Consumer Expectations on Spending and Home Prices Show Improvement
The Federal Reserve Bank of New York’s Center for Microeconomic Data released the January 2021 Survey of Consumer Expectations, which shows that households’ year-ahead spending growth expectations rose to 4.2%, the highest level recorded in more than 5 years.
- Median household spending growth expectations rose by 0.8 percentage points (the second largest month to month increase in the history of the series) to 4.2% (the highest level since June 2015) in January. This sharp increase was driven primarily by respondents below the age of 40.
- The median expectation regarding a year-ahead change in taxes (at current income level) increased for the third consecutive month to 4.4% in January from 3.3% in December. This is the highest level since September 2013.
- Respondents were also slightly more optimistic about their households’ financial situations in the year ahead with more respondents expecting their financial situation to improve a year from now.
In contrast, earnings growth expectations have remained flat for the sixth consecutive month. The median expected growth in household income increased by 0.2 percentage points to 2.4% in January, the highest level since February of last year.
Labor market expectations continued to improve with higher expectations about job security and job finding. Home price expectations rose again in January to reach their highest level since May 2014. Median inflation expectations were flat at both the short and medium-term horizons, while inflation uncertainty and inflation disagreement remain elevated compared to pre-COVID-19.
This indicates that consumers are currently prepared to dip into their high savings.
Sending money directly to households has been one of the main components of U.S. stimulus packages in the last three recessions. How effective is the most recent program in terms of stimulating consumption? We provide some of the first estimates for transfers to U.S. households put in place under the CARES Act. We find evidence that is broadly consistent with the 2001 and 2008 experiences, albeit with somewhat lower marginal propensities to consume: U.S. households only spent around 40 percent of their stimulus payments but there is significant heterogeneity in terms of how different individuals respond. Many spent their entire stimulus payment, and just as many saved their entire check or used it to pay off debt.
Why were the stimulus payments not more successful in spurring consumer spending? One possibility may be that it reflects the presence of the pandemic that caused the need for spending in the first place. Few restaurants are operating at full capacity, many bars and shopping outlets are closed, recreational activities are curtailed, and travel options are limited, so there is less scope for spending on the part of consumers. Furthermore, the closing of offices and widespread lockdowns reduce the need for transportation, which may help explain why so little spending went to larger durable goods like cars. To the extent that the pandemic will ultimately end, it suggests that future stimulus payments to households may be more effective in future crises.
Another, less optimistic, interpretation is that the stimulus payments were less effective because they were larger than previous ones. As the size of one-time transfers to households rises, diminishing returns induces individuals to consume smaller fractions of their temporarily higher income. This suggests that there is a bound on how much stimulus can be generated through direct transfers to households. In the face of large crises, government may want to consider a broad range of policies targeting aggregate demand, with direct transfers being only a part of the fiscal policy response. For example, direct government purchases of goods and services can provide an effective stimulus, since they translate into purchases in a one-for-one manner. Another strategy can be to increase transfers to cash-strapped local and state governments to help prevent them from cutting the services that they provide in the midst of crisis, much as was done in the American Recovery and Reinvestment Act of 2009.
Covid-19 Mortgage Relief Ends Soon for Millions of Homeowners Many people who are struggling financially during the pandemic won’t be able to resume paying their monthly mortgage bills when yearlong forbearance plans run out.
More than half of 2.7 million active forbearance plans are set to end for good in March, April, May or June, according to mortgage-data firm Black Knight Inc. (…)
The federal Cares Act passed last March allowed borrowers to postpone payments on federally backed mortgages for as long as 12 months. About 75% of U.S. mortgages are guaranteed or insured by the U.S. government, according to Black Knight. Close to one in 10 homeowners signed up for forbearance at the peak of the program’s use last June.
Like other consumer-relief programs crafted during the pandemic’s early, frenzied days—lenders also let struggling borrowers skip payments on credit cards and auto loans, and the government paused payments on federal student loans—mortgage forbearance was envisioned as a short-term fix, a way to buy time for the economy to recover and consumers to get back on their feet. (…)
Lenders are supposed to work with borrowers when forbearance plans expire, and there are rules to constrain them from making borrowers pay back all their missed mortgage payments at once if the loan is government-backed. Lenders also can offer modifications such as lower interest rates or longer terms to lower the monthly bill—but borrowers typically need to be employed to qualify for a loan modification.
(…) there is a significant difference compared with the 2007-2009 recession. Back then, lenders foreclosed on millions of borrowers, many of whom owed more than their homes were worth because of plummeting home prices. This time, home prices are rising across the country, so if homeowners have to sell, they can likely make a profit. (…)
The Biden administration said last week that it plans to gather representatives from the housing agencies in the coming days to develop a plan around the expiration of forbearance, according to a White House spokeswoman. (…)
Job Openings Pick Up in Pandemic-Resilient Industries Help-wanted ads returned to pre-pandemic levels last month, as businesses seek to fill jobs, according to job-search site Indeed.
(…) 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.
