Economic & Investment Blog

It's important to note that Fed tightening this time around is fundamentally different from tightening cycles in the past. The main difference this time is that the Fed is not draining reserves from the banking system. Reserves are still plentiful at over $3 trillion. That's a huge deal. [Making] the point another way: there is no shortage of liquidity in the financial markets, unlike during periods leading up to recessions in the past.

We lose a market indicator: For years, one of the key indicators of market stress was the T-bill over Eurodollar spread, commonly called the “TED spread.” Since LIBOR represented nongovernment guaranteed dollar deposits, there was credit risk embedded in the rate. Market participants began to notice that when credit stress developed in the financial markets, the TED spread would widen, with LIBOR rates rising above T-bill rates.

Inflation as measured by government indices (e.g., CPI, PCE Deflator) is a lagging indicator of true inflation. True inflation is defined as the loss of purchasing power of a currency. Right now that is just not the case: the dollar is soaring against nearly every currency in the world and virtually all commodity prices are collapsing. Don't pay attention to inflation; pay attention to sensitive market-based prices—they tell you where inflation is headed.

The M2 measure of the money supply grew a very rapid 24.8% in 2020 and 12.4% in 2021. Year-to-date through July, M2 has grown at only a 1.8% annual rate in 2022. Since inflation came from this money printing, we see this as progress!

Sentiment surveys are registering lower readings today than even in the midst of the 2008 financial crisis. But while consumers aren’t talking the talk, they are walking the walk: growing their spending well in excess of inflation. Rising net worth and job security are far more important predictors of consumer behavior than comments people are willing to share with survey takers

M2 is no longer exploding. In fact, its annualized growth rate over the past 3 months has fallen to a mere 1.3%, down from its all-time, year-over-year high of 26.9% in February of last year.

The spread I have generally preferred is the 1-10, but there's one I think is even better: the spread between the real Fed funds rate and the real yield on 5-yr TIPS. Here I'm referring the real yield curve, not the commonly-used nominal curve. Real yields, after all, are far more important than nominal yields because they reflect the true cost of borrowing and the true returns to saving, and those are what create the most powerful incentives in the economy.

For the full year, the blended earnings growth rate for CY 2021 is 47.4%. Looking ahead to the first half of CY 2022, analysts expect earnings growth of 5.5% for Q1 2022 and 4.8% for Q2 2022

We expect S&P 500 earnings to be up, actually, about 12 percent. We think the market is going to not be willing to pay as much as they did at the end of 2021 for the same earnings. So, we expect market multiples, the valuations that you highlighted, to actually contract a little bit.

Globalization was under pressure before the pandemic. The rise of populism in the West since the Great Financial Crisis was, in part, a reaction against globalization. The pandemic has accelerated the pace of deglobalization. Lengthy supply chains have been exposed as wanting ...As supply chain resilience becomes paramount, we expect a shift from just-in-time to just-in-case inventory management.

Still, the economy has a long way to go before a full recovery. We are still 5.3 million payrolls short of where we were in February 2020; down 5.6 million for civilian employment. The labor participation rate is at 61.7% versus 63.3% pre-COVID; the employment-population ratio – the share of adults who are working – is 58.5% versus 61.1% pre-COVID. We project that it will take until about mid-2022 to recover all the jobs lost during COVID

Although some market participants appear to be worried about an impending slowdown, we continue to believe the economy is undergoing a somewhat typical handoff from the early- to mid-cycle. This period often is accompanied by choppier equity markets as investors seek to ascertain the dominant themes of the next expansion

There is no recession within our forecast period. Monetary and fiscal stimulus should continue in the U.S. over our three-year forecast period, yet at a decreasing rate as the economy recovers.

the best years for economic growth have gone hand-in-hand with more mixed but above-average stock market performance. Further, it isn’t unusual to see a correction of over 10% in periods of economic strength, as investors try and handicap just how much growth will slow in the following year

higher prices from supply bottlenecks in the manufacturing sector are typically short-lived. High prices and an improving COVID situation will bring more capacity online by the end of 2021, in turn dampening inflation pressure next year

The primary problem is a lack of homes. Based on population growth and scrappage (voluntary knockdowns, fires, floods, hurricanes, tornadoes...etc.), we would normally expect housing starts of 1.5 million per year. But in the past twenty years (March 2001 through February 2021), builders have only started 1.256 million per year. Builders haven't started more than 1.5 million homes in a calendar year since 2006.

