Thursday, January 14, 2021

Last year in a nutshell

In April of last year I predicted that the shutdown of the US economy would prove to be the most expensive self-inflicted injury in the history of mankind. Unfortunately, I turned out to be right. We now know that an economic lockdown is virtually useless to stop a contagious pathogen, but it is powerfully destructive of economies, business, livelihoods, and the social fabric. Along the way it spawned enormous, unprecedented, and far-reaching changes in both the economy and the financial markets. 

At the risk of oversimplification, here's how I would describe, in a nutshell, what has happened this past year from an economist's perspective:

The biggest financial event of the year was when the Fed decided, correctly, to accommodate a huge increase in the public's demand for money and money equivalents by purchasing about $3 trillion of notes and bonds, transmogrifying them into T-bill substitutes by paying for them with bank reserves. This facilitated an almost $3 trillion increase in bank savings and demand deposits (banks effectively lent their cash inflows to the Fed in exchange for bank reserves), and this all worked to accommodate the public's unprecedented desire to boost risk-free savings balances in the face of massive Covid-related uncertainties. 

The demand for money now looks to be weakening, but the Fed has not yet taken steps to reverse last year's note and bond purchases. This is resulting in an excess supply of money, and that is showing up in rising commodity prices, rising real estate values, rising equity prices, and a weaker dollar (i.e., too much money chasing a relatively fixed supply of assets). Meanwhile, interest rates are very low, especially real interest rates. Very low real interest rates are not necessarily the result of Fed policy; more likely, they reflect a market that is very risk-averse (i.e., willing to pay extremely high prices for risk-free assets) and a market that expects long-term growth in the economy to be weak for the foreseeable future (risk-free real interest rates tend to track the economy's trend rate of growth). Commodity prices have rallied impressively since last March, as fears have faded and global industrial and construction demand has rebounded. Even after rising strongly for the past 9-10 months (with average PE ratios now topping 30), equities still have an earnings yield which is very attractive relative to the yields on safer assets, and that will likely help drive equity prices even higher. Stocks don't necessarily look overvalued when compared to the lower-risk alternatives available in the bond market.

With the Fed promising to keep interest rates very low for an extended period, the risk of higher inflation is rising, fueled by a continued—and probably growing—oversupply of money. This is already showing up in higher breakeven inflation rates, which are up from a low of 0.5% last March to now a bit over 2%. The market has yet to price in a significant increase in inflation beyond what we have seen in the past decade or so, however. My sense from the gist of Powell's recent comments is that the Fed wouldn't mind inflation exceeding 2% for a year or so, since that would "make up" for their having undershot their inflation target in recent years. The Fed might be content to sit back and enjoy some extra inflation, but that borders on the hubristic belief that they can fine-tune things at a later date. Color me skeptic, but for now an unexpected and painful Fed tightening is not in the cards. Meanwhile, bond yields are rising and the yield curve is steepening in anticipation of an eventual Fed tightening. Higher yields pose little threat to today's equity market because liquidity remains abundant and a growing economy naturally supports higher yields. 

As for the economy, the shutdown was the perfect "Black Swan" event which shocked the US and the global economies to their foundation. We've weathered the storm remarkably well, thanks in large part to central banks' willingness to accommodate the sharp increase in money demand that accompanied the shutdown. Many sectors of the economy have recovered most or even all of their shutdown losses, but there remain pockets that continue to suffer (e.g., restaurants, travel, entertainment). It will likely take years for displaced workers to find new jobs. Fiscal stimulus is justified only to the extent that we owe compensation to those whose lives and businesses were ruined by government fiat. Sending out more checks to everyone would be foolish. If Biden is able to push through a huge "stimulus" package I believe that would only retard the recovery. It would also work to permanently slow the path of future growth, much as happened with Obama's trillion-dollar, "shovel-ready" stimulus. Government simply can't spend money efficiently, and wasting scarce resources only serves to cripple future economic growth.

What follows are a series of charts which flesh out the story:

Chart #1

Chart #1 shows the level of the M2 money supply, widely considered to be the best measure of "money." It consists primarily of bank savings deposits (by far the largest component), currency in circulation, demand deposits, retail checking accounts, retail money market funds, and small time deposits. It's money that is safe and easily spendable by the average person. As the green line shows, M2 historically has risen about 6-7% per year on average. It dipped below that in 2018 and 2019 when the economy was growing and confidence was returning, but then it soared in the wake of Covid shutdowns. 

Chart #2

Chart #2 shows how the M2 measure of money supply tends to track the level of nominal GDP over time. That's natural: the bigger the economy, the more money it takes to turn the wheels of commerce. It also highlights just how dramatically things have changed in the past year: M2 exploded to the upside in the second quarter of last year, while GDP collapsed, only to subsequently rebound strongly in the third quarter. GDP probably grew at a 10% annualized growth rate in the fourth quarter, which I have plotted in this chart. By now, nominal GDP has most likely fully recovered its second quarter loss. Note, however, the huge and unprecedented gap that remains between M2 and GDP. This is arguably the biggest untold story of the Covid collapse and recovery.

Chart #3

Chart #3 shows the ratio of M2 to nominal GDP, which I refer to as "money demand." M2 is a good measure of money and nominal GDP is a good proxy for income. The ratio of the two can be thought as the amount of money (cash and cash equivalents) the average person wants to hold relative to his or her annual income. What we see here is a dramatic and unprecedented rise in the demand for money which occurred in the wake of the Covid shutdowns. People were panicked and wanted extra cash for security In a broad sense, personal savings exploded upwards. The Fed accommodated this as I explained above. But already the demand for money is beginning to decline. It's a good guess that by the time things return to "normal" in the economy, the ratio will drop to 70% or less.

Chart #4

Chart #4 shows the 3-mo. annualized growth rate of the largest component of the M2 money supply: demand and savings deposits. I think this is also a good proxy for money demand. Why? Because the interest rate that banks pay on savings and demand deposits is virtually zero. People currently hold $14.5 trillion of this stuff, and they don't own it because of the interest it pays. They own it because they want the safety and liquidity of this form of money. Note that money demand exploded as the economy collapsed, but since then the growth of money demand has slowed dramatically. In the past three months it's up at a mere 10% annualized rate.

