The Risks of Too Much ‘Stimulus’ Disposable real per capita income rose 5.5% in 2020, the highest rate since 1984, due largely to transfer payments.
Even among economists who strongly support President Biden, a consensus is growing that the economy emerged from last year set for a robust recovery. That view has been espoused by Bill Clinton’s Treasury Secretary Lawrence Summers and Barack Obama’s former top economist Jason Furman. Both have expressed concern that the economy may overheat. (…)
To be sure, many Americans have taken a serious hit: Commerce Department data show total employee compensation in the second and third quarters of 2020 was down by $215 billion compared with the first quarter. Yet government personal transfers were up $893 billion—four times the compensation lost. In the second quarter alone, real per capita disposable income was up 10.5% compared with the first quarter—25 times as fast as the average quarterly income growth in the prior two years.
This surge in personal income was driven by government stimulus equal to $2.6 trillion, more than all the private wages and salaries paid in the first quarter of 2020. While preliminary fourth-quarter figures show that personal income declined from the previous quarter, real per capita disposable income in 2020 grew 5.5%—the highest growth rate since 1984, the peak of the Reagan recovery. All of this occurred before the $900 billion December stimulus took effect.
So what happened to all that money? As transfer payments surged in the second quarter and the shutdown curtailed personal-consumption expenditures, pent-up purchasing power spiked. Quarterly savings rose by almost $800 billion. The historical savings rate of 7% to 8% of income reached an astonishing 26% in the second quarter. Preliminary data for 2020 show total savings for 2020 was $1.6 trillion higher than in 2019. And that was before the $900 billion stimulus.
President Biden now wants another $1.9 trillion bill, which would further swell potential purchasing power and impede production by more than doubling the minimum wage and paying more than half of unemployed people more than they make working. Assuming this new spending occurs by September, when the vaccination process should be largely complete and the economy largely open, the Biden plan and the December stimulus would add another $311 billion a month in purchasing power into the fall. (…)
Though economic activity remains depressed in the new shutdown and low monetary velocity is now muting its effect, M2 money supply is still up by 28.3% over the past 12 months. And that’s before the Fed monetizes the next wave of stimulus. For comparison, money-supply growth peaked at 13.8% in the high-inflation era of the 1970s. It may sound old-fashioned in the brave new world of “Modern Monetary Theory,” but is there not the need for some caution here?
Despite recent shutdowns, vigor is evident across the economy. Housing sales are at a 14-year high, private business investment is up 25%, the IHS manufacturing index hit a six-year high, and agricultural prices are at an eight-year high. The Fed projects 4.2% growth in 2021, and the International Monetary Fund raised its U.S. growth estimate to 5.1%. Even the negative December jobs report showed underlying strength. While the leisure-and-hospitality industries lost 498,000 jobs as a result of renewed shutdowns, the rest of the economy added 358,000 jobs. (…)
Rising vaccinations may restore consumer demand in leisure and hospitality even before venues are able to ramp up their capacity. Damaged supply chains are causing some of the longest delays in a quarter-century. International shipping challenges are driving up global freight rates.
Policy makers are acting as if running up the national debt and printing money doesn’t matter. Yet all the factors are present to generate rising prices and eventually higher interest rates: excess fiscal stimulus, excessive money-supply growth, impaired domestic production capacity, and impaired international production and transportation capacity. To this volatile mix, Mr. Biden is promising to add regulatory assaults on energy, finance, small businesses, labor and health care.
Perhaps the resulting impairment of economic capacity will prove manageable, but given that such action is occurring at the very moment of excessive fiscal stimulus on top of a tinderbox of monetary expansion, it is putting the nation at risk. Unless members of Congress are willing to spend no matter what the consequence, a new stimulus bill now is probably a risk not worth taking.
Phil Gramm and Mike Solon offer a condensed version of my January 7 post UNDER CONTROL without considering potential offsets such as vaccination delays/problems and enduring consumer anxiety leading to high precautionary savings. Politicians and central bankers have clearly decided to err towards preventing a potential depression at the risk of overinflating economies. Only time will tell how this huge build in money supply will be dispensed by the various economic agents when normality re-emerges.
