Chicago Fed National Activity Index Improves During December
The Federal Reserve Bank of Chicago’s National Activity Index increased to 0.52 during December from November’s 0.31, revised from 0.27. Despite the increase, the index remained near recent lows.
The three-month moving average, which smoothes out the m/m volatility in the index, rose last month to 0.44 from 0.13 in November. During the last 20 years, there has been a 91% correlation between the Chicago Fed Index and quarterly growth in real GDP.
Only the Production & Income component of the index rose last month with an increase to 0.44, the highest level since July. The Employment, Unemployment & Income series eased to 0.13, its lowest level in six months. The Sales, Orders & Inventories also slipped to 0.05 and matched its September low. At -0.09, the Personal Consumption & Housing series remained in negative territory for the second straight month. The diffusion index, which measures the breadth of movement in the components, eased to 0.54 from 0.55 as 53 of the 85 component series deteriorated.
THE BIG DEBATE (continued)
Saved Stimulus Checks Expected to Help Spur Recovery Many households have boosted their savings during the pandemic, and pent-up demand for services like travel and dining are expected to propel economic growth once vaccines become widespread.
(…) Americans saved $1.4 trillion in the first three quarters of 2020, or about twice as much as in the same period of the prior year, according to analysis by Berenberg Economics. That amount is equivalent to nearly 10% of 2019 household spending, estimates Berenberg’s chief economist, Holger Schmieding. (…)
An analysis by the Federal Reserve Bank of New York found that consumers socked away more than a third of the first stimulus checks, which were sent to households as part of the $2 trillion Cares Act enacted last March. Just under a third of the stimulus payment, 29%, got spent, while 36% was saved and 35% used to pay down debt. The survey also found that consumers expected to spend an even smaller share of future stimulus payments, and use a higher share to pay down debts. (…)
With nonessential businesses closed or operating at limited capacity in many regions, consumers haven’t been able to spend their money as freely as before—and many have been saving it instead.
The personal-saving rate, the portion of after-tax income that U.S. consumers sock away, was 12.9% in November, according to the Commerce Department. That compares with a saving rate of 7.5% in November 2019, before the pandemic hit. (…)
Consumers with less than $100 in their bank accounts spent over 40% of their stimulus payments within the first month, while individuals with more than $4,000 in their accounts barely spent a dime, according to a recent study [see below] published by the National Bureau of Economic Research. (…)
Income, Liquidity, and the Consumption Response to the 2020 Economic Stimulus Payments
An empirical analysis confirming common sense expectations:
(…) Households respond rapidly to the receipt of stimulus payments, with spending increasing by $0.25-$0.40 per dollar of stimulus during the first weeks. Households with lower incomes, greater income drops, and lower levels of liquidity display stronger responses highlighting the importance of targeting. Liquidity plays the most important role, with no significant spending response for households with large checking account balances. Households that expect employment losses and benefit cuts display weaker responses to the stimulus. Relative to the effects of previous economic stimulus programs in 2001 and 2008, we see faster effects, smaller increases in durables spending, larger increases in spending on food, and substantial increases in payments like rents, mortgages, and credit cards reflecting a short-term debt overhang.
We formally show that these differences can make direct payments less effective in stimulating aggregate consumption. (…) Our results suggest that the effects of stimulus are much larger when targeted to households with low levels of liquidity.
Right on cue: Biden signals willingness to compromise on $1.9tn stimulus President says he is open to lowering income threshold for $1,400 government cheques
The known unknown remains what happens with this saved cash upon normalization:
From the Federal Reserve Bank of New York (my emphasis):
- The proportion of households who made a large purchase in the past four months of electronics and vehicles increased in December 2020, approaching December 2019 levels. The share reporting purchases of home appliances, retreated slightly from its series high of 14.5% in August 2020, while the proportion reporting spending on vacations dropped to 8.4%, a new series low.
- Median expected growth in household spending over the next year increased sharply to 3.0% in December 2020 from 2.2% in August 2020 and 2.4% in December 2019. The increase was broad based across education and income groups.
- Differentiating spending on essential and non-essential items, the median year-ahead expected change in household spending on essential items, such as daily living expenses, over the next year increased to 4.1% in December 2020 from 3.5% in August and 3.0% in December 2019. The median expected change in spending on non-essential items, such as hobbies, leisure, or vacation, over the next year also increased to 1.6%, from 1.0% in August and 1.4% in December 2019. Both December 2020 readings are new series highs.
- The average likelihood of making a large purchase in the next four months increased for furniture, home repairs, a house or apartment, vacations, and vehicles compared to August. Relative to December 2019 readings, the average likelihood of making a large furniture, home repair, or home purchase remained elevated, while that of vacations remained considerably depressed, recording at 13.0% in December 2020 compared to 25.5% in December 2019.