It's quite possible that as the economy continues to grow and confidence gradually returns, the demand for this form of money is likely to decline. People won't want to hold such a huge amount of their annual income in the form of money. So what will they do? The problem is that money can't just disappear, even if people try to spend it. If I withdraw $10,000 from my savings to fix up my house, someone else (Home Depot, plumbers, carpenters, appliance manufacturers) will end up with the money. Key point: all the extra money that was created in the Covid collapse can disappear if the Fed reverses its asset purchases.* To date they continue to expand their balance sheet and they have given no time table for when they might begin to withdraw money or raise short-term interest rates.

*Actually, there is a way that excess money can "disappear" without any action on the Fed's part. If the economy grows and prices rise, so will incomes. If nominal GDP (i.e., income) grows by enough (especially if there is a lot of inflation), while M2 grows at a slower rate, the ratio of M2 to GDP will decline, and people will have effectively reduced their demand for money. 

The Fed can accommodate declining money demand by either 1) reversing its asset purchases and/or 2) allowing a significant increase in inflation. So this is where inflation—rising prices—comes into the picture.

Chart #5

Chart #5 shows an index of non-energy industrial commodity prices. They have surged some 40% since the end of last March. Excess dollars have found their way into a whole range of prices. Copper is up 70% since March; crude oil 170%; lumber 30%, raw industrials 25%; and Bitcoin 500%, to name just a few.

Not coincidentally, the dollar dropped over 10% at precisely the same time as all these other prices rose. 

Chart #6

Chart #6 compares the same non-energy industrial commodity price index as Chart #5 (but this time as measured in real terms) compared to the inverse of an index of the US dollar vis a vis other major currencies. That the two almost always move together suggests strongly that much if not most of the change in commodity prices is simply a function of the value of the dollar: a weaker dollar corresponds to higher commodity prices and vice versa. This is all consistent with what we would expect to see if the value of the dollar is impacted by a change in dollar supply vs. dollar demand.

Chart #7

Interestingly, and perhaps not surprisingly, gold prices soared in the past 2-3 years, as we see in Chart #7. Gold is supposedly notorious for being far-sighted. TIPS prices (the blue line, using the inverse of their real yield as a proxy for their price) also soared. Both prices have been more or less joined at the hip for many years, which is itself quite interesting. 

Chart #8

Chart #8 compares the nominal yield on 5-yr Treasuries with the real yield on 5-yr TIPS. The difference between the two is the market's expected annual rate of consumer price inflation over the next 5 years (on average). Here we see that inflation expectations have soared since March, rising from 0.5% to now just over 2%. The market is correctly interpreting the intersection of the Fed's willingness to supply money and the market's declining demand for money: higher inflation. 

Chart #9

But inflation needs to rise above 2% on a sustained basis before it catches the Fed's eye. As Chart #9 shows, the ex-energy version of the CPI has risen almost exactly 2% per year on average for the past 18 years. That's our baseline. It's also consistent with inflation according to the core personal consumption deflator (the Fed's preferred measure of inflation) of about 1.6-1.7% per year (the CPI does tend to overstate inflation by a bit because of its rigid construction, whereas the PCE deflator adjusts dynamically to changes in consumer preferences). So far, while it's true that inflation expectations have jumped, they are not yet "unmoored" or uncomfortably high.

Chart #10

Chart #11

Chart #12

Chart #13

Chart #14

As for the economy, the manufacturing sector is fairly booming, as Chart #10 shows. Manufacturing all over the world is booming, post-Covid-crash, though the US appears to be enjoying the strongest boom. A similar chart focusing on the service sector (Chart #11) is not nearly so boomy. The labor-intensive areas of services (e.g., restaurants, stores, leisure, entertainment) are having real trouble living and thriving as Covid cases and deaths surge all over the world. Vaccines will ultimately save the day, but not for at least several months. Chart #12 confirms that; service sector businesses do not expect to be in a strong hiring mode for at least awhile. Charts #13 and #14 show that while there was a welcome surge in air travel around the holidays, air travel has since returned to a path that marks a very slow recovery from the depths of last April. Currently, air travel is running about two-thirds less than what it was a year ago at this time.

Chart #15

Chart #15 is interesting because it ties interest rates to the health of the physical economy. I've plotted 10-yr Treasury yields in red, and the ratio of copper to gold prices in blue. This latter ratio is quite sensitive to changes in global manufacturing activity. The ratio has turned up sharply, as copper prices have soared alongside slumping gold prices and manufacturing and construction have surged. This presages a significant increase in interest rates which appears to have just begun. Beware bonds.

Chart #16

Chart #16 compares US to Eurozone equity prices. The US continues to enjoy a substantial advantage, but in general equity prices around the world are on the rise.

Chart #17

I know there are lots of people worried that the stock market is a bubble waiting to burst. It sure looks like easy money has helped inflate the equity balloon. But there are calculations under the surface that support further equity price gains. Chart #17 illustrates that. It shows the difference between the earnings yield on the S&P 500 (the inverse of the PE ratio) less the yield on the 10-yr Treasury (the traditional equity hedge for long-term investors). The resulting equity risk premium is still relatively high from an historical perspective. Think of it this way: equity investors today have to pay $30 to have a claim on $1 of after-tax corporate profits, but bond investors have to pay $83 for $1 per year of interest on 10-yr Treasuries. Aren't equities much more attractive than bonds? And incredibly more attractive than cash, which yields nothing? Selling stocks is very hard in the current environment, no matter what you think of the Fed's monetary policy or Biden's fiscal policy.

Chart #18

Chart #18 reminds us that, despite high and rising equity prices, the market remains fairly cautious, as seen in the still-elevated level of the Vix "fear" index. Very low interest rates in general are another sign of caution, or least strong risk-aversion, since investors are willing to pay sky-high prices for the safety of cash and Treasuries. The market doesn't yet look like it's over its skis.