The Shanghai Containerized Freight Index, a composite index of 15 export routes out of China, shows shipping prices more than tripling since 2019. Closer to home, the U.S. PPI shows intermediate transportation and warehousing costs for goods rising at an 11% annualized pace over the past three months

private sector leverage: total household liabilities as a percent of total assets. Leverage today is as low as it has been since 1976, and it has declined by a huge 40% since the peak in early 2009

As the money continues to flood into the private sector we continue to see a rise in stock and bond prices. Over time, as stimulus payments and tax refunds are distributed and more money looks to be put to work, investors will extend maturities on their bond portfolios in a “reach for yield.”

The U.S. consumer will lead the charge in this growth rebound by relying on a mix of previously accumulated savings, still-flowing fiscal support and a pick-up in job growth.

Goldman Sachs financial conditions index is the most accommodative since we started tracking the data in 1989.

The “new nominal” is not simply about our expectation for a higher inflation regime in the next five years. It means stronger growth in the near term, and eventually higher inflation - without the typical rise in nominal bond yields.

The median existing single-family home sales price last month was up by about 15% from last November.

Many are still looking ahead to 2021 through the lens of a traditional business cycle framework. But we believe this playbook doesn’t apply: in the same way that the “stoppage” was different from a “recession”, the “restart” is different from a “recovery.”

The greatest increases in building occupancy came from New York, with a 4.2% rise to 17.3%, and Chicago, with a 3.4% rise to 19.6%. Dallas continues to lead as the most open city on the Barometer at 42.2% open, with Houston closely following at 39.7% open. [Los Angeles metro is currently at 34.1%]

the real return on cash is negative: holding cash implies losing about 1.5% of your purchasing power every year.

very low real interest rates on Treasuries confirm that safety is extremely expensive, Treasuries are a bad deal for investors and a great deal for the federal government

new filings among a subset of business owners who tend to employ other workers reached 1.1 million through mid-September, a 12% increase over the same period last year and the most since 2007

Annual M2 money-supply growth sits at nearly 25%. The household savings rate sits at 18%, a historically high level, even after surging to 33.7% earlier in the pandemic. Credit card debt has steadily declined through the downturn

The Fed made it clear that the singular focus on inflation suppression that dominated the Fed’s thinking from 1978 to 2006 has ended. …Simply put, this news today is bad news for long-duration bonds. …It has been our position that the protective impact of duration to a portfolio has likely been exhausted. The policy announcement appears to have confirmed our position.

Financial markets have been building in the idea that the Fed was going to engage in financial repression. Specifically, the expected policy mix was fixing interest rates across the yield curve, a slow reaction to rising inflation and continued policy accommodation.

This temporary payroll tax holiday could be offset by raising the retirement age for those who choose to participate. For instance, the full retirement age, now 67, could be increased by six months each year until it reaches 78 or retirement, whichever comes first

A significant improvement in what is the lion's share of our economy

According to the McDash Flash Forbearance Tracker, as of June 2, 2020, 4.73 million homeowners – or 8.9% of all mortgages – are in COVID-19 mortgage forbearance plans.

According to the Apple data, driving is back to normal, walking is close to normal, but public transit is still off 64% from the pre-crisis level.

the spread of the Coronavirus has given larger well-capitalized companies, particularly technology companies and big box stores that were allowed to stay open, an advantage over Main Street competitors

On average, the stock market bottoms around 1.5 months before the peak in jobless claims and 4.5 months before the end of the recession.