- Reported expected spending responses to an unexpected 10% increase in income shows an average 36.3% would be used by households to pay down debt (down from 36.5% in December 2019), 44.5% would be saved or invested (46.4% in prior year), and 19.3% would be spent or donated (17.1% in prior year).
I suspect respondents were still influenced by current uncertainties when assessing their potential year-ahead behavior. Still, expected spending growth rose and dispersion skewed on the upside. Spending growth rose the most among higher income respondents and the least among middle income people.
U.S. Hospitalizations Are Lowest Since Dec. 13
New York to Ease Some Restrictions as Cases Decline
Rent Collection Is Down, and Apartment Owners Feel the Squeeze Multifamily properties were initially a bright spot during Covid-19, but banks now see more apartment debt as high risk
(…) Ratings companies have downgraded bonds tied to senior-housing and student-housing properties, and some co-living companies, where tenants lease rooms in shared apartments, are also struggling. (…)
But the traditional rental-apartment business is showing cracks, too. During the pandemic, the share of total apartment debt that banks place into their highest-risk categories has ballooned to 16.9% from 4.6%, according to a December report from Trepp LLC, a real-estate data firm that compiled risk ratings from more than a dozen major banks. (…)
Developers of new apartment buildings look even more vulnerable right now, having to fill units when many renters left large cities to buy homes or find cheaper apartments. (…)
Still, many in the real-estate industry believe that apartment owners are much better positioned to ride out this recession than they were the last one. That is in large part due to their relatively low levels of debt, said Kris Mikkelsen, chief operating officer of brokerage Walker & Dunlop’s investment sales division. (…)
The test bed on the Big Debate is China:
SALES MANAGERS INDEX FOR CHINA: JANUARY DATA SHOWS THE CHINESE ECONOMY CONTINUES TO GROW RAPIDLY OUT OF THE COVID INDUCED RECESSION
Business Confidence continues to improve, and is now at an almost 7 year high in the Manufacturing sector. Business Confidence in the Service sector is some way behind Manufacturing, but still on a rising trend and at a level indicating the problems of Covid are being left behind.
The Sales Growth Index backs up the growing buoyancy of business confidence, with data relating to actual revenues as opposed to beliefs about the future. Both Manufacturing and Services Indexes show very positive numbers well above the 50 no growth line.
Unlike in the USA, where price movements are starting to look suspiciously like turning into renewed inflation, prices appear more under control in China, and indeed in the manufacturing sector are actually falling as production is ramped up.
However, the Staffing Levels Index does not suggest that recruitment levels are back to pre-Covid levels. As in the United Sates, it appears that the experience of Covid has left many companies still very cautious and as yet reluctant to recruit.
Note the chart is for Services which remains “some way behind Manufacturing”:
MOB ATTACKS
GameStop Stock Jumps to New Record Videogame retailer has been at the center of a tussle between Reddit-driven day traders and hedge fund short sellers
(…) About 175.5 million shares changed hands Monday, the second-largest one-day total on record, according to Dow Jones Market Data. That compares with the 30-day average of 29.8 million shares.
The rally has been fueled by investors encouraging each other on social media to pile into GameStop shares and options. The buying pressure has led money managers to switch out of substantial bets that the stock would fall, investors and analysts said. This resulted in a short squeeze, in which rising prices prompt investors to buy back shares they had sold short to cut their losses, pushing the stock higher still.
The company has become a high-profile battleground between bullish chatroom-driven day traders, especially on online platform Reddit, and hedge fund short sellers, who have been betting against the stock. (…)
Some Reddit users egged others on when GameStop shares subsequently went into reverse, using an emoji to describe the stock as a rocket to the moon. “Hold the line! No room for doubters,” wrote one. Another bemoaned losses: “I’m still new to this and bought to double my holdings at $137. Please tell me I’m OK.” (…)
Other stocks also vaulted higher without any apparent catalyst Monday, before sliding back. Struggling home-goods retailer Bed Bath & Beyond Inc., BBBY 1.56% whose in-store sales have slumped during the pandemic, surged as much as 58% at one point but ended the session up just 1.6% at $30.68. Software and services firm BlackBerry Ltd. BB 28.42% advanced 28%.
Adding to the frenzy, options contracts tied to GameStop shares have been changing hands at a record pace, a sign investors are trying to position for further gains. When the stock leapt 51% Friday, options activity tied to the company jumped to the highest level ever.
The purchase of bullish call options can feed into gains for underlying stocks, because dealers that sell the contracts may seek to hedge against rising prices by buying the shares. (…)
GameStop began the year as one of the most-shorted companies listed on the New York Stock Exchange and Nasdaq, according to Dow Jones data. As of Friday, short interest in the company’s shares outstanding stood at 102%, according to IHS Markit data tracked by S&P Global Market Intelligence. (…)
GameStop was again the subject of discussion on Reddit on Monday. “Looking at the 5-year GME [GameStop] chart is just insane,” wrote one user. Many tagged their posts YOLO, an acronym for “you only live once.” (…)
What is insane anyway, nowadays? Selling short, already a rather dangerous, if not insane, move, more than the float is insane. If that chart was not insane a few weeks ago, it now is.
