <i>A pile of savings to spend.</i> How can it be that consumer spending has rebounded so strongly when millions of workers remain unemployed? During the lockdown recession, personal saving soared from $1.4 trillion (saar) during February to an all-time record of $6.4 trillion in April (<a href="http://www.yardeni.com/pub/tc_20201005_3.png" target="_blank">Fig. 3</a>) . It was back down to $2.4 trillion during August.
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Consumer spending clearly was boosted by the jump in the government social benefits component of personal income from $3.2 trillion (saar) during February to a record $6.6 trillion during April (<a href="http://www.yardeni.com/pub/tc_20201005_4.png" target="_blank">Fig. 4</a>).
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However, government social benefits was down to $4.1 trillion during August. That’s still well above the $3.2 trillion during February. The same pattern is evident in personal saving. So there is still enough “potential” fiscal stimulus left over to provide “kinetic” energy to consumer spending over the next few months, in our opinion.
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(3) <i>Earned income rebounding.</i> But don’t we need another round of fiscal stimulus to keep the consumer recovery going until a vaccine is available? Not if wages and salaries continue to rebound along with employment. The former is up 7.6% since April through August, while the latter is up 6.5% from April through September (<a href="http://www.yardeni.com/pub/tc_20201005_5.png" target="_blank">Fig. 5</a>).
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Our Earned Income Proxy (EIP) is highly correlated with wages and salaries in the private sector (as reported in the BEA personal income release). The EIP is up 10% from April through September (<a href="http://www.yardeni.com/pub/tc_20201005_6.png" target="_blank">Fig. 6</a>). The EIP is based on the monthly BLS payroll data. It is simply aggregate hours worked by all workers—which is up 12.1% from April through September—multiplied by average hourly earnings. Aggregate hours worked reflects payroll employment—which is up 8.8% from April through September—multiplied by the average length of the workweek. This augurs well for the ongoing V-shaped recovery in both consumers’ purchasing power and their spending.
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(4) <i>Housing-related spending leading the way.</i> The latest personal income release confirms my view that a housing-related spending boom is underway as a result of de-urbanization and record-low mortgage rates. Spending on furniture & furnishings and household appliances soared 38.9% from April through August to new record highs since June of this year (<a href="http://www.yardeni.com/pub/tc_20201005_7.png" target="_blank">Fig. 7</a>).
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Construction spending on new homes and on home improvements is included in the residential investment component of GDP rather than in personal consumption. The recent jumps in new and existing home sales suggest that both categories of residential construction should be rising to new cyclical highs soon and could be on their way to record highs in coming months (<a href="http://www.yardeni.com/pub/tc_20201005_8.png" target="_blank">Fig. 8</a>). Together, they totaled $589.4 billion (saar) during August, 13.1% below the record high during February 2006.
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Altogether, housing-related consumer and construction spending totaled a record-high $906.4 billion (saar) during August, surpassing the previous record high during February 2006 by 1.3% (<a href="http://www.yardeni.com/pub/tc_20201005_9.png" target="_blank">Fig. 9</a>).
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(5) <i>Spending on autos also strong.</i> Undoubtedly, the pandemic also has boosted the demand for autos along with the demand for houses by people moving out of cities to the suburbs and rural areas. Sure enough, current-dollar spending on new motor vehicles jumped 50.6% from April through August to the highest pace since July 2005 (<a href="http://www.yardeni.com/pub/tc_20201005_10.png" target="_blank">Fig. 10</a>). Spending on used cars is up 94.5% since April.
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(6) <i>Services are on the mend too.</i> As noted above, the services economy also has been recovering, but has a ways to go to regain all that was lost during the lockdown recession. That’s because several important services-providing industries remain challenged by various voluntary and enforced social distancing restrictions.
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Initially, the pandemic caused spending on health care services to plunge 34.7% from February through April (<a href="http://www.yardeni.com/pub/tc_20201005_11.png" target="_blank">Fig. 11</a>). Hospitals suspended elective procedures in anticipation of a huge influx of Covid patients. Since April through August, this category is up 43.5%, which is only 6.4% from its record high during February.
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Also taking a big hit from the lockdowns was spending on food services, including restaurants. This category plunged 47.5% from February through April but rebounded 69.4% through August (<a href="http://www.yardeni.com/pub/tc_20201005_12.png" target="_blank">Fig. 12</a>). It is still 11.2% below its record high during January. It is likely to struggle to climb higher in coming months as winter weather forces restaurants to halt outdoor dining and do the best they can with significant capacity limits on indoor dining.