China is most advanced towards normality but the country did not boost spending enough to provide us with solid indications.
For now, evidence continues to show booming M2 growth and very slow velocity through Q4’20.
Starting mid-November, however, money started to move from savings to checking accounts, perhaps an indication on rising velocity:
After hitting a record high one year ago, the percentage of U.S. adults who say they are now financially better off than they were a year ago has tumbled 24 points to 35%, the lowest reading since 2014. At the same time, 36% say they are worse off and 28% volunteer that their situation is the same. (…)
While U.S. adults’ assessments of their own economic situation are lackluster, they are far from the worst Gallup has recorded in its 45-year trend. Twice in 2008, during the Great Recession, a historical high of 55% of Americans said they were financially worse off than they had been the previous year, one of three times (the other was 54% in 2009) that a majority responded this way. (…)
Although their ratings have declined by double digits, U.S. adults with annual household incomes of $100,000 or more are the most likely group to say they are better off (50%), while those with household incomes under $40,000 are least likely (at 23%) to say the same. (…)
Although Americans’ appraisals of their financial situations are currently bleak, a 63% majority expect they will be better off a year from now, while 22% say they will be worse off, a finding that is consistent with every reading since the first measurement in 1977. That is, even during tough economic times, more Americans have predicted their finances would get better rather than worse in the year ahead. (…)
Given expensive markets and the highly uncertain outlook, this is a good spot to quote from a recent interview with Oaktree’s Howard Marks:
(…) In the United States, the economy is in good shape, and it will be getting stronger. In 2021, the US economy will probably have a very good year. What’s more, since we had that brief recession a year ago, we may not have another recession for several years. The fundamental outlook is good, but the problem is that asset prices are high. They’re high largely because interest rates are so low. So if the economy is in good shape, then the biggest risk is rising interest rates, which would mean declining valuations stemming from higher demanded returns. (…)
Nobody has any discomfort about holding risk assets like stocks. In fact, the opposite is true: The discomfort of the last four months has been with regard to not holding risk assets. Today, everybody thinks the economy is going to get better, we’re going to solve the coronavirus crisis, life will get back to normal around the third quarter, we’re not going to have a recession for several years, interest rates will stay low and companies will succeed. But you have to take into account the fact that when everybody is optimistic, they can get only a little more optimistic. Then again, they can certainly switch to pessimism, in which case markets go down. (…)
Usually, the later stages of a bull market in stocks correspond to the later stages of the economic recovery. But now, we’re really just at the beginning of the recovery. (…)
If interest rates go up, then the value of everything else comes down. Today, people are buying the ten-year Treasury bond to make 1% because cash pays 0%. So what if cash pays 2% in about five years? Nobody is going to buy the ten-year Treasury bond for 1%. Investors are going to demand 3% or 4%. Consequently, if a bond which is now yielding 1% has to yield 3% to satisfy the demands of the marketplace, there is only one way to do that: The price has to go down. (…)
So you don’t have that tailwind anymore, and in the best case, rates could stay where they are, in which case we have a Goldilocks environment. But they can also go up, and then it’s a headwind. (…)
The financial innovation of the past decade was primarily centered around the growth things like Bitcoin and SPACs. None of these imply the use of leverage. What’s more, certainly the financial institutions are less levered and less risky today. In general, the investment world is less leveraged. (…)
The most important decision is how you feel about risk. When people want my advice, I ask them what’s more important: keeping what you have safe, or making a lot more. Of course, they say «both». But you can’t do both, you have to choose. In American football, you have an offense team and a defense team, and they change places. But that’s not investing. Investing is more like European football, where every player has to play both offense and defense. You don’t get to change players very often. So you have to come up with a portfolio which embodies offense and defense in the right balance.