(…) higher-wage postings in technology and finance have recently picked up. (…)
New York City Indoor Dining to Resume Friday Restaurants in the city can restart indoor dining with limited capacity on Friday, two days earlier than planned, and a program to provide live arts programming will begin later this month, said New York Gov. Andrew Cuomo.
Covid-19’s Hit to State, Local Revenues Smaller Than Many Feared The coronavirus pandemic hasn’t decimated state and local government revenues, as many feared early last year. But costs are rising, opening budget holes that must be filled.
(…) Policy analysts estimate state and local revenue losses due to the coronavirus pandemic will total about $300 billion through fiscal year 2022, though that doesn’t include rising expenses.
State and local governments employ 18.6 million people, who provide services from collecting trash to teaching children. Democrats in Congress are pushing for $360 billion in aid to cities and states as part of President Biden’s $1.9 trillion coronavirus relief bill, while many Republicans argue that would only encourage fiscal profligacy. (…)
In the end, state revenues fell 1.6% in fiscal year 2020 and were 3.4% lower than projected before the pandemic, according to the National Association of State Budget Officers. While states expect revenues to decline 4.4% in fiscal 2021, which ends on June 30 for most, 18 states are seeing revenues come in above forecast. (…)
The left-leaning Center on Budget and Policy Priorities estimates the state and local revenue shortfall will total about $300 billion through 2022, as does Louise Sheiner, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Moody’s Analytics puts the figure at about $330 billion, well below the $500 billion it estimated last spring.
State and local governments also have about $75 billion in rainy day funds to offset budget shortfalls. But analysts said it’s unclear how much expenses have risen due to the pandemic, making it difficult to estimate how much they may need. (…)
Small Business Optimism Drops Further Below Historical Index Average in January
- The CBO’s latest report finds that a $15 minimum wage would cost 1.4 million jobs but would increase income overall and pull 900,000 people out of poverty. (Bloomberg)
U.S. Budget Deficit Widened Sharply in January, CBO Says The federal budget deficit was $348 billion in the same period last year, the Congressional Budget Office estimated.
The monthly deficit widened to an estimated $165 billion in January, compared with $33 billion in January 2020 and $144 billion in December, the nonpartisan CBO estimated on Monday.
For the first four months of the 2021 fiscal year—which started Oct. 1—the federal budget deficit rose 90% to $738 billion, the CBO added. (…)
- Goldman now thinks that additional COVID-relief funding is likely to be higher than the $1.1 trillion (5% of GDP) previously assumed, and is raising of assumption for additional fiscal measures to $1.5 trillion (6.8% of GDP). “In the more likely event that political disagreements arise that must be worked out, enactment in mid- to late March looks likely.”
- “we now expect to satisfy the FOMC’s thresholds for liftoff a couple quarters earlier, and we have brought forward our forecast for the first hike in the funds rate from the second half of 2024 to the first half. We expect the FOMC to start tapering its asset purchases in early 2022.”
Honda and Nissan to sell a quarter of a million fewer cars because of chip shortage Honda cut its sales target by 100,000 vehicles, or 2.2%, on Tuesday to 4.5 million cars, while Nissan lowered its target by 150,000 vehicles, or 3.6%, to 4.015 million units as a chips shortage forced both companies to curb output.
U.S. Junk-Bond Yields Drop Below 4% for the First Time Ever
(…) Yield-hungry investors have been gobbling up junk bonds as an alternative to the meager income offered in less-risky bond markets. Demand for the debt has outweighed supply by so much that some money managers are even calling companies to press them to borrow instead of waiting for deals to come their way. A majority of new issues, even those rated in the riskiest CCC tier of junk, have been hugely oversubscribed.
The lower yields should encourage more speculative-grade companies to tap the market after raising more than $7 billion last week. January was a record month for sales with $52 billion priced, and year-to-date volume stands at about $60 billion.
Buyers have been snapping up CCC graded issues as yields for that slice of high yield also decline. They dropped to 6.21% on Monday, also a record low, and have outperformed the rest of the market for three consecutive months, according to data compiled by Bloomberg. Notes rates in the single-B tier yield an average 4.30%, while those in the BB range yield 3.05%, the data show.
Issuance conditions have been so conducive that some of the riskiest types of transactions come to market, such as bonds that are used to fund dividends to a company’s owners and so-called pay-in-kind bonds that allow a borrower to pay interest with more debt. (…)
Stanley Druckenmiller in a recent interview:
(…) “The juxtaposition of the various policy responses is somewhat breathtaking. Since 2018, M2 in the US has grown 25% more than nominal GDP; a 25% increase in liquidity. In China M2 to nominal GDP is where it was 3 years ago. So China hasn’t borrowed anything from their future and we’ve had a massive liquidity input and frankly very little investment. It’s primarily been transfer payments and Fed Stimulus. We’ve done a horrific job with the virus. The Chinese and Asia in general they’ve pretty much defeat the virus.” (…)
And it’s possible in fact probable that all this stimulus will be in place just when we unleash the biggest increase in pent up demand globally since the 1920s which could make the world extremely different than it looks today.”