The financial system has already seen an enormous amount of deleveraging. Commodity trading accounts, volatility funds, risk parity funds and other client-oriented funds, as well as hedge funds, levered ETFs, MLPs — you name it — have delevered in the past two weeks. We are now likely at the lower end of leverage in the financial system. The volatility associated with this deleveraging should start to decrease as we go forward.

There are three factors which are creating those conditions: the coronavirus, government-ordered shutdowns, and a war between Saudi Arabia and Russia over oil production, and they are all inter-connected.

The U.S. manufacturing sector returned to expansion territory in January after five months in contraction, according to the latest reading of the Institute for Supply Management (ISM) Purchasing Managers Index.

As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy

"[W]e believe that carbon-heavy utilities will accelerate their earnings growth by pursuing a 'virtuous cycle': shutting down expensive coal plants and investing in cheap renewables,"

The potential for oil prices disrupting global economic growth is probably as high now as it was in the 1970s.

While higher wages are often a short-term benefit, over time they have the capability to do harm

Household debt burdens have declined sharply since the great recession. The Household debt service ratio was at 13.2% in 2007, and has fallen to a series low of 9.69%. The overall Debt Service Ratio decreased in Q2 2018, and has been mostly moving sideways and is at a series low. The financial obligation ratio (FOR) declined in Q2 and is also near a series low. The DSR for mortgages is also at a series low (since at least 1980). This data suggests aggregate household cash flow has improved

At today's real yield of a mere 0.05%, 5-yr TIPS appear to be priced to the expectation that real GDP growth will average about 2% per year going forward.

Based on the report, new export orders appear to be the biggest drag on manufacturing activity, which suggests that much of the slowdown is due to a reduction in global trade."

Over the past 52 weeks, ICI's money fund asset series has increased 20.1%, with Retail Money Market Funds rising by 22.9% and Institutional Money Market Funds rising by 18.5%

falling PMIs, which are good proxies for the business cycle and have moved in near lockstep with 10-year Treasury yields since the financial crisis, suggest the slowing business cycle (softer domestic backdrop) is the more likely culprit for low U.S. rates

Essentially, the world oil market is now running without any buffer. For most of the history of the oil market, some producers have held production off the market to stabilize prices. This offline capacity has acted to dampen price spikes when events occur. The world mostly relies on the KSA for maintaining this buffer. For the time being, that buffer is missing which means price volatility will rise.

yield curve inversions have preceded every recession since the 1950s. But there is one other variable which has also preceded every recession, and that is a real Fed funds rate that is high and rising (e.g., at least 3-4%). Currently, the real funds rate is barely positive, which means that monetary policy is far from being so tight as to strangle the economy or to starve the market of much-needed liquidity

The yield curve is indicating economic weakness, but I'm not currently on recession watch. ...In general, I find new home sales and housing starts a better leading indicator for recessions than the yield curve. And Year-to-date (through June), new home sales are up 2.2% compared to the same period in 2018. Not indicating a recession!

monetary policy was never meant to stimulate or throttle growth. Growth is not created magically when the Fed lowers interest rates. Monetary policy is meant to keep the supply and demand for money in balance, and thus to deliver low and stable inflation, which in turn is conducive to growth

the current estimate of final sales to private domestic purchasers is a healthier 3% [GDP growth]

inflation-adjusted value of household net worth, which has also reached an all-time high. It's important to note that this measure of financial well-being has been increasing by about 3.6% per year for many decades. Recent gains are almost exactly in line with historical experience. Nothing unusual or unsustainable about this

consumers increasingly curate their own entertainment experiences, gaming is coming to the forefront. The compelling shifts among millennial consumers (which now includes people up to age 35 years old) reached an inflection point, with video gaming subscriptions edging ahead of Pay TV subscriptions—53 percent versus 51 percent

One trend that is likely to emerge is the creation of trade blocs, where local trade will be dominated by regional hegemons with little trade activity between blocs due to impediments. This would mean a world of higher inflation and lower profitability, but it will likely also be more equal and there will be less “creative destruction.”

Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy.

Robust and steady GDP growth has been reflected in growing global demand for commodities, energy, and real goods and services, which in turn has translated into robust and steadily growing corporate profits

the economy's fundamentals remain healthy ...Thus, it pays to remain optimistic

In a sign of great progress, over 120 million people worldwide gained access to electricity in 2017.

Gasoline and diesel displacement by electric vehicles will grow by 96,000 barrels a day this year ... That brings the lost cumulative demand since 2011 at 352,000 barrels a day ...By comparison, total global oil demand growth over the same period rose 12 million barrels a day to 100.6 million, according to the International Energy Agency.

The United States has become the world’s largest crude producer and broke the country’s previous annual record set in 1970

Americans' optimism about their personal finances has climbed to levels not seen in more than 16 years, with 69% now saying they expect to be financially better off "at this time next year."

Wages represent the greatest component of income for most Americans, and higher wages can be good for consumption and the economy broadly as individuals have more dollars to spend. However, rising wages can also put pressure on corporate margins if productivity doesn’t keep pace, ultimately leading to inflationary pressures with companies having to raise prices to maintain profitability.

industrial production in the US reached an all-time high last month, and it has made impressive strides since late 2016

"While the recent decline is of bear market magnitude, I think it is more akin to the three biggest corrections we’ve lived through since the market bottomed in 2009."

At present, 11 of the 12 ClearBridge Recession Risk Dashboard indicators we track remain [in Expansion]

While it's hard to argue with facts, an almost-flat curve is not the same as a flat or inverted curve. The latter occur only when the market looks into the future and sees good evidence that the Fed will no longer tighten policy and will very likely ease policy at some point. We're not there yet

Overall, in the past year exports are up 7.2%, while imports are up 9.8%, signaling very healthy gains in the overall volume of international trade and easily outstripping the pace of nominal GDP growth.

[When looking at the] index of housing affordability, you find that it is still the case that the average family has an income that is more than sufficient to qualify for mortgage big enough to buy a median-priced home using conventional financing. Prices are up and mortgage rates are up, but so are incomes, and the economy is in pretty good shape.

The economy is accelerating, and the Fed is chasing both rising real growth and rising inflation. Even if the Fed lifts rates to 3.5% by the end of 2019 (which would require six more rate hikes at the current pace), the Fed will still not be tight relative to nominal GDP growth. So, the odds of a recession in the next few years remain very low even if we get a technical inversion.

Capital spending trends appear quite healthy and should be an important driver for equities in the second half of the year.

business fixed investment – equipment, structures, and intellectual property – was revised to a 9.2% annualized growth rate from a prior estimate of 6.1%.

Truck shipment growth has been increasing on a year-over-year (YOY) basis, with YOY improvement of 5% or more in each of the last seven months. This pickup in freight activity is consistent with an expanding economy.

As in recent years, gains have come mostly from financial assets (up $27.6 trillion since late 2007) plus real estate (up $2.8 trillion since the pre-Recession peak of 2006), offset by only a $1 trillion increase in debt.

In this edition of Reading the World, we will examine White House staff turnover, U.S. dollar as the world reserve currency, and the Joint Comprehensive Plan of Action (JCPOA) regarding Iran.

We expect the high end of the [residential real estate] market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations, but there will be offsets for these buyers due to the lower rates - and these buyers will likely benefit from the corporate tax cuts. Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT).

A contrary assessment to the Net Neutrality repeal.

For 2018, the bottom-up EPS estimate (which reflects an aggregation of the median EPS estimates for all of the companies in the index) for the S&P 500 is $146.17.

Rising rates won’t kill the recovery or bull market any time in the near future.

U.S. stocks are not cheap. Total U.S. stock market capitalization as a percentage of gross domestic product (market cap to GDP) currently stands at 142 percent.

Global trade volume is growing faster than industrial production, while shipping volumes are strengthening.