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Among the services-providing industries, the most challenged have been the following (showing the percentage changes from February through April and from April through August, as well as the percentage below the February pace): Air Transportation (-93%, 888%, -36%), Hotels & Motels (-83, 176, -54), Gambling (-80, 320, -18), Amusement Parks, Campgrounds, & Related Recreation (-90, 240, -67), and Admissions to Specified Spectator Amusements (-97, 423, -82) (<a href="http://www.yardeni.com/pub/tc_20201005_13.png" target="_blank">Fig. 13</a> and <a href="http://www.yardeni.com/pub/tc_20201005_14.png" target="_blank">Fig. 14</a>).
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(7) <i>Bottom line.</i> Although the recovery from May through September has been V-shaped, there are plenty of challenges ahead. The pace of the recovery is bound to slow in 2021, and there could be setbacks. However, so far, the recovery has been impressive.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0tag:blogger.com,1999:blog-66918198591611590.post-49217333297964474572020-09-24T15:12:00.000-04:002020-09-24T15:12:00.280-04:00The Glass Is More Than Half Full<div class="yrimain">
We didn’t know how good we had it in 2019. Then the pandemic hit in 2020, and we all concluded that it will take many years before life will be as good as it was in 2019. Perhaps we’re too pessimistic. After all, 2019 was better than we realized at the time; perhaps we’ll return to the good life sooner than we realize now. Let’s examine that notion, starting with how good it was in 2019, then considering how we might rebound to the good old days sooner than widely anticipated:
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<b>(1)</b> <i><b>Household income rose to record high in 2019.</b></i> My attitude toward any data series that doesn’t support my story is that either it is flawed or it will be revised to support my story. That’s been my strongly held attitude toward median real household income, the annual series compiled by the Census Bureau and used to measure poverty in America. It’s been a big favorite with economic pessimists and political progressives in recent years because it confirmed their view that, for most Americans, the standard of living has stagnated for years.
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My view has been that lots of other, more reliable indicators of income confirm that the standard of living has been improving for most Americans for many years. Now even the Census series confirms my story. So it’s back on the right track after misleadingly showing stagnation from 2000 through 2016 (<a href="http://www.yardeni.com/pub/tc_20200921_1.png" target="_blank">Fig. 1</a>). The median household series, which is adjusted for inflation using the CPI, is up 9.2% from 2016 through 2019 and hit new highs during each of the last three years (2017-19) after remaining flat from 2000 to 2016.
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Also up over the past three years to new record highs are the Census series for median family (up 11.0%), mean household (10.7%), and mean family (12.5%) incomes. Almost everyone was doing better than ever before last year.
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<b>(2)</b> <i><b>Personal income data refute stagnation myth.</b></i> While the Census data make more sense to me now, they still have lots of issues. Most importantly, the Census data are based on surveys asking a sample of respondents for the amount of their money income before taxes. So Medicare, Medicaid, food stamps, and other noncash government benefits—which are included in the personal income series compiled by the Bureau of Economic Analysis (BEA)—are excluded from the Census series. In addition, the BEA data are based on “hard” data like monthly payroll employment statistics and tax returns. BEA also compiles an after-tax personal income series reflecting government tax benefits such as the Earned Income Tax Credit.
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The BEA series for personal income, disposable personal income, and personal consumption expenditures—on a per-household basis and adjusted for inflation using the personal consumption expenditures deflator (PCED) rather than the CPI—all strongly refute the stagnation claims of pessimists and progressives (<a href="http://www.yardeni.com/pub/tc_20200921_2.png" target="_blank">Fig. 2</a>). All three measures have been on solid uptrends for many years, including from 2000 through 2016, rising 25.1%, 27.9%, and 25.9%, respectively, over this period. They often rose to new record highs during this period. There was no stagnation whatsoever according to these data series. Instead, there was lots of growth!
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The standard critique of using the BEA data series on a per-household basis is that they are means, not medians. So those at the very top of the income scale, the so-called “1- Percent,” in theory could be skewing both the aggregate and per-household data. That’s possible for personal income but unlikely for average personal consumption per household. The rich can only eat so much more than the rest of us, and there aren’t enough of them to substantially skew aggregate and per-household consumption considering that they literally represent only 1% of taxpayers, but almost 40% of the federal government’s revenue from income taxes, as discussed below.
