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Economic & Investment Blog

Unprecedented Level of Aid Stands to Boost the Economy After Recovery

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
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We May See Investment-Grade Corporates Become the Signaling Device

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.
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Fed Released the Minutes of its July 28-29 Meeting

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.
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A Payroll Tax Holiday Will Put the U.S. Back to Work

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
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U.S. Service Sector Activity Shows Substantial Turnaround

A significant improvement in what is the lion's share of our economy
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Six High Frequency Indicators for the Eventual Recovery

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.
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How Can Equities be Doing so Well?

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
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How will stocks rebound from COVID-19?

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.
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Encouraging Signs Are on the Horizon

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.
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Recession + Deflation = Real Panic

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.
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Activity Rebounds

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.
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The Fundamental Strength and Resilience of the U.S. Economy

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
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US power generators set for another big year in coal plant closures in 2020

"[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,"
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Oil is the Key Risk

The potential for oil prices disrupting global economic growth is probably as high now as it was in the 1970s.
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Growing Wage Pressure from Lower-Paying Jobs

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

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
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The Weakest Recovery and Longest Expansion

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.
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Data released for September suggests the economy is still firmly in expansion

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."
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Assets of Retail Money Market Funds Increased to $1.32 trillion

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%
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Conflicting Signals from Fixed Income Markets

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
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Houthis have claimed a massive attack on Saudi Arabia’s oil infrastructure

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.
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Risk Aversion is the Big Story, Not the Yield Curve

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
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Don't Freak Out about the Yield Curve

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!
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FOMC decided to reduce its short-term interest rate target by 25 bps

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
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Split opinions on the Fed about the need for a rate cut

the current estimate of final sales to private domestic purchasers is a healthier 3% [GDP growth]
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At Least Households Are In Good Shape

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
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The Dizzying Effect of Trade Wars

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.”
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Trade War Hysterics

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.
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There hasn't been a single year this decade in which global growth fell below 3%

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
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10 Key Charts Say There's Little To Worry About

the economy's fundamentals remain healthy ...Thus, it pays to remain optimistic
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Population Without Access to Electricity Falls Below Billon

In a sign of great progress, over 120 million people worldwide gained access to electricity in 2017.
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How Much Oil Is Displaced by Electric Vehicles? Not Much, So Far

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.
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The United States has Become the World’s Largest Crude Producer

The United States has become the world’s largest crude producer and broke the country’s previous annual record set in 1970
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Americans' Confidence in Their Finances Keeps Growing

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."
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Inflationary Pressures Building

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.
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Key Economic Indicators are Mostly Positive

industrial production in the US reached an all-time high last month, and it has made impressive strides since late 2016
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Bull Markets Die from Excessive Optimism – They Don’t Worry Themselves to Death

"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."
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Recession Indicators Update

At present, 11 of the 12 ClearBridge Recession Risk Dashboard indicators we track remain [in Expansion]
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Yield Curve is NOT Forecasting a Recession

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
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The Trade Deficit in Goods and Services

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.
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Housing Market Update: Slowing but Not Collapsing

[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.
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Yield Spread: 2-year and 10-year Treasury Note spread has narrowed

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.
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Economic Fundamentals Remain Robust: Despite the Tariffs

Capital spending trends appear quite healthy and should be an important driver for equities in the second half of the year.
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Business Fixed Investment - 1st Quarter GDP

business fixed investment – equipment, structures, and intellectual property – was revised to a 9.2% annualized growth rate from a prior estimate of 6.1%.
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Likelihood of a Recession in the next 12 months Remains Low

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.
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Household Net Worth Hits $100 Trillion

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.
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White House staff turnover, dollar as world reserve currency, and the JCPOA

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.
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Will the New Tax Law impact Home Sales, Inventory, and Price Growth

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).
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Net Neutrality Repeal Won’t Lead to Internet Apocalypse

A contrary assessment to the Net Neutrality repeal.
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Will S&P 500 Report Record-Level EPS in 2018?

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.
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Don’t Fear Higher Interest Rates

Rising rates won’t kill the recovery or bull market any time in the near future.
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Relationship between Market Cap to GDP Ratios and Subsequent 10-year Returns

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.
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Snapshot: A Boatload of Good News for Global Trade

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