More on Reddit’s mob attack on Melvin Capital:
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Buried in Reddit, the Seeds of Melvin Capital’s Crisis Retail investors plotted online to take down Gabriel Plotkin’s hedge fund. Now Citadel and Point72 have thrown it a lifeline.
And Zero Hedge adds more savory stuff:
Last Friday, in the aftermath of the Gamespot’s historic eruption which sent the stock from $40 to the mid-70s (before it doubled again on Monday rising as high as $158), we had a feeling which way the wind was blowing and laid out all the Russell 3000 stocks that had the highest Short Interest (50%> of float).
Also on Friday, we put together an equal weighted basket of the companies listed above which on Monday… well… exploded, in light with our expectations that WallStreetBets/Robinhood traders would go down the list and systematically ramp up each and every one of these most shorted names, sending them in the stratosphere.
That’s exactly what happened.
(…) What is most remarkable, however, is that a quick look at Melvin’s put positions – which had attracted the ire of WallStreetBets investors who were long the names that Plotkin was short – shows that most of them were amazingly the same as the most shorted names shown above! One wonders how many idea dinners Plotkin attended to pitch his positions to his hapless peers who followed him right into the Big Short Squeeze abyss, and how many other hedge funds had been caught in the conflagration.
(…) while the negative hit from Plotkin’s shorts and/or puts may have been neutralized, especially with the help of the nearly $3 billion in excess funding from Steve Cohen and Ken Griffin, which removes his incentive to cover shorts at all costs, earlier today we learned that as the hobbled hedge fund cralwed through the finish line, suffering massive P&L losses, countless other hedge funds took its place shorting Gamestop et al. In fact, GME’s short interest as a percent of float declined from 142% two weeks ago to… 139% today. (…)
BTW, there are 2.1 million users on WallStreetBets.
More insane stuff from Brent X. Donnelly, senior risk-taker and FX market maker at HSBC New York, via Epsilon Theory:
And this doctor, a BA and CFA!!!
Yep! It must be!
Retail order flows have reached 20% of the U.S. stock market’s total, according to UBS research, twice what they were in 2010. Off-exchange trading, which includes but isn’t limited to retail, is up to a record 48% of the total, compared with 2019 levels of more like 35%. That is nothing though, relative to the over 80% that Chinese retail traders account for, according to recent research by U.S. and China-based academics. (WSJ)
This is from WallStreetBets moderator Bawse1 via Bloomberg:
“The traditional Wall Street view is that markets are driven by some tie to fundamental value,” said Hoffstein. “What we’re seeing is an influx of speculative retail traders who don’t have any philosophy about valuation.” He quotes a phrase from Bloomberg’s Tracy Alloway: “Flows before pros.” The market will be driven by a flow of capital rather than fundamentals. …
“I think the subreddit brings a new factor into stocks that wasn’t as prevalent as before,” says Bawse1. “It’s called hype.”
Reminds me of something…
Also:
China Asset-Bubble Warning Threatens Stock Frenzy in Hong Kong
The People’s Bank of China drained about $12 billion via open-market operations on Tuesday. The decision was unusual in the weeks before the Lunar New Year holiday, which in 2021 falls in mid-February, because residents typically need more cash to pay for seasonal travel and gifts. It also went against recent reports in Chinese newspapers that liquidity wouldn’t be tightened before the holidays.
While Tuesday’s withdrawal was small in isolation, it added to signs that Beijing is growing wary of how cheap and plentiful liquidity has stoked excess in markets. PBOC adviser Ma Jun told local media that risks of asset bubbles — such as in the stock or property market — will remain if China doesn’t shift its focus toward job growth and inflation management instead. (…)
WILL THIS GET INSANE?
China sent an unusually large force consisting of at least 15 fighter jets, anti-submarine aircraft and reconnaissance planes into Taiwan’s air defense identification zone on Sunday. A day earlier, China sent at least six bombers flanked by four fighter jets into airspace between mainland Taiwan and the Taiwan-controlled Pratas Islands in the South China Sea. The U.S., meanwhile, expressed its “rock-solid” commitment to the self-ruled island and sent a U.S. carrier group to the South China Sea on Sunday. (Geopolitical Futures)
As a reminder:
The world’s principal supplier of semiconductors is now Taiwan.
Will China allow the world’s principal supplier of semiconductors to remain outside its direct political control?
Can the USA allow the world’s principal supplier of semiconductors to come under the direct political control of China? Intel just ordered 6nm chips from TSMC for next year and its leading-edge capacity is now fully-booked for the first half of next year.