A final commentary: the Democrats' margin of victory wasn't exactly compelling in the recent elections, but it was enough, apparently, to loose all of Washington's worst instincts: stimulus spending, industrial policy (think Green New Deal), free money sent to nearly everyone, and the return of many of the regulatory burdens that Trump managed to erase. To make matters worse, "cancel culture" is in full bloom, aimed at curtailing our civil liberties and silencing critics. It's nothing short of mob rule punctuated by spontaneous lynchings of anyone who dares challenge the politically correct dogma of the day. Whatever happened to the rule of law? Vaccines and subsidies are now handed out according to one's race and skin color? I am shocked and dismayed to see all this sweeping the country. This is not the unity that we were promised, it is just the opposite.

I think this all argues for a replay of the slow-growth Obama years. We probably have another 3-6 months of catch-up growth with recovery tailwinds for help, but beyond that it is tough to see robust growth. That's not an outlier forecast, though, since the current level of real yields is consistent with very weak long-term growth expectations. So I hope I'm wrong.

Finally, I would once again strongly recommend that you subscribe to my friend Steve Moore's Hotline. It''s free, and if you're like most of the people I know, you will find it to be quite refreshing, easy to read, and full of interesting information about the things that matter to the economy—even a dose of humor here and there. Many of my friends have remarked that it's one of their favorite things to read each weekday. Caveat: it may make you a target for the cancel culture.


Charlie said...

Always value and respect your analysis, Scott.

I, too, am appalled at the treatment of J.K.Rowling for her stance on women's bathrooms. I also find it concerning that a man in a Viking hat was rampaging through our capital.

Scott Grannis said...

Your example reminds me of someone’s definition (can’t remember who) of “political correctness:”

When you can’t talk about what is obvious.

It is in the same vein as Orwell’s 1984. When words lose their meaning, when the past is rewritten, when you either accept the new definitions of words, or else you get thrown into a re-education camp. And now we hear liberals saying that Trump supporters need to be re-programmed and/or banned from ever working again! This is scary stuff.

arrotsevni said...

A great rendition. Could make this into a book by itself.

wkevinw said...

The terms "black swan", "bubble" and "crash" are among those words whose meaning have been corrupted. The only real black swan in my lifetime may be the Covid pandemic. There might be a couple of bubbles in my lifetime- (economic)- 2000 and maybe now. 2000 may be the only real bubble. There are probably a couple of crashes in my lifetime- 1987 and 2020. 2020 may not really be a crash. There have been several serious bear markets- which are not crashes.

Anyway, Covid is 2020 in a nutshell. After the economic impact of that, everything else "makes sense". The incumbent party had very little chance of gaining re-election with the economy in the shape it was in during the election year.

Thanks for the posts. Best in 2021. said...

Couldn’t agree more with the third paragraph from the bottom.

Frozen in the North said...

Scott my friend

All the analysis was great, until the last three paragraphs. Mob rule under the democrats you already had it last week in Washington...I have to say as a non-American I was shocked by the behavior of those so call Trump supporters. The world watched aghast of the behavior of a few crazed Americans. Moreover, it's not getting any better now with panic buttons "apparently" removed before the invasion of the Capitol.

If you have issues with some Democrats wanting to reprogram some crazed Trump supporter, I've got a ton of threats of killing members of Congress and even the vice president. Don't confuse the will of the people with few stupid individuals.

Finally, maybe Trump got 74 million votes but the democrats got north of 80 million. There is no doubt that black and hispanic voters for Trump was far higher than most people thought.

As for your economic analysis, you are correct.

Fred said...

Here's how I realized things have really changed for the worse. My application for a Covid antibody test at Kroger asked me "what sex I was assigned at birth." Good grief.

Iris said...

Fred, the science behind that Kroger request was that men die at much higher rates than women from Covid-19. Likely this info was requested not to favor/disfavor your application, but to gather information. If this is the worst thing that happens to you this year, consider yourself lucky. You could be living in a city where all of the ICUs are full.
Frozen in the North, I agree. Scott's economic analysis is always super interesting. But the idea that Dems will ruin our country with "cancel culture" now seems much less worrisome than white supremecists doing so with violent acts against people they simply don't agree with.

pgrommit said...

"Whatever happened to the rule of law?"

It disappeared along with all those folks who wanted SMALLER government, SELF-reliance, and getting government OUT OF the free markets.

Roy said...

"In all of the US, and for the year to date, covid-19 has been tied to only 1700 deaths. Simply put, this is not a pandemic, and is very likely not going to become one, especially given the draconian measures that have been imposed across the country to date."

"What we really need right now is to recognize that this virus is not a pandemic or a mass killer. It's probably more like an unusually nasty flu." -- Scott Grannis


This blog has been filled with fallacies and conspiracy theories.

Maybe it's time to go back to just economics?

The Cliff Claven of Finance said...

My summary of 2020:

Pandemic, still in progress

$3 trillion Federal deficit

$3 trillion Fed credit creation, supporting 25% M2 growth

Stock market at record high valuations relative
to sales, and as a percentage of GDP
-- both are excellent 10 year market return
indicators (the P/E Ratio is not).

18.4 million Americans collecting state and federal
unemployment benefits, down from 32 million in
May 2020, but still very high

Old president who favored capitalism
has been replaced by a new president
who favors socialism, (whatever he reads
from his teleprompter) , with his party
controlling both houses of Congress.,
with new policies possibly starting with a federal
$15 minimum wage.

The change in government control,
and new policy priorities, is HUGE.

If deficit spending is the key to a prosperous economy,
then we should all be happy ... Biden is proposing a COVID
stimulus package of $1.9 TN. which would lead to our
government expanding it's debt by over 30% of GDP
in only two years (2020 and 2021).

Economic growth has been hampered by slow labor
force growth for the past 20 years -- throw in lots of
new socialist policies and even 2.5% Real GDP growth will
be a challenge in the Biden years.

honestcreditguy said...