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<b>(3)</b><i> <b>Real hourly wages belie stagnation myth too.</b></i> Another data series that refutes the stagnation claim of pessimists and progressives is average hourly earnings (AHE), reported in the monthly employment report and reflected in the BEA income data. Adjusting it for inflation using the PCED shows that it soared during the second half of the 1960s through the early 1970s (<a href="http://www.yardeni.com/pub/tc_20200921_3.png" target="_blank">Fig. 3</a>). It then stagnated during the rest of the 1970s through mid-1995 as a result of what was then called “de-industrialization.” Since December 1994, it has been rising along a 1.2%-per-year growth path. That’s a significant growth rate in the purchasing power of consumers, as real AHE compounded to an increase of 37.2% from December 1994 through July of this year. That coincides with the High-Tech Revolution, which I’ve been writing about since 1993!
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By the way, the hourly wage series I am using here is for production and nonsupervisory workers, which obviously doesn’t include the rich. Furthermore, these workers have accounted for between 80.4% and 83.5% of total payroll employment since 1964 (<a href="http://www.yardeni.com/pub/tc_20200921_4.png" target="_blank">Fig. 4</a>). So the real AHE series includes lots of working stiffs and isn’t distorted by the 1-Percent, let alone the top 20%-or-so of earners.
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<b>(4)</b> <i><b>The CPI is very misleading.</b></i> It is well known that the CPI is upwardly biased, especially compared to the PCED (<a href="http://www.yardeni.com/pub/tc_20200921_5.png" target="_blank">Fig. 5</a>). Since January 1964 through July of this year, the CPI is up 838.5%, while the PCED is up 646.3%. As a result, while the PCED-adjusted AHE has been rising in record high territory since January 1999, the CPI-adjusted version didn’t recover to its previous record high during January 1973 until April 2020, which makes absolutely no sense (<a href="http://www.yardeni.com/pub/tc_20200921_6.png" target="_blank">Fig. 6</a>)! (An extremely flawed August 2018 <a href="https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/" target="_blank">study</a> by the Pew Research Center concluded that Americans’ purchasing power based on the CPI-adjusted AHE has barely budged in 40 years!)
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The Fed long has based its monetary policy decision-making on the PCED rather than the CPI. A footnote in the FOMC’s <a href="https://www.federalreserve.gov/boarddocs/hh/2000/February/ReportSection1.htm" target="_blank">February 2000 Monetary Policy Report to Congress</a> explained why the committee had decided to switch to the inflation rate based on the PCED.
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<b>(5)</b><i> <b>Adjusting for household and family sizes makes a difference.</b> </i>The fun of making fun of the funny-looking Census income data series continues when I adjust them for the average size of households and families in the US (<a href="http://www.yardeni.com/pub/tc_20200921_7.png" target="_blank">Fig. 7</a> and <a href="http://www.yardeni.com/pub/tc_20200921_8.png" target="_blank">Fig. 8</a>). Both series have been on downward trends since the 1940s, especially the average size of households. Households have always been smaller than families, and earned less, since the former include single-person households, which have increased significantly in recent years because young adults have been postponing marriage and older folks have been living longer, resulting in more divorced and widowed persons.
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Furthermore, data available since 1982 through 2019 show that the percentage of nonfamily households has increased from 25.1% to 35.7% over that period (<a href="http://www.yardeni.com/pub/tc_20200921_9.png" target="_blank">Fig. 9</a> and <a href="http://www.yardeni.com/pub/tc_20200921_10.png" target="_blank">Fig. 10</a>). So there are more of these households that tend to earn less than family households. No wonder that the Census data adjusted for household size and for inflation using the PCED shows less stagnation and steeper uptrends since the start of the data (<a href="http://www.yardeni.com/pub/tc_20200921_11.png" target="_blank">Fig. 11</a> and <a href="http://www.yardeni.com/pub/tc_20200921_12.png" target="_blank">Fig. 12</a>).
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<b>(6)</b> <i><b>The rich aren’t like you and me.</b></i> What about the 1-Percent, who earn too much money, have too much wealth, and don’t pay their fair share of taxes? The total number of all the tycoons on Wall Street, in Silicon Valley, and in the C-suites of corporate America—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.5 million taxpayers in 2017, exactly 1% of all taxpayers who filed returns that year, according to the latest available data from the Internal Revenue Service (IRS) (<a href="http://www.yardeni.com/pub/tc_20200921_13.png" target="_blank">Fig. 13</a>).