There is no one size fits all approach. I tend to think of it as the speedometer in a car that goes from zero to one hundred. Zero is no risk, full defense: You put all your money in cash or in T-Bills. One hundred is complete risk, straight offense: You’re fully invested in aggressive securities, maybe with leverage. Every person should figure out what their normal position on that speedometer should look like. This decision depends on your age, income, assets, aspirations, dependence, outlook for future income and intestinal strength, etc. How will you feel to live with big markdowns? People should not overlook that last point, their emotional makeup.
(…) if you buy high, the price falls and you sell, then you never get to participate in the subsequent recovery. That’s the cardinal sin: selling out at the bottom. That’s the reason it’s so important to not overestimate your risk tolerance. (…)
Here’s my most important advice: Start young, try to figure out which companies will do best in the long run and hold them. Invest in good, solid companies, not promotional stocks, not the company of the day. That way, you can’t miss accumulating a lot of money. (…)
Emerging markets, for instance. They are a good play because they have a bright future. They were up very well last year, but they are still reasonably priced on the basis of history. One of the big decisions you have to make today is how much China to have in your portfolio, since its economy is very powerful and rapidly growing. People often think: I should have representation in China, so I’m going to put in 2%. But that’s pretty close to zero. So the question is: Do you have the nerve to make it a big piece of your portfolio? That’s the interesting thing about investing. Everything you do to try to be right exposes you to the risk of being wrong. If you stay at 2% for China, and it goes well, you will regret that you didn’t do enough. On the other hand, if you are at 20%, and it does badly, you will shoot yourself. There are no easy answers or sure things. A friend of mine, Richard Oldfield, wrote a good book on investing. The title sums up investing quite well: «Simple, but not easy».
SERVICES PMIs
China: Services activity growth eases notably in January
China’s service sector expanded at a softer rate at the start of 2021,with companies signalling the weakest increase in business activity for nine months. Concurrently, the total amount of new work rose at the softest rate since last August, partly due to a slower increase in export sales, amid reports that customer demand was dampened by the ongoing the coronavirus disease 2019 (COVID-19) pandemic. On the employment front, staffing levels rose only slightly during January. Input costs meanwhile increased at a sharper pace, but prices charged inflation eased to a modest rate.
The headline seasonally adjusted Business Activity Index dipped from 56.3 in December to 52.0 in January, to signal a modest expansion of Chinese business activity. Notably, the reading pointed to a further loss of momentum since November and was the slowest rate of growth recorded over the current nine-month period of expansion.
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Eurozone: Service sector leads further contraction of eurozone economy
The eurozone’s private sector endured a challenging start to 2021, with output declining for a third successive month and at an accelerated rate. This was highlighted by the seasonally adjusted IHS Markit Eurozone PMI® Composite Output Index which recorded 47.8 in January, down from 49.1 in the previous month.
Services was once again the main drag on the economy, with activity in this sector contracting for a fifth successive month and also at a sharper rate than in December. Manufacturing remained a bright spot, with production rising for a seventh successive month albeit at the lowest rate in this growth sequence.
Of the largest eurozone members, only Germany recorded a rise in private sector output during January, although growth here weakened to its lowest level for seven months. All other nations recorded a contraction in activity, although there were noticeable divergences.
Solid falls were seen in France and Italy, while inclement weather in Spain exacerbated the effects of local restrictions designed to deal with the pandemic and led to a noticeable drop in activity. In Ireland, the unwinding of Brexit-related December stockpiling by manufacturers and the twin impact of lockdowns and new UK trading arrangements on service providers led to a sharp contraction of activity at the start of the year.
Latest eurozone data indicated a solid fall in levels of incoming new work for a fourth month running. Ongoing restrictions related to dealing with COVID-19 remained the primary factor weighing on sales across the bloc, especially in local markets as export business continued to improve, rising modestly for a second month in succession.
Meanwhile, a net fall in staffing levels was recorded during January, extending the current downturn to 11 months. However, the rate of contraction was marginal and the weakest in the current sequence of falling job numbers. Firms were again able to comfortably keep on top of workloads as evidenced by another drop, albeit marginal, in levels of work outstanding.