Cancel culture and free speech being pulled back when the liberals get into power is a true testament to media corpocracy....Biden has dementia, Nancy has dementia, the issue with the mob in DC is direct result of seeing the left push and push with riots, blood, destruction racism and so on, while congress took a knee.....These nutty democrats will be the downfall of America.

Dementia Joe already set to bring in illiterate, broke illegal aliens or 11 Million more food stamp, welfare and rental and housing assistance charges against taxpayers.

Illegal aliens over veterans and inner city youth. Hypocrites of the left want me and my family to pay for their pink pony ball licker dreams. I'm a moderate independent American and I'm done paying for this orwellian game of thrones by a bunch of worthless scum from both sides....there are many more like me..the prudent, who get reamed time and time again though they take nothing....

Benjamin Cole said...

As always, terrific wrap-up by Scott Grannis.

Even more importantly, Grannis is correct in that freedom of speech is imperiled in the US.

The guy in the buffalo-helmet in the Capitol (a wayward Buffalo Bills fan?) was a million miles from taking over the government or staging a coup. I never condone violence, and I do not condone the physical takeover of the Capitol. But that event was about as important as a fart in a sewage treatment plant.

The fleeting occupation of the Capitol by a bunch of loonies is being used to justify more government (and corporate) censorship and police powers, and larger police forces, all at the national levels. And of course, to declare that everyone and every policy connected to Trump is malign.


A stray thought: The $2,000 stimulus checks---are they "free money," or is a better description that the federal government is returning money it confiscated from me in the first place?

There are about 130 million households in the US. Every year, the federal government spends about $1.3 trillion on DoD, VA, DHS, the black budget and pro-rated interest on the national debt. That's about $10,000 per household (I imagine more per household for Calafia Beach readers, who seem like a smart bunch, and probably upper income).

If this money is for bona fide national security, fine.

But it has become obvious that something else is going on, and words like "global security" are shamelessly bandied about. What we have today is more akin to global guard service for multi-nationals. (Many fine individuals are employed in the services---this is no rap on earnest citizens, or guys who just need a job, and do a good job. Many stages of my life, I just needed a job).

So this year, the federal government will return $2,000 of the $10,000 they took from my household to pay for the global guard service.

The Donks are worse than the 'Phants when it comes to endless military entanglements, or rubbing buns with globalists.

randy said...

Even the day after the riots I argued that the democrats are still scarier long term than republicans. After reflecting a little more, the post riot votes changed my mind.

"In a vote Wednesday evening, six Republicans in the Senate and 121 in the House backed objections to certifying Arizona’s electoral outcome, while seven Senate Republicans and 138 House Republicans supported an objection to certifying Pennsylvania’s electoral outcome.

It was a somewhat surprising result following the violence and destruction by President Donald Trump’s supporters at the Capitol earlier that day, which prompted a number of Republicans to drop their previous challenges."

My 2020 nutshell is that the Nov election gave conservatives a wonderful, unexpected opportunity. Voters rejected Trump, but also rejected progressives down ballot. Clearly an opportunity for Republicans if they could only act with prudence and govern a little closer to the middle. I was kind of excited. Trump was the hand grenade. But the quoted paragraph above says it all - the current GOP is toast. Better learn to live with the outcome.

Bob said...

Interesting; no mention of fraudulent voting. IMO Donald Trump won this election hands down. Our election system is compromised and will continue to be so. We have a one party system now. Does anyone think for a minute that these thugs will allow a Conservative resurgence in 2022? Does anyone think that this Globalist/Socialist juggernaut that has infiltrated our educational system and media over the last 50 years are going to Hawaii and calling it a day? Power is like fire, it starts small, consolidates itself, burns ferociously and then burns itself out. We are in for a decades long haul until, but inevitably it will start turning and eating on itself. Power never quits. Sad times for this American patriot and at 73 most likely will not see the next true American Revolution or else will be to old to give a damn.

For those who are so horrified with so called "invasion of the Capitol"; Where were you when Portland and Kenosha were burning. Every indication I see says that the people that were violent were Antifa plants and were there an hour before the people who were at Trump's rally could get to the Capitol building. John Sullivan has been arrested and a CNN reporter is under suspicion for encouraging violence while under the guise of "reporting". FYI I am a former Democrat harkening back to the days of JFK. I also am very critical of Trump and his bellicosity. But admire him for is belief in America first and much of, but not all of his policies. There is NO nuance in the leftist Democratic Party. It is largely lockstep Nazi intimidation of win at all costs, including the originality and exceptionalism of this great country.

Thank you Scott for continuing to blog and offer you insights.

Scott Grannis said...

Skepticism is certainly warranted these days. I can’t help but think that the Democrats’ marshaling of 20,000 troops for the inauguration and building huge walls around the Capitol are not justified by any or reasonable threat, but instead as a way of showing the rest of the country that the “right-wing extremists” are numerous, unhinged, and dangerous. They must be, otherwise why go to such extreme protective measures? Where were those protective measures when Seattle, Chicago and NY were burning?

Charlie said...

A bit of sarcasm in my initial post went (as usual) unnoticed. To be more explicit:

1) I don't like cancel culture in its current form on the left. For what it's worth, I don't like a lot of aspects of American culture on both the left and right.

2) This appeal to "free speech" currently in vogue on the right is really and appeal for government regulation of social media companies. If it must be done, I hope it can be done with a light touch. The First Amendment certainly doesn't apply here: Twitter is not the government. "Free speech" as a concept applies to the extent that you consider access to social media (or other specific platforms) a right. This is exactly analogous to the liberal claim that we all have a "right to health care."

3) While the above two items are certainly of consequence, and deserve long thoughtful conversation, neither is as immediate as the current situation where our president has been (for the last couple months) working hard to incite an insurrection against our current form of constitutional government. (This statement is true regardless of the existence of fraudulent voting. Our elections have always been a clusterf*ck.)

Bob said...