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Collectively, during 2017 the 1-Percent paid $625 billion in income taxes, or 26.7% of their AGI. That amount represented 38.9% of all federal income tax paid by all taxpayers who paid any taxes at all (<a href="http://www.yardeni.com/pub/tc_20200921_14.png" target="_blank">Fig. 14</a>, <a href="http://www.yardeni.com/pub/tc_20200921_15.png" target="_blank">Fig. 15</a>, and <a href="http://www.yardeni.com/pub/tc_20200921_16.png" target="_blank">Fig. 16</a>). The rest of us working stiffs, the “99-Percent,” shelled out $980 billion, or 61.1% of the total tax bill. What should be the fair share for the 1-Percent? Instead of almost 40% of the federal government’s tax revenue, should they be kicking in 50%? Why not 75%? They would be less rich, but everyone else would be richer—unless the 1-Percent decided to work less hard or to leave the country, having lost their incentive to keep creating new businesses, jobs, and wealth.
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<b>(7)</b> <i><b>Can you Trump this?</b></i> Love him or hate him, the standard of living did increase significantly during Trump’s first term (until the pandemic hit), as it has done under many previous presidents, especially those who have championed pro-growth and pro-business policies, including tax cuts and deregulation.
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<b>(8)</b> <i><b>Time for progressives to declare “mission accomplished?”</b></i> Progressives continue to claim that government policies need to be more progressively focused on raising taxes and redistributing income. Until recently, they’ve relied on the Census income series to prove their point, though these measures clearly leave out the positive impact that past progressive policies have already had through Medicare, Medicaid, food stamps, tax credits, and other noncash government social benefits.
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Progressives long have promised that their policies will create Heaven on Earth. Arguably, they have succeeded in doing so for many Americans with their New Deal, Great Society, and Obamacare programs. These programs have reduced income inequality by redistributing income, which has been growing faster than progressives concede thanks to America’s entrepreneurial spirit and capitalist system. Progressives, who never seem satisfied with the progress they have made, run the risk of killing the goose that lays the golden eggs to pay for their programs. Incomes can always be made equal by making everyone equally poor.
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As confirmed by the latest available IRS data, there is no denying that the rich got richer during 2017 and earned more taxable income than ever before. They undoubtedly continued to do so during 2018 and 2019. But now even the Census data show that real median household income rose to a record high last year. Most Americans were more prosperous last year than ever before, though some more so than others. Why does anyone have a problem with that?
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The bottom line is that just before the pandemic, American households enjoyed record standards of living. Income stagnation was a myth. Income inequality isn’t a myth but an inherent characteristic of free-market capitalism, an economic system that awards the biggest prizes to those capitalists who benefit the most consumers with their goods and services. Perversely, inequality tends to be greatest during periods of widespread prosperity. Rather than bemoaning that development, we should celebrate that so many households are prospering, even if a few are doing so more than the rest of us.
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<b>(9)</b><i> <b>Housing-led recovery.</b></i> So how do we bring back the good times once the pandemic is over so that we can enjoy widespread prosperity again? We may not have to wait that long. The pandemic has triggered a housing boom that could offset many of the ongoing woes in industries still plagued by the pandemic. De-urbanization is certainly weighing on urban economies, but suburban ones are booming because more and more city apartment dwellers are moving to homes in the burbs. There’s increasing anecdotal evidence that Millennials who’ve been renting apartments in urban areas are responding to the pandemic by buying houses in the burbs. Housing-related retail sales of furniture, furnishings, and appliances have rebounded to record highs as both existing and new home sales are surging.
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Among the industries that are most likely to face a challenging recovery are the ones covered by the following categories of personal consumption expenditures: air transportation, hotels & motels, food services, amusement parks & related recreation, admission to special spectator amusements, and gambling. Altogether, these categories added up to $996 billion (saar) during July, while housing-related construction and consumption totaled $862 billion. While the recent recovery in the former could stall until a vaccine is available, the latter is likely to boom in coming months (<a href="http://www.yardeni.com/pub/tc_20200923_17.png" target="_blank">Fig. 17</a>).
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Furthermore, Americans have $10.6 trillion in home mortgages. Thanks to the Fed’s ultra-easy monetary policies, many are refinancing their loans at record-low mortgage rates, providing a significant boost to monthly household incomes. Those record-low mortgage rates are also helping to keep home buying affordable even as home prices continue to rise. In addition, Americans have a record $20.2 trillion in home equity. If they need it, they can use it to raise some cash through home equity loans or by selling their homes at record-high prices. The glass is at least half full.
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Dr. Ed Yardenihttp://www.blogger.com/profile/12041997768694431451noreply@blogger.com0