(…) the “overriding theme is inflation relative to what policymakers think. But because of the policymaker response which could be very varied based on the vaccine, I’ve found it’s better to have a matrix. So basically to play reflation I have a short treasury position primarily at the long end.”
He also has a large position in commodities: “the longer the Fed tries to keep rates suppressed the more I win on commodities; the quicker they respond the quicker I might have a bigger problem with commodities.”
(…) “because of the juxtaposition of the US policy response versus Asia, I have a very, very short dollar position.”
(…) “if we get 4-5% inflation in the US a few years out and bond yields rise precipitously that’s very negative historically for growth stocks relative to other stocks. On the other hand the comparisons with 2000 are ridiculous. The reason they are ridiculous is we had a double whammy back then of not only the raging mania of overvaluation but also earnings were about to end, because those companies that were growing rapidly then were all about building the Internet itself”, and that was done so there was no way to generate earnings.
Looking to today, Druckenmiller says that “the combination of valuation and challenged bond markets could certainly make growth stocks in a very, very challenged environment the next 5 years relative to what they’ve been.”
“Having said that, on the cloud we are in the 3rd-4th inning. COVID-19 had us jump from the 1st to 3rd-4th inning but we’re not in the 9th inning and if anything every company that I talk to is speeding up their transition because they are going to competitively die if they stay behind within digital transformation.”
“Within tech itself AMZN and MSFT have been big underperformers in the last 2-3 months. It’s like that market has rotated into 40x sales tech companies or into radioactive reopening stocks. And if you look at Amazons, Microsofts and Googles of the world, they are not overvalued, they are GARP names that are currently out of favor. And if the Fed continues to push the envelope in terms of friendliness I’m not worried about those stocks in fact they could keep going.”
(…) he owns China, Japan and Korea, “They’ve had a very good start to the year” and considering how much the US borrowed from the future, he thinks “Asia is the big, big winner coming out of COVID-19.”
The same is true within tech itself, where Intel has thrown in the towel “so Asia owns foundry, memory, they are ahead in robotics.I think the next 5 years Asia looks a lot better than the US because at some point we have to pay back in terms of productivity, in terms of higher wages, in terms of lower dollar for all these transfer payments we’ve made the last nine months and we will continue to make.” (…)
Number of registered newborns in China drops 15% in 2020 Steep decline highlights demographic challenges facing the country
TESLA
Elon Musk Discusses Build Quality Problems With Engineer Who Compared Model 3 To ‘A Kia In The ’90s’
I am a fan of Elon Musk, a fan of Tesla and a fan of Sandy Munro. Good interview:
Elon Musk is taking accountability for Tesla’s manufacturing failures. He recently sat down with one of Tesla’s biggest build-quality critics, manufacturing expert Sandy Munro, founder of the benchmarking consultancy Munro & Associates. Here’s what Musk had to say about large panel gaps and poorly designed body structures in what has to be one of the most epic technical interviews I’ve seen in a while.
What happens when you take a manufacturing expert with decades of automotive engineering experience and put him in a room with a science nerd like Elon Musk? Magic. That’s what.
Bitcoin powers towards $50K as Tesla takes it mainstream
Monday, it leapt 20% after Tesla announced it had a $1.5 billion investment and that it would eventually take the cryptocurrency as payment for its cars. That was its largest daily rise in more than three years. (…)
In the ongoing digital wave, central bankers and regulators, particularly in China, are also starting to embrace issuing their own digital currencies for everyday use, in a major break from the conventional workings of global finance.
Beijing will issue 10 million yuan ($1.55 million) worth of digital currency to residents that can be used during the Lunar New Year holiday starting on Thursday, domestic media reported.
However, Vitor Constancio, former vice-president of the European Central Bank, wrote on Twitter that policymakers should focus on regulating cryptocurrencies and only develop digital currencies if they will help banks in their role of enabling credit creation.
“Bitcoin prices should appear in ‘commodities’ lists, not in forex columns,” he said. (…)
Druckenmiller:
(…) when asked if bitcoin may be the “mother of all asset bubbles or something genuine” Druckenmiller said “maybe both.” And while he admits he does not know the future, he knows how we got here, and his take is one we completely agree with (and one which Neel Kashkari should read very closely): Bitcoin “wouldn’t do what it’s doing without Central Bank behavior.”
While Druck was skeptical of XBT 3-4 years ago when the crypto first broke out out – “why would anybody buy this thing” – he now admits that bulls have done an unbelievable marketing job. Bitcoin has been around 13 years and younger millennials look at bitcoin the way he looks at Gold. That said, Druck has doubts whether Bitcoin will ever be anything other than a store of value, as Bitcoin has problems as a currency because it uses a lot of energy, it’s volatile and it’s got other problems. But that doesn’t matter because right now it’s an asset class, “my view of it has been way overblown in the press; I do own some of it, it’s gone up a lot since I bought it.” In the end he doesn’t believe in it. He doesn’t not believe in it. He simply admits honestly that he “doesn’t know.”