As President Trump has had to fight his entire 4 years against the lies and corruption and an attempted soft coup from the deep state, getting absolutely zero respect for a single accomplishment, and there have been many, you have the audacity to accuse him of inciting insurrection!? Outrageous sir. The insurrection has come from the leftists, and no it isn't true regardless of the existence of fraudulent voting. By the way, our elections used to be carried out on the first Tuesday of November with the exception of absentee ballots, most of which were for service men and women and other Federal workers who were overseas. It would appear you are a Donald Trump hater, and are intelligent enough of a writer to try and make yourself look reasonable, like most who suffers from TDS.

However I will agree in most part with you second comment.

Benjamin Cole said...

People are calling the Donks and mainstream media "left wing."

It is worse than that. Far worse.

Think about it. The multinationals, Silicon Valley, Hollywood, Wall Street are backing the Donks. And backing a gigantic, fantastically expensive global foreign policy military apparatus. The mainstream media has become like that of a Third World country, aligned with a money-soaked political party (the Donks) and not a set of ideals, or principles. Truth takes a backseat, or is left off of the bus.

What the Donk elites want is cheap labor or access to it. And even more US "influence" everywhere, although Beijing "influence" is acceptable, if multinationals have access to labor and markets.

It is not China v the US. It is the multinationals and the CCP against the employee class of both nations. Which is obvious when you look at all the foundations, think tanks and lobby groups affiliated with multinational and the Donks.

But the Donks know that "We worship cheap labor and pal around with the CCP" is not winning platform.

So to get votes, the Donks play the ID politics card, hard and heavy.

Look at Donk messaging: Everything is race, class or sexual identity. I have yet to hear Biden say anything close to, "I really don't care about your color or sex, or your private life life. I want a better deal for people who work for a living."

The Donks have their voters believing it is local racist police departments who are holding them back. Even the Capitol police are racist, as they did kill enough white people.

I am not a Marxist, despite this post. I believe in free markets, but what happens in international trade today has little to do with free markets. It is collusion among multinationals and the CCP to exploit repressed labor.

And there are practical considerations on immigration (the vast majority of immigrants want to work and are admirable).

The other issue, on the side but important, is property zoning. The end of property zoning would do a lot for living standards.

Good luck everybody.

BTW, a great, non-ideological book is "Trade Wars are Class Wars" by Michael Pettis.

Bill Snarf said...

Scott writes the most objective economic blog. I would love to have the commentary focused on just that. No one is debating the impact of runaway inflation, the inability to raise rates, valuation of stocks... The Fed cannot raise rates be because of a large economic hole but the Fed's duty is price control. Inflation will be 3%, vaccine kicks in giving the fed their mandate back. By then inflation is out of control? So rates must go up much higher while government debt is out of control.
Instead you opened the door to the sick political division. Both sides are messed up and the starting point for a better America is recognizing the big issues with the side of your allegiance. Greatly appreciate the best economic analysis.

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Charlie said...

Anyone that wants to learn something about the election should read some of the court cases. Skip the media and go directly to the docs. A good set of reference documents has been compiled in Wikipedia here:

Skip past the Wiki article itself. In fact, I'd advise you to cover your eyes until you've scrolled to the bottom reference section. But you need to use caution even in the reference section, as there are liberal sources mixed in among the court documents. Well, f*ck it. It's impossible to know the truth anyway. Let's all just watch Newsmax instead.

Bob said...

Unfortunately politics and economics are two sides of the same coin and cannot be separated for ones convenience of argument. However out of respect for Scot Grannis and the unselfish giving of his time and knowledge I will not pursue this line of argument further.

Benjamin Cole I pretty much agree with your latest comment.

The Cliff Claven of Finance said...

Thanks for the link about the election. I rarely consult Wikipedia, since it is a majority rule website, but this summary was decent.

However the article on election fraud court cases provides no wisdom.

There was an unprecedented amount of election fraud witnessed, or suspected, based on HUGE number of sworn affidavits (over 1,000) by people risking a felony perjury sentence if they were lying.

There were hard to believe election results, such as Biden winning fewer counties than Obama in his prime (2008),

and Biden losing in 18 of 19 bellwether counties, yet "winning" the election? In unprecedented:

Biden's "best hours" were after midnight of election day in four Democrat majority cities, in four battleground states he needed to win (Michigan, Georgia, Wisconsin and Pennsylvania), two of which had Republican ballot counting watchers sent or forced out of the building BEFORE unusually large pro-Biden ballot "dumps" (over 100,000 votes) suddenly spiked the vote count, and permanently eliminated the Trump lead.

The evidence of election fraud in 2020 exceeds evidence of election fraud in all prior elections since I was born in 1953, combined. My summary here:

The ability to prove election fraud in just six weeks before the electors are certified on December 16 is near zero, unless people confessed, and no one did.

PROVING that state election rules were illegally changed without state legislative approval, in a way that encouraged voting fraud, was easy to do, but no state judge seemed to care about that.

Proving specific ballots were NOT filled out by legal voters is MUCH more difficult, especially in six weeks. That could take a year or more to do, and that's assuming the evidence (ballots and ballot envelopes) are not (illegally) destroyed. One example of a door-to-door investigation of voter fraud by volunteers in Arizona is described here:

Ataraxia said...

Can't thank you enough Scott for this blog over all these years. A veritable treasure trove.

Benjamin Cole said...

I agree with Cliff Claven above that there is no way for an ordinary citizen to know if elements of the last election were rigged or not. I am not endorsing violent protest.

Unfortunately, in just the recent past, mainstream media has furthered an evidently hollow Russiagate story, then ignored a bona-fide laptop story involving Hunter Biden, and then said the Wuhan virus could not have leaked from a lab.

Now, it appears Russiagate was vapors, the Hunter laptop was real and not Russian disinformation, and the Wuhan lab may well have leaked a virus that undercut the global economy.

So, now the mainstream media ridicules "rigged election" stories. This conclusion was reached within hours of election results.

Who knows? If you think you know, how do you know?

randy said...

Sure.. all those Republican election officials, Barr, even pundits like Ben Shapiro must be part of the Cabal for stating emphatically there is no credible evidence of organized fraud massive enough to make a difference. (Yes, there were irregularities, voting rule changes that shouldn't happen, mail in rules that favors dems, etc, but that's not vote dumps)

Do Republicans have any interest in growing their base by, you know, having a positive platform with meaningful issues that would appeal to voters that are not captured at the extreme right? Appears not. I give Republicans zero chance at better national election success in its current state. Heal thyself.