Meanwhile, inflationary pressures – especially in manufacturing – intensified during January. According to the survey data, input cost inflation accelerated to the sharpest in two years. Competitive pressures and the challenging business environment served however to restrict pricing power. Output charges declined modestly in January and for an eleventh successive month.
Finally, confidence about the future remained in positive territory during January, with the degree of optimism little-changed since the previous month. Sentiment was firmly linked to hopes of a successful rollout of a COVID-19 vaccine in the coming months.
The IHS Markit Eurozone PMI® Services Business Activity Index fell further below the 50.0 no-change mark in January, slipping to 45.4 from December’s 46.4. Latest data marked the fifth successive month in which the index has posted a reading below the 50.0 no-change mark.
All five nations covered by the index registered falls in activity since the previous month, led by Ireland, which recorded its sharpest drop since last May. France and Germany recorded the weakest drops in activity.
Lower aggregate regional activity was again closely linked to a similar-sized drop in services new business volumes, which declined for a sixth successive month. Another drop in new export sales was also recorded, with the rate of contraction again sharp despite easing to the lowest for nearly a year.
Staffing levels also continued to fall in January, although the rate of decline was marginal and the weakest in the current 11-month sequence of contraction. Growth in employment was seen in both Germany and France, which broadly offset declines in jobs elsewhere.
Meanwhile, input cost inflation edged up slightly, reaching the highest level since last August. With output charges falling at a faster rate, margins remained under pressure.
Looking ahead to the coming 12 months, confidence about the future dipped since December but remained comfortably in positive territory. Optimism was highest in Italy, followed by Spain.
A contraction of GDP therefore looks likely in the first quarter, though on current trends this should be modest in comparison to the falls seen in the first half of 2020.
However, with virus containment measures likely to constrain euro area economies in the coming months, and potentially well into the second quarter given the slow vaccine roll-out, the focus will be on the need to sustain supportive fiscal and monetary policymaking for some time to come, notably to prevent further intensifying job losses in the hardest hit sectors, such as hospitality, tourism, travel and retail.
Rising costs have dealt a further blow to many companies, with input prices rising at the steepest rate for two years to squeeze margins. However, in many cases this reflects a short-term lack of capacity and shipping delays, which should ease in coming months, helping alleviate these price pressures.
Japan: Business activity contracts further at the start of 2021
Japanese service providers signalled that business conditions continued to be disrupted by rising coronavirus disease 2019 (COVID-19) cases at the start of the year. Both output and new business inflows experienced sharper declines in January, with the latter falling at the fastest pace for eight months. That said, employment levels remained stable for a fourth consecutive month and optimism towards growth prospects was retained.
At 46.1 in January, the seasonally adjusted Japan Services Business Activity Index fell from 47.7 in December, indicating a quicker contraction in business activity. The latest reduction was the sharpest recorded since August, and meant that activity has fallen in each of the last 12 months.
Similarly, new business declined at a quicker pace in the latest survey period. This extended the current sequence of contraction to 12 months, with the latest reduction the fastest since May. Panel members highlighted that the resurgence in COVID-19 infections and the introduction of a state of emergency to allow new restrictions designed to curb the spread of infections caused the fall in new work. Moreover, international demand for Japanese services deteriorated further.
Despite ongoing weaknesses in activity and new business, Japanese service providers kept employment levels broadly stable for the fourth consecutive month in January. Where employment levels increased, firms commented on higher demand for skilled workers in the technology and digital sectors. However, this was offset by ongoing retirements and voluntary resignations at other companies. There was also evidence that businesses redirected capacity towards the completion of existing projects, indicated by a sharp fall in outstanding business. Backlogs of work decreased to the greatest extent since last July.
Average cost burdens faced by firms in the Japanese service sector rose for the second consecutive month in January. However, the rate of increase remained only marginal. According to anecdotal evidence, businesses faced increased costs for transportation and equipment. However, this was partly offset by cost-cutting efforts elsewhere to combat the wider impact of the pandemic on margins. Despite higher input costs, survey participants reported a further fall in average prices charged in January, with price-discounting strategies extended into an eleventh successive month amid efforts to stimulate sales.