I've resolved to do more biking and fishing myself.

Regina said...

The fences at the Capitol also keep the independent journalists OUT. Only state-approved news; state-approved science; state-approved medical experts. But you'll be able to spend your state-sponsored tokens at the company store.

Frozen in the North said...


Re: Electoral Fraud

Sorry but 60 court cases that were dismissed -- often by heavily "Republican courts" the absence of any proof -- these 1,000 affidavits were often bull (some were real) but the vast majority were wrong about the "fraud the saw".

The biggest problem of the 2020 elections was that some states changed the rules as to how people could vote...biggest problem there is that it was done quickly and not terribly well.

Using outside observers (yep not Dems or GOP) the overall consensus was that the election was fair. Also, you don't get to bitch about "state right" only when it suits you. Especially with regards to Presidental elections -- the founders of your republic were very very clear (hence the electoral college). The states are supreme in deciding how they conduct their democratic election for the president...

Finally, you can be convinced that fraud occurred when none did! One doesn't negate the other.

Finally, I am happy the Dems won maybe now there spend spend spend cycle will end and the government will again control its expenses. Why is it always under the GOP that the biggest spending increases occur>

Grechster said...

Frozen: All of the cases were dismissed on procedural grounds. There was no actual vetting, no weighing of evidence, no real legal tussling between two passionate parties. That some of these dismissals occurred in "Republican" courts should raise more questions about the commitment of Republicans to electoral justice than it does about the legitimacy of the election itself.

Contrast this sorry state of affairs with what happened in the election of 2000. As you know that election was crazy close. It all came down to one state and that state was on a razor's edge. So both sides sent an army of high-powered attorneys down to Florida. For six weeks they fought, debated, analyzed. The state apparatus of Florida was involved and, of course, it ended up in the Supreme Court where the nine justices weighed the evidence. One doesn't have to agree or disagree with the end result to acknowledge that the US vetted what happened in the very close election. And nobody questioned the righteousness of the endeavor.

But now, if you even raise the question you're somehow deemed an enemy of the state. And it's that condemnation of those who question anything - condemnation not just from the Dems but, even more chillingly, from the press at large - that has so many of us so appalled.

Fred said...

Grechster: You are wrong about the lawsuits. Trump's team actually stipulated to the fact that there was no fraud in the Penn. case which is never done in contested cases on the facts. When forced to actually put up hard evidence of fraud (e.g- a person voted who didn't exist or person not eligible to vote who did), they declined to do so. Don't forget when Tucker Carlson asked Sidney Powell to show him the evidence behind her allegations in the so-called Kracken lawsuit she declined to do so and now faces a ruinous libel/defamation suit by Dominion. She will have to put up the "evidence" now if she doesn't want to go down in flames. I absolutely agree with you that the left is overreaching by trying to cancel anyone who disagrees with them on policy but there is no Constitutional right to spew a bunch of lies about election fraud. If you can cite names of people who voted who either don't exist or had no right to vote in a particular state more power to you, but I don't think you can and it is certainly clear that Trump's Keystone Cop lawyers couldn't either. By the way, I voted for Trump and hoped he would win and was open minded about fraud being a factor but am now convinced that although there was probably some of it there was not enough to make a difference.

Benjamin Cole said...

"But now, if you even raise the question [of election irregularities] you're somehow deemed an enemy of the state. And it's that condemnation of those who question anything - condemnation not just from the Dems but, even more chillingly, from the press at large - that has so many of us so appalled."--Grechster

This is the core of the matter. The US is gravitating toward the position that those who say, or out loud wonder, if there was election fraud will be prosecuted, and if not that, de-platformed.

This is like people in China who wonder if the Wuhan COVID-virus leaked from the labs in Wuhan. Maybe those who suspect a lab leak are wrong, maybe they are right---but that is not the point. The point is they are disappeared or silenced.

Jeez, some people spent four years suggesting Trump was elected through Moscow influence, was thus illegitimate. That is fine, I respect people's right to believe Trump is a Putin-stooge (a sentiment just re-iterated by Hillary Clinton yesterday, who suggested Trump took advice from Putin and staged the occupation of the Capitol).

But if you dish it out, then see if you can "dish it in" (to quote a Superman comic book from the early 1960s, cite lost).

wkevinw said...

"there is no Constitutional right to spew a bunch of lies about election fraud"

The lack of understanding of basic constitution concepts is breathtaking. Did anybody get Civics or US History classes in school (or maybe it should be asked if they passed )

Basically there is a small number of "limitations" to free speech: obscenity, threatening physical violence, fraudulent business practices/advertising fraud, slander/libel.

I guess it's unwritten as to the many reasons for free speech. One is the "light being the best disinfectant." You want all the "crazies" to spew their crazy.

There is a constitutional right to challenge governmental functions such as election law irregularities, of which there were many in 2020.

If libel was committed by a lawyer in this case, well, they will get an unwanted day in court. That's exactly how it's supposed to work!

rhapsody said...

We've come to a place where the media has successfully divided us. I would love to see an honest survey of voters indicating if they voted "for" their candidate, or "against" the other candidate.

Unfortunately, because of the propaganda being sold as "news", the media has turned anyone with internet access in to their own version of Rush Limbaugh, or Al Franken.

In the days following the election, I have watched countless political activists calling themselves “news reporters”, or “journalists” struggling to comprehend how a businessman doing a near perfect impersonation of a horse’s rear-end could have garnered so much support.

It seems to me, Donald Trump is a symbolic “Moby Dick”, the Left-leaning media were his “Captain Ahab”.

Over the last 8 months the US has watched as our Captain Ahab as they “piled upon the whales white hump, the sum of all the rage and hate felt by his whole race.

And yet, for the second consecutive Presidential election, the media activists are incapable of summoning the self-awareness required to consider the possibility that their zealous furor successfully alienated, outraged and inspired conservative voters in record numbers.

Ahab’s obsession led to his own demise.

Fox, MSNBC, CNN, NPR, The New York Times & Post (in an abbreviated list) have all assumed roles as political advocates for their respective parties. They are no longer interested in disseminating unbiased news stories to the American public.

Is it any wonder Americans have become so divided? Each person’s version of truth is now derived from the source of opinionated “infotainment” they are exposed to.


It is my understanding our founding fathers incorporated “freedom of speech” and “freedom of the press” in to the First Amendment to protect American citizens from Government tyranny.

Unfortunately, our media is dividing the Nation’s citizens. We are being recruited in to separate Government camps by the "press" as their propaganda squads advocate for their respective parties. Our “free press” is in bed with both sides our Government and they are recruiting each of us to pick a side. No in-between.

Dividing our citizens with propaganda will lead to a very, very bad place.

A pox on both their houses.

randy said...


The charts highlight silo-ed information sources. 90%+ of all NYT, MSNBC, and NPR viewers vote democrat. 90%+ of all Fox viewers vote republican. The incentive is to push crack. The business loves the subscribers and stickiness that generates, and the reporters love the sense of power. I haven't seen any good ideas to fix it. Re-evaluating federal funding for NPR seems worthy but alone would just seem petty - and ain't happening now.

Interesting that WSJ and WAPO were not named by at least 2% of respondents - and so are excluded. WSJ is the closest I can find to rational.

rhapsody said...

I haven't seen any good ideas to fix it.

Perhaps the re-institution of the FCC's Fairness Doctrine would be something to consider:

Since it was repealed in 1987, one could argue things seemed to have gone in the wrong (undesirable?) direction.

I would hope we can all see were this steady diet of extremist propaganda (from both sides of the isle) is leading us. Extreme ideological political disputes are not usually settled peacefully. I know I certainly don't want to see it go any further.

We need to do something to make it stop.

Anonyx said...

Yes, it's messy and I agree with all of the diagnosis of the problem. To "fix it," how about trusting markets? Ultimately, this means trusting free individuals. You can't regulate information sources to try to reduce the disharmony.

Start smaller: seek your own diversified info sources. Work on your family to persuade them. Try to be influential with your close friends. If all your close friends agree with you 100%, try expanding your circle a bit. Combat lunacy (in all its forms) when you see it--don't be afraid to stand up, whether it's in your local school system, church, or neighborhood. Don't assume bad faith or motives from others that disagree with you. Be a happy warrior and advocate with cheer and from good faith. Turn off sources of nonsense. Celebrate the good where you see it--liberty, rights of individuals, rollback of government encroachment, success of entrepreneurs, etc.

rhapsody said...


I completely agree with the sentiment. Uncle Milton would be proud of your recommendation!

However, in our free market system, we rely on the SEC to promote honesty and accuracy in corporate reporting. Certainly, they are burdened with the issues of most Government bureaucracies. In fact, I would argue they were not apportioned enough responsibility in the 2008 crisis.

The reason for the SEC is obvious. We can't have true free market if the participants are producing disinformation. Likewise, the FDA attempts to ensure your food & drug labels are communicating accurate information regarding what you put in your body. There are other examples, as well.

Unfortunately, I believe we have trusted the free markets for the last 30+ years since the Fairness Doctrine was repealed. And, as a result, we have major media outlets enabling rioters to burn-down a Minneapolis Police Station, and lay siege to our Nations capital. And, in my opinion, both hordes were inspired by propaganda and misinformation.

I believe our free markets in propaganda are leading to a very dark place (much darker than what we see now). And, if China and Russia are not active participants, they are at the very least enjoying this.

Bob said...

Except your comments premise on the belief that there is no subversion, that the main stream media is split down the middle, that they just argue ideological points. First of all the entire MSM is promoting one political ideology and only one major outlet, Fox News, is promoting the other side, and that is quickly fading to the left. That leaves upstarts OAN and Newsmax to give the Conservatives somewhat of a voice. And as far as I can tell the leftist juggernaut is out to crush them as we see censorship happening starting with the big corporate social media giants. Biden calls out for a war against "White supremacy" when there have been virtually no acts of white terror that can compare to BLM and Antifa. And yes, of course there are white people who are as bad as the terrorist mob of Antifa, but this war on white supremacy is actually a movement to crush conservative thinking and Christian belief. If a conservative disagrees with the current mob they are immediately tagged a racist or misogynist. It's right out of Rules for Radicals. It's 1984. So talking about doing something to control the media is like putting a band aid on an infection. Oh yes, and let's go after Trump and impeach him after he has left office. Is that even Constitutional? IMO we are no longer a Constitutional Republic.

rhapsody said...

My concern is propaganda and disinformation from the Right & Left that IMHO is dividing our country. I'm pretty sure our Constitution allows for Freedom of the Press because our Founding Fathers wanted the "Press" to be the citizen's watchdog against Government oppression.

I don't see the "Press" as acting in best interest of the citizens if it is recruiting us in to the separate folds of Government ideology with propaganda. In other words I think they are working for the Government and not against the Government.

You and I probably agree on more things than we disagree on. But, I think making this a "Left" or "Right" issue is the wrong way to look at it. And, while "Left" thinking usually favors more Government involvement, I suppose my thought that the "Press" should be protecting from the Government could be consider a "Right" ideal.

I also think that making it a "Black" or "White" issue is playing in to their hands.

Biden calls out for a war against "White supremacy" when there have been virtually no acts of white terror that can compare to BLM and Antifa.

I'll see your BLM riots and raise you "Oklahoma City".

My point is: They are both unacceptable. Period. If we (as a Nation) can't agree on that, we are headed in a direction that will end in civil war.

So talking about doing something to control the media is like putting a band aid on an infection

Maybe. But I think your talking about countering an ideology. I'm talking about making the "Press" accountable for spreading propaganda rather than vetting and disseminating truth/facts.

I'm not a big Jon Stewart fan. But if you have ever seen his Crossfire appearance (in 2004!!), I think I would have to say this is prophetic - and exactly what I am trying to say:

Needelman said...

Always appreciate your insight Scott and this latest post was worth the wait. Thank you!

As for all the comments and debate, I'd love to see this blog supplemented with a Telegram channel -- so much more conducive to discussions and following multiple conversations than simple blog comments section.

Those who think Scott should just stick to economics and leave his politics at the door need to remember that this is HIS platform. You have the freedom to read or move on.

Of course you have the liberty to react to it as well --- but keep in mind there's 0 incentive for him to stifle his own personal expression, on his own FREE blog, in order to placate you.

Adam said...

There are some tensions on the market, ad HF are forced to sell long positions to increase collateral. Would you plse, share your thoughts on currrent volatility spike. How the spreads are doing?
Thx as always.

EHuang said...

Fantastic blog post.

Economic recovery, rising money supply, rising prices.

Especially appreciated the chart on equity risk premium--explains the "Rational bubble" case for equities.

Lastly, I like that you included your. non-economic opinions. Don't necessarily completely agree with them, but you muted them and they do affect the economy in that social events and politics affect the which politicians are chosen and to what they respond.

Great comments too.

Johnny Bee Dawg said...

Amazing disinformation in this comments section. Fred?? lol
Election was stolen. There was no investigation by DOJ or FBI. They are there to protect the scam.
No judge admitted the evidence into court.
David Purdue and Kelly got caught on a Zoom call declaring they were GLAD Biden won.
GA voters saw it, and stayed home. I would have.

Take it, America. Here we are.
Joe Biden was installed by force, at gunpoint by 25,000 troops.
There was no "peaceful transfer of power."

The gentleman commanding the conglomerate of National Guard troops said there were actually 65,000 troops in DC.
The coup just happened.

The Virus is going to magically go away.
Vaccines already widespread.
DEM Governors will open their domains. MIRACLE!!
Economy will recover and cover up the 45 Executive Orders that Joe formerly called a "dictatorship".
Lawless America is back. Business as usual. For a while.

Sentiment is off the charts negative, which keeps me invested....for now.
Hell is coming....but later. For now, just a pullback.
Democrats and Davos are laying groundwork for Tribulation.
The goal is to separate the citizen from his government...just like in the EU or China.
Its coming here, now.
voting is now irrelevant.

America will regret turning over our nation to a lawless unConstitutional criminal cabal.
Mark my words.

Fred said...

JDB: You reap what you sow. I voted for Trump, Perdue and Loeffler because I believed they were better alternatives to the ruinous policies of the Democrats. Those who voted for Biden because they hated Trump's personality or stayed home in Georgia because they believed the election was stolen or that Perdue and Loeffler were secretly happy that Biden won can now celebrate that they stood by their "principles" and live with the consequences of four years of Democrat policies.

Johnny Bee Dawg said...

It doesnt matter who you voted for in the state of GA in this election. It was rigged. As in other swing states.

"Votes" were dumped into the system all at once in the middle of the night with no observers, illegally, in both the General and the Runoff.
And the double signature check was disabled for mail in ballots, without required legislative approval.
And more than one election official testified to the Legislature committees on more than one occasion and swore under penalty of perjury that the extra ballots which were brought in were unfolded, and pre-filled out by a printer, and were not on regular ballot paper.
The fraudulent "re-count" just counted these fake ballots a second time.
None of this evidence was allowed in any court. Case dismissed!

Im glad you voted, and that you felt like you mattered. That's got to be a good feeling.

FWIW, outspoken neverTrumper Gabe Sterling, who is now back with the Sec of State's office as of Jan 1, worked as an independent contractor in part of 2019 and all of 2020, and negotiated himself a $200,000 contract to implement that new Dominion system and ballot drop off system. There was a LOT more money involved in getting that system implemented, and it came from very very bad people. The GA Sec of State remained hidden, and had this independent contractor interact with the press, instead. People assumed Gabe was a state official. Legal loopholes, well-planned.

The major ATL counties in question cant find their legally required chain of custody records. Nor has there been a forensic audit allowed of the fraudulently produced 4am ballots. And where are those ballots, now? 4 PUB committee chairs in the GA Legislature have lost their leadership roles in Jan for challenging election results. There is more to that story, but if you ask them, personally, they will all tell you exactly what I just wrote. A HUGE amount of money created this result.

Lets all just move on.
Joe was installed by 25000 troops at an empty ceremony with fences and razor wire....just as our Founders intended.
Senile, clueless, non-campaigning Joe is my President. Signs a few EOs and then puts a "lid" on the day. Has no idea what he is signing, and has even admitted it on video.

Peter Navarro has 3 well-documented pdfs detailing the coordinated election fraud in the swing states.
Anyone can download or read Vols 1,2,and 3 at

Lawless country. Americans will regret allowing this fraud to occur.

Fred said...

These election fraud theories have been debunked in Georgia. Trump's lawyers were given an opportunity to put up evidence of fraud and they decided not to and instead stipulated to the facts. The defendants in the Dominion lawsuits will have plenty of opportunity to introduce evidence of fraud during discovery. We shall see if they can do it. I doubt it.

Houston Advisor said...

T**** destroyed the "Rule of Law" concept the last 4 years and now the Matt Gaetz's of the world are attempting to "cancel" the Liz Cheney wing of the GOP out of existence. I love seeing the GOP eat each other. Been coming for decades. #HumanWeakness

Larry said...

Good to see JBD back in action.
Good info!!

Johnny Bee Dawg said...

"These election fraud theories have been debunked in Georgia"
Passive voice....who debunked them, Fred?
Where can I read about that?

Bob said...

yes, they eat each other, just as the Democratic party got eaten by the swamp rats and is no longer the liberal voice of America, but rather the extinguisher of liberty. Now we must hope for Matt Gaetz to throw out the RINO establishment. They are tied at the hip with the current power leadership.

Adam said...

The Fed just quit corporate bonds support program. Is this a step into rates hike?

John A said...

There was no election fraud. The only election fraud that exists is in the fantastical imaginations and wishful thinking of the Trumpers.

Larry said...
This comment has been removed by the author.