Nonetheless, business expectations for the next 12 months remained positive in January. Firms commonly attributed confidence to hopes of an end to the pandemic, which they hope will stimulate both domestic and international demand. The latest data indicated that optimism was moderate overall and softened for the third month in a row.
The au Jibun Bank Japan Composite PMI Output Index fell to 47.1 in January from 48.5 in December, highlighting the quickest fall in private sector output since September. Moreover, output has now contracted for 12 months in a row.
Output fell at a quicker pace among services firms than at their manufacturing counterparts. Moreover, the rate of contraction in aggregate private sector new orders quickened to the fastest since September. The fall in orders was driven by services, as the manufacturing sector saw a stabilisation in new orders. Falling orders encouraged private sector firms to deploy resources to reduce outstanding business, with backlogs down markedly in January.
Employment levels in the Japanese private sector declined in January, after stabilising in December. The rate of job shedding was the fastest since August, and driven by a modest fall at manufacturers.
Private sector firms were optimistic regarding the year-ahead outlook for business activity, but confidence weakened to a four-month low. Nevertheless, businesses displayed positive sentiment for the seventh month running.
German car sales drop 30% in January
New passenger car registrations in Germany fell more than 30% in January to around 170,000 vehicles, an industry source told Reuters on Wednesday.
Car dealerships have been hit by a second lockdown amid the coronavirus pandemic in Germany, with non-essential stores closed since mid-December, and by tax breaks for consumers running out at the end of 2020.
New car registrations in December had been up by almost 10%.
TECH EARNINGS
Data: FactSet, company filings; Chart: Andrew Witherspoon/Axios
COVID-19
Amazon strain sparks fears of spread throughout Brazil More transmissible variant linked to surge of cases in rainforest city Manaus
Antibody protection lasts at least six months, study finds The Biobank study, which included more than 20,000 participants, found that antibodies persisted in 99 per cent of people who had previously been infected with Sars-Cov-2 after three months, and in 88 per cent after six months.
From Axios:
The coronavirus pandemic in the U.S. has been chiefly driven by young and middle-aged people, while killing mostly older people, Axios Vitals author Caitlin Owens writes. The notion that non-vulnerable people can go about their normal lives, while vulnerable people self-isolate, has not borne out in the U.S.
Adults aged 20-49 were responsible for the vast majority of virus transmission last year, according to a study published in Science.
- Three-quarters of new infections originated from adults 20-49 until mid-August of last year. Adults 35-49 contributed the most to spread.
- The study estimates that school reopenings increased total infections by about 26% as of October, and deaths by about 6% — because children and teenagers spread the virus to adults, who are “more transmission efficient.”
Data: American Association for the Advancement of Science. Chart: Axios Visuals
IF YOU CAN’T BEAT THEM, JOIN THEM:
Traders Who Launched GameStop Frenzy Are Turning Against New Members Longtime WallStreetBets followers ask moderators to ban new users or limit where they appear
Longtime members of the Reddit forum that was the launchpad for the GameStop GME -60.00% frenzy are lashing out at the group’s millions of new users, asking whether they can be trusted and accusing them of working for hedge funds.
WallStreetBets has been hit by bots that question some of the members’ investing initiatives and pitch commission-free brokerage accounts, according to a Wall Street Journal analysis of the posts. Messages that promote stocks that don’t have large short positions—where traders sell borrowed securities betting the price will be lower when they buy it back—are blasted by members as being controlled by moneyed interests to sap momentum from the GameStop bet. (…)
“Seriously, the 6 million new users have f— this place up,” one user wrote Monday. “New users are coming here to screw us,” a post last Wednesday read. (…)
Some of the posts are seemingly submitted by bots because they are posted in rapid succession containing the same text. (…)
The next short squeeze?
(The Market Ear)
To help you assess the wisdom of forex speculators, this chart from TradingView.com: