Wednesday, April 14, 2021

Updated outlook and some interesting charts

It's fairly clear to all that the near-term outlook is rosy. Vaccinations are becoming ubiquitous, and although daily new cases have ticked up a bit here and there (with the notable exception of Michigan), the severity of cases and hospitalizations is declining; most of the old and most vulnerable folks have either left us or are by now largely immune, so most of the new infections are occurring amidst the young and healthy. In any event, "herd immunity" is likely only months away at the current pace of vaccinations. Jobs are growing at a healthy clip and business investment is surging—the economy has recovered most if not all of the ground lost over the past year. Optimism is on the rise, but animal spirits are somewhat restrained by still-pervasive risk aversion. None of this is likely to reverse in the next several months, so the economy will continue to benefit from a widespread, natural healing process.

Looking further into the future, however, there are dark clouds on the horizon. On the monetary front, the Fed has supplied more liquidity to the system than ever before—and by orders of magnitude—but the inflationary potential of this has been kept in check by a still-robust demand for liquidity and safety. By promising to remain super-accommodative for at least a year or so, the Fed runs the real risk of allowing inflation and inflation expectations to run wild. Who wants to hold all that cash, when cash returns are zero in nominal terms and -2% in real terms? Who doesn't want to borrow at near-zero or negative real interest rates, when just about all commodity, real estate, and equity prices are rising? Absent a blow to confidence, the demand for money is sure to decline, and that in turn could fuel a substantial rise in the general price level (aka inflation) as economic actors attempt to unload unwanted cash—unless the Fed reverses course in a timely manner. 

Perhaps the darkest of clouds is the Biden Administration's urge to expand government spending (on just about everything except a relative handful of actual infrastructure projects) while borrowing trillions in the process, reversing the de-regulation accomplishments and jacking up marginal tax rates on the rich. Common sense tells us that increased government spending, borrowing, regulatory and tax burdens, subsidies, and income redistribution cannot possibly strengthen the economy, and can only weaken it. Today we enjoy a long-awaited healing and reopening process, but by next year we could be slowly suffocating under the burden of Big Government.

It's hard to imagine a worse scenario than inflationary monetary policy coupled with anti-growth fiscal policies, but that's the risk that lies menacing on the horizon. 

I am surely not the only one to worry about such things. The bond market is so dominated by risk aversion that short-term Treasury yields are still extremely low, and risk-free real yields are frankly negative. Bond investors are willing to pay exorbitant prices for anything resembling security. The equity market is far less frothy, since valuations do not appear terribly out of line with interest rates and the global economy (see Chart #9 below). 

Chart #1

With yesterday's release of the March CPI stats, no one was surprised to see year-over-year inflation rise by over 2.6% (as compared to the weak price action of March '20). But as Chart #1 shows, most of the inflation "noise" comes from energy prices, which are by far the most volatile component of the CPI index. Subtracting energy prices, the CPI rose a little over 1.9% in the past year (red line).

Chart #2

Chart #2 shows the ex-energy CPI index plotted on a log scale y-axis. Here we see that the long-term trend of ex-energy prices has been a relatively steady 2% per year over the past two decades. We have been living in a 2% consumer price inflation world for many years, and nothing so far has changed. 

Chart #3

Chart #3 compares the price of gold to the price of 5-year TIPS (Treasury Inflation-Protected bonds), using the inverse of their real yield as a proxy for their prices. Both of these assets promise protection not only from inflation but also from geopolitical risk and general currency debasement. In short, they are classic safe-haven assets. That both are trading very near their all-time highs is a good sign that the world is still quite risk-averse. 

Chart #4

Chart #4 shows 10-yr Treasury yields, which have surged over 100 bps from last year's all-time lows. Yet yields today are only marginally higher than they were prior to the onset of the Covid crisis. Back in February of last year, a casual observer would have remarked that Treasury yields were exceptionally—and historically—very low. Yes, the outlook has brightened, but it still remains unusually dark. That investors are still eager to buy Treasuries at today's prices can only be interpreted to mean that the demand for Treasuries (arguably the safest place in the world to park long-term funds) is still very, very strong, which in turn strongly suggests that risk aversion is still very much alive and well. So strong that the nominal yield on Treasuries is fully expected to be less than the rate of inflation for the foreseeable future. 

Chart #5

Chart #5 shows the volume of passenger traffic in US airports. On a seven-day average basis, 1.4 million people took to the air as of yesterday. That's a huge improvement (about double) from just two months ago, but it is still more than one-third less than the rates we were seeing in 2019 and early 2020. There is still plenty of upside here.

Chart #6

As Chart #6 shows, equity prices have moved ever higher of late thanks in large part to a decline in the Vix "fear" index. Yet the level of the Vix today (17) is still substantially higher that the average (about 12) that is typical of periods of relative calm. Again we see that risk aversion is still alive and well, though obviously much less so than it was at this time last year. 

Chart #7

Chart #7 compares the market capitalization of Apple and Microsoft, the two leading tech giants. Both companies are worth over $2 trillion, an amount previously thought unimaginably high. If Apple were the only company to sport a two-trillion handle, we might be tempted to call it a bubble. But both companies have experienced similar gains over the years, and they were both well-positioned to profit from the new work-at-home reality which Covid fears sparked. 

Chart #8

Just for fun, Chart #8 compares the market caps of Walmart—the former world's retail giant—and Amazon, the new world-class retail giant. At $1.7 trillion, Amazon's market cap is more than four times larger than Walmart's and only a bit below that of Apple and Microsoft's. Arguably, both companies radically changed the retail world, only in very different ways and at different times.

Taken together, the market cap of these three giants adds up to about 14% of the current market cap of all US equities, according to Bloomberg. And to think they barely existed 30 years ago!  

Chart #9

Much has been made of late of the Buffett Indicator, which says that the market cap of US stocks exceeds US GDP by such a huge and unprecedented margin as to be a clear sign that the market is in a "bubble" that is set to burst. Chart #9 is my counter to that argument. I don't think it makes sense to compare the market cap of US corporate giants to just US GDP. After all, they have become huge players in the global marketplace, which is like saying their addressable market has expanded exponentially in recent decades. Globalization is a relatively new phenomenon, and it has meant that a US corporation can derive a huge portion of its profits from overseas markets which previously barely existed (e.g., China, India). Comparing after-tax corporate profits (a rough proxy for market cap) to global GDP shows no sign of an extreme. Profits have increased dramatically relative to US GDP (they averaged about 6% of GDP through 2000, but they have averaged almost 10% of GDP for the past decade), but not when measured against the surge in global GDP.

The long-term outlook is cloudy, but the near-term outlook is still favorable for investors. It's not an entirely comfortable situation, unfortunately. But the good news for now is that the risks out there are not going unnoticed, and that's a healthy sign. Will Congress really end up passing economy-crippling legislation?

UPDATE: This article by Gregory van Kipnis of AIER adds a lot of meat to my brief discussion regarding Chart #9. The author uses a rough estimate to make his point: "... half the growth in the Buffett Indicator comes from the increased importance of foreign earnings to US corporations, and another half of the growth comes from the increased amount of profits emanating from publicly traded companies."


Carl said...

"Much has been made of late of the Buffett Indicator, which says that the market cap of US stocks exceeds US GDP by such a huge and unprecedented margin as to be a clear sign that the market is in a "bubble" that is set to burst."
Mr. Buffett never suggested using the tool as a timing tool but more to assess general valuation levels and to moderate expectations, if applicable. It's interesting to remember that he had voiced concerns about high and rising corporate profit margins as a percentage of underlying real economic activity..He had in effect suggested that this would mean that the trickle down was no longer working according to the secret sauce elaborated in the Constitution.
Using global GDP as the denominator gives an interesting perspective but does not appear to be a useful tool to asses the general level of corporate valuations in the US. If you overlap US market cap to GDP with US market cap to GNP, there is very little difference. Also, the relative constancy between the two may be simply a reflection of the fact that, during that time period, global GDP (with ex-USA GDP growing faster than US GDP) and US corporate profits have risen at about the same compound annual growth rate ie about 3.5%. For US corporations this rise in profits reflects growing profit margins and one has to decide if we have reached a permanently elevated plateau. An aspect which is clear is that the more impressive growth outside of the US (especially in China) has caused the weigth of the US economy to progressively go down on a relative basis. In 1960, the US part formed 40% of the total economy (vs China at 4%) and now the US part is down to 24% (while China's part has grown to 16%). While an argument could be made that corporations have benefited through higher profit margins, by maintaining persistently high trade deficits and through other mechanisms including automation, real wages for US workers, since 1970, has grown, in real terms, by 10 to 15% while, for the same period, global GDP has been multiplied by 5 to 6.
The trickle down has indeed slowed down to a trickle.
Interesting times: today, there was this debate about housing. Some suggested that there was a bubble (ready to burst type) and others said that this was the first inning of an upcoming boom.
i guess everything is the eye of the beholder. The Fed calls this the wealth effect and i continue to wonder if it's real wealth.

Benjamin Cole said...

Another superb wrap-up of the US and even global economics-business scene by Scott Grannis.

IMHO, yes, the Biden Administration will inflict harm on the US economy, and especially on the US employee. Biden's buddies on Wall Street, Hollywood, Silicon Valley and in the military-business complex will probably do fine.

I must begrudgingly give credit to Biden, if he actually gets the hell out of Afghanistan. The US must develop a foreign-military-trade policy that first benefits Americans. The globalists have a different agenda.


The latest PCE core posted at 1.4% year-over-year, for February. I never regarded the Fed's 2% inflation target as sacrosanct, and some central banks, such as the Reserve Bank of Australia, target a 2% to 3% inflation band target. Modest inflation under 3% does not strike me as a problem.

As usual, I am uncertain about interest rates. Today we have global capital markets, and money is a fungible commodity. We have four major central banks (Fed, ECB, PBoC and BoJ) and some middle-sized ones. Global capital markets are about $450 trillion (stocks, bonds, property).

Most money-printing is not done by the central banks, but by fractional-reserve commercial banks. You know when you take out of home loan? You know where the money came from? Your bank printed the money.

Here is a stray thought: The world of fractional-reserve commercial banks preceded that of central banks. The fractional-reserve banks, which borrow short to lend long, and are heavily leveraged at that, often collapsed. So central banks were invented to provide liquidity when needed to the inherently fragile commercial banking sector. Commercial banks remain influential through the process and o this day.

This is how our monetary system evolved.

But does this system make sense?

In present circumstance, do money-financed fiscal programs make more sense?

I think so, but unfortunately, politics and interest-group politics get involved.

Carl said...

In what specific circumstances do 'money'-financed fiscal programs make sense?
Please consider fiscal dominance, crowding out, debt intensity etc

randy said...

Meanwhile, the risks are growing that Russia invades Ukraine, or China invades or blocks Taiwan, or both - perhaps even coordinated.

Benjamin Cole said...

IMHO, money-financed fiscal programs make sense in any recession and maybe permanently.

Why should new money creation take place only through the commercial banking system only?

Is such a system divinely-inspired?

Deficit spending builds up debt, but money financed fiscal programs do not.(Although, if the Federal Reserve simply builds up its balance sheet, it is as if the programs were money-financed anyway).

To be sure, commercial banks want to retain their central role in the creation of new money. It has been very profitable, and today commercial banks are even paid money to do nothing, and sit on reserves.

But what is in the interest of commercial banks, and in the interest of taxpayers, may be two different things.

Carl said...

"IMHO, money-financed fiscal programs make sense in any recession and maybe permanently."
Isn't this too good to be true? (!)

Money-financed public deficits imply financing deposits with a non-interest-bearing liability, ie currency but it's still a liability (central bank liability which is a government liability when the Fed is consolidated with the Treasury which it should be for analysis) in the sense that the liability will be (eventually) cancelled through either inflation and/or taxation.

One could argue that debt monetization has not really occurred in developed countries although perpetually maintaining a central bank balance sheet proportional to government debt issues is a conceptual equivalent (this has been going on for more than 10 years now).
However, when asked, central banks do not depict their actions as monetization and, in fact, often vehemently oppose the idea. Why is that?

It seems to be a game of subterfuge and the message is that the constraints will be developing inflation and an overheating economy but monetary velocity has been falling (going against growing monetary supply). What if inflation or sustainable growth never comes? The next logical step then would be helicopter money, the purest form of money-financed public deficits. Isn't there a trust issue then with 'we' the people?

Another major issue with money-financed deficits is that decisions then become concentrated in the hands of a few. Long ago, there was a similar argument that went on between John Law who pushed for debt monetization and Baron Montesquieu who suggested a wide and balanced distribution of power among participants. It's interesting to note that John Law's money printing experiment failed and the Founding Fathers were inspired by the concept of separation of power described by Montesquieu. Fractional-reserve in the banking system was the result of some kind of compromise reached over a long period and the idea of a central bank may be non-essential but, if it exists, central banks should remain independent from the branch of government that does not naturally see constraints on spending (money-financed or otherwise).

Grechster said...

"Deficit spending builds up debt, but money financed fiscal programs do not." Exactly.

This why we should publicly announce a policy of mailing out $1000 to every social security number so long as the latest PCE core reading is sub-2%. And do so every six months until PCE core gets to 2%.

This would be a far superior policy to buying Treasuries and MBS (which only serves to liquify the wealthy and exacerbate the 1/99 split.) Money velocity in this current QE regime goes straight down. And this is what we've seen since 2008 - velocity has drifted ever downward. The only pause in the decline has been very recent and that's because, unlike traditional QE, money was put straight into the hands of the people.

I know I'll get a bunch of push-back on this idea. So let me say it isn't my first choice. It's just better than the QE playbook that's been run for most of the last twelve and a half years.

Let me also acknowledge that this program would be an impediment to work. So suspend all payroll taxes until unemployment gets to a certain level, say 5%. At that time bring back the payroll tax but at only half of the current rate (for both employee and employer) and lift the cap on wages.

While I'm dreaming, I think The Dems should propose a $2 trillion pure infrastructure plan - no bailouts to incompetents like Chicago - and chum the waters for Republicans by dropping, yes dropping, the cap gains rate. And while they're at it, Dems could publicly commit to getting back to being the party of the people and abandon any effort to mess with the SALT. (Let the wealthy in CA and NY rough it, and give credit to Trumpy to appear magnanimous.)

This would bring about boogie woogie boom times.

Benjamin Cole said...


Get it right.

The proper expression is "Full Tilt Boogie Boom Times in Fat City."

I am not a fan of UBI. I am a fan of payroll tax holidays offset by the Federal Reserve buying Treasuries and placing them into the Social Security.

Ergo, we get new money creation by cutting taxes on workers and businesses. Productive people.

I think you are onto something when you say that conventional quantitative easing does not benefit the broader economy.

But US commercial banks get a lot of reserves under conventional quantitative easing---and guess what---they are paid interest on those reserves. For doing nothing.

Carl said...

The comment about Social Security is fascinating.
A phase has been entered whereby the pay-as-you-go will no longer meet objectives meaning that future beneficiaries (in the next 15 to 25 years), if nothing is changed, will have lower payouts.
For changes to occur (tough discussions), the following options have to be considered:
-raise (payroll) tax
-lower benefits or delay age of retirement
-appropriate funds from other parts of the government budget
-issue debt...
and now (!) (maybe typical of 'Modern Monetary' thinking), why have those tough discussions and instead use permanent money-financed deficits (aka helicopter money) to 'fund' the SS Trust Fund.
It is interesting to imagine FDR announcing the program in the 30s: "The Social Security Program will be funded with free printed money". How have we not thought of this sooner?
Last i checked, accounting is still based on double entry.

Benjamin Cole said...


I see no problem with using helicopter money to finance Social Security.

One could argue the US has been financing a global military through borrowing and helicopter drops since 2008. The US spends about $1.3 trillion annually on DoD, VA, DHS, black budget and pro-rated interest on the national debt. BTW, that about $10,000 per household, every year.

Where is the inflation?

Even more dramatic is Japan. Half of the that nation's gigantic national debt is held by the Bank of Japan. The consumer price index was 100 in 1997 in Japan, and nearly that now (though sinking). That is 33 years not just of low inflation, but no inflation.

The Swiss National Bank has printed $910 billion in Swiss francs in recent years, to buy sovereign bonds of other nations. Switzerland has a population of 8.5 million. Switzerland has had deflation and inflation under 1% since engaging in this gigantic QE program.

If you have a theory about what causes inflation, should it not apply in the real world?

Sure, a nation can engage to too much money creation, whether through its commercial bank system, or through money-financed helicopter drops.

A nation can also starve its monetary system of money, and trigger a Great Depression.

In the US we had a commercial banking system that was inherently fragile, that is they borrowed short, leveraged to the hilt, and lent long. The commercial banks created a central bank in 1913 to bail out busted banks when needed. Bank panics were common in the US.

Given that commercial banks are systemic to macroeconomic health, there is good and bad in central banks, probably mostly good.

But should we sacralize commercial banks as the only way to create money?

BTW, the guys who met at Jekyll Island were all bankers. Gee, what plan did you expect them to come up with?

Carl said...

"I see no problem with using helicopter money to finance Social Security."
i do, so it may be worthwhile to continue the discussion. :)

"BTW, the guys who met at Jekyll Island were all bankers. Gee, what plan did you expect them to come up with?"
Not quite. Mr. Paul Warburg was also there. Mr. Warburg was a major driver force and architect behind the plan. The trigger was the 1907 Panic (when it was realized how massively important the US monetary/financial had become) coming on the back of recurring 'liquidity' crises. Mr. Warburg had written about this potential need (to deal with a financial panic) months prior to the actual 1907 Panic. If interested see:

BTW, i agree that central banks have been captured by various interest groups and the kick-down-the-road mentality. However, that does not mean that even worse possibilities should be adopted.

The problem with money creation (private, hybrid QE-type or public) is that too much of it, whatever its origin is likely to result in poor outcomes, possibly in a non-linear way. i would centrally-planned money creation is likely the most dangerous kind. Yes Japan and the most recent experience in the US shows that inflation is not picking up. With the trends and levels of central banks' balance sheet, shouldn't there be a pause for reflection concerning money creation.

In 2013, the Federal Reserve (see below for reference) came out with a position paper stating that they were not monetizing the debt and saying that they were implementing temporary policies. Since then, the size of the Fed involvement has grown (about 20% of of a much larger debt pie).

Money printing (whatever the origin) is like Hotel California, a place you can check out any time you like but from which you can never leave.

i'm just a simple guy typing on a screen and living in a suburb of a large city in North America who has seen the value of his home jump recently for dubious reasons unrelated to fundamentals and who wonders how come so many people seem to have free lunches. In Canada, during 2020, the central bank's share of government debt went from 15 to 40% and the 'bank' absorbed 95% of all bills and bonds issued at the federal level. Why does this feel like Alice in Wonderland?

Benjamin Cole said...


Not sure why you suggest Paul Warburg was not a banker. He was a third- or fourth-generation banker.

"Warburg was born in Hamburg, Germany, to the Warburg family, a Jewish banking dynasty with origins in Venice.

In 1891, Warburg entered the office of the family banking firm of M. M. Warburg & Co., which had been founded in 1798 by his great-grandfather. He interrupted work there to undertake a world tour during the winter of 1891–92. Warburg was admitted to a partnership in the family firm in 1895."

That's a banker, born and bred!

I am not sure I have much to add to my previous comments. I think money-financed fiscal programs work, and work better than conventional QE. Conventional QE puts new capital into global capital markets, which are glutted with money anyway.

The US is a defined geographic area. A Social Security tax holiday puts more money in pockets of workers and businesses and they can spend it, within the borders of the US.

To reiterate, I am not a fan of more federal spending, but rather more federal tax cuts.

The present monetary system evolved from circumstances and bandaids. Lenders unilaterally began lending out more money than they had in the till. Fractional reserve banking was born. Then central banks were invented to safeguard the system.

This is a clunky, fragile, Rube Goldbergian system, and like all federal apparatus, to some large degree captured by relevant industry.

BTW, some Libertarian right-wing economists advocate eliminating fractional reserve banking. I think John Cochrane has similar views along this line.

It is an interesting question----who has the right to print money? Should it be private-sector commercial banks? A central bank? A national government? No one?

A gold-standard and no fractional reserve banking would mean "no one" prints money.

I am not a fan of metallic standards. Why not silver? Electrum? Platinum?

But hey, the nice thing about macroeconomic debates is no one is ever wrong!

Carl said...

^Mr. Paul Warburg is mentioned because he was a wise man and aimed for sound banking. He combined technical knowledge with sound principles of banking. Of course, he became ridiculed in the late 1920s when he suggested various potential outcomes as a result of the collective path taken.
The permanent problem is that people (quite a bipartisan view now) expect the government to spend on them and to tax others and governments have discovered that this permanent problem ca be carried forward.
The basic problem is that money-financed programs implies a permanent aspect which has not been incorporated by people in general. Once people collectively realize that the currency is worth less than before, there is the potential to enter a phase with non-linear changes.
At a Tea-Party movement rally some time ago, there was a vocal participant who said: "Take your hands off my Medicare Program".
The issue of spending other people's money now includes the issue of money spent today instead of into the future. Even countries have to reckon with that, in spades, at some point.
The fact that governments can print their own currency practically at will now has indeed become a Faustian bargain.

The Cliff Claven of Finance said...

Investors and pundits often criticize stock market valuation indicators near the end of bull markets. Everyone thinks they are an investment expert near the end of bull markets.

I have been an investor since 1974, and retired at age 51 to live off my investments.
The pundits argue that "it's different this time".
And they are always wrong.

Buffett once mentioned the Market Cap to GDP indicator but there is no evidence he actually uses it. The amount of cash his firm holds is a decent indication of market valuations. And that is public information.

I'm waiting for criticism of the Price to Sales Ratio, which, like the Market Cap to GDP Ratio, has been an excellent predictor of stock market returns over the next ten years.

In general, the higher the stock market total return over the past ten years, the lower the stock market total return over the next ten years.

The record high levels of stock market valuations right now, using the two indicators mentioned, and others with good long term records, predicts unusually low stock market returns over the next ten years.

In addition to the record high stock valuations, the US government now has socialists in charge. They have a really old guy reading what they place on his teleprompter, and signing what they tell him to sign. It's all socialist. If they can pack the Supreme Court, they can get H.R.1 (Democrats Forever voting "reform") into law, and not ruled unconstitutional.

The current government is not pro-business, except for the "green" industry, and Democrats plan to hike corporate tax rates. If cutting corporate tax rates was good news, then raising corporate tax rates is bad news.

I know this blog has never been bearish, not even in late 2008 just before the stock market collapsed. So I expect permanent optimism here.

But anyone interested in buying low, and selling high, should realize that NOW is high.

Scott Grannis said...

Cliff: thanks for your thoughtful comments. Although I'm not explicitly bearish, I think a fair reading of my recent posts shows that I am at least much less optimistic about the long-run outlook than I have ever been. However, I do think the near term outlook is still quite bullish given the obvious and ongoing recovery from Covid misery. I share your concerns about Big Government, Biden and higher taxes, etc. As a first approximation, it could be said the outlook for the next several years will be for another sluggish a la what we saw in the Obama years following his "stimulus" policies—or worse, e.g., with GDP growth averaging only 1 - 1 ½ percent per year. That would undoubtedly coincide with very low returns for the stock market.

But all of that is conditioned, of course, on Biden and the Dems in Congress getting what they want, and than is not yet certain by any means.

Thought experiment: if you're convinced equity returns will be very low in the next 10 years, what do you do with your money? If you turn to Treasuries, you won't even approach 2% per year. Maybe the market is already priced to your outlook? If so, one today would indifferent to being in equities or bonds on a risk-adjusted basis.

I also think that there is a reasonable likelihood of higher than expected inflation over the next 5-10 years. That would lift corporate earnings, and potentially by enough to fully offset the impact of higher interest rates on discounted future profits. So a slow-growth economy could still deliver equity returns that beat the yields available today on 10-yr Treasuries

randy said...

Regarding Price To Sales ratio - I remember reading something from Ken Fisher that it was a highly effective metric. But at some point it was much less effective because it was adopted by too many other analysts. Not to take anything away from your good argument. But you said "I'm waiting for criticism of the Price to Sales Ratio".. that criticism came from none other than the man who innovated it's use. FWIW.

The Cliff Claven of Finance said...

Thank you for providing an example supporting my main point about investors dismissing valuation indicators with good long term track records (10 to 12 year forward market projections).

You have dismissed the Price to Sales Ratio.

The P/s Ratio has a very good long term record of about .90 correlation with stock market returns over the next ten year period. It is not useful for one year, or five years, which may be what Ken Fisher complained about. It really doesn't matter what Ken Fisher says -- the data prove the P/S/ Ratio has been valuable.

Mr. Grannis:
Thank you for a detailed, intelligent reply.

You wrote:
"I do think the near term outlook is still quite bullish"

My response:
That sure sounds like you are bullish.
What else matters?
In the long term, we are all dead.

Please revise that airlines chart.
It is visually deceptive with the log vertical axis.

And stocks do not climb a wall of worry
Just the opposite.
Worry declines as stock indexes rise.

Stocks climb a ladder of confidence.
Confidence increases as stock indexes rise.
Near the market top confidence stops rising
Most investors are already very confident.
They have very little cash on the sidelines.
Many investors think they are financial geniuses.
And many investors dismiss proven valuation indicators.

It's always "different this time.

Benjamin Cole said...

I think true Marxists and socialists would be insulted to hear that the Biden Administration is being lumped in with them.

The Biden Administration and the Democratic Party are an agglomeration of interests, including globalists, multinationals, Silicon Valley, Wall Street, and media. Add-on the absolutely revolting identity-politics crowd, and an increasing affiliation with the global security state and the Pentagon.

Compared to the Democratic Party, an honest socialist would be a refreshing change of scenery.

HDX said...

Things look rosey to Scott because when his generation came of age, the USA was the largest creditor the world had ever known. They spent and they "borrowed" (with no intention of ever repaying). As they enjoy their twilight years, the USA is hundreds of trillions in debt, about $25 trillion on balance sheet debt plus (according to the government's own GAO estimates) another $115 trillion in unfunded promises, neglected infrastructure, etc. Of course things look good when you max out your grand kids credit cards!!!

For those who will get stuck with the trillions in unpaid bills, things look bleak. One of the many neglected areas is the education system, which spends three times as much per student as any other country... more than half of it going to expensive administrators, purchasing fraud, and political indoctrination. Very little goes to teacher salaries, and even then a lot of big city teachers are morons who should be fired if not for corrupt "teacher" unions.

A generation of poorly miseducated kids with low skills are going to inherit trillions in debt from their parents, and Scott tells us this is a good thing?

But the Fed is printing money like they are zimbabwe!! Surely that will work out the same as it did in Zimbabwe and Argentina and countless other 3rd world sh!tholes! Yes, the same garbage inputs will yield the same garbage outputs Scott, and that is the problem.

Tonight, our cowardly dementia patient will be on TV -- proposing to "borrow" several more trillion that he won't pay back even if he somehow survives his term. Pelosi and McConnel, both over 80yrs old, will clap like monkeys at all the money they are stealing from America's grandchildren.

Throughout history, we hear stories of parents making extreme sacrifices so their kids will have a better life. We see this happening all over the world, in every culture and every continent.

Contrast this human endeavor with the cowards (both parties) in Washington DC. Tax, borrow and spend on corruption and political pork. Then have Wall Street strategists like Scott tell us that debt is good! Well, debt is good for the political class and their bankers. Its toxic for everyone else.

Just a pathetic group of losers.

Scott Grannis said...

HDX: A close reading of my comments in recent months would not support your claim that my outlook is rosy. I have taken pains in many posts to highlight the risk of a significant rise in inflation—it is of great concern to me. I have also argued that the Big Government policy proposals of the Biden administration are going to create serious headwinds to growth in the years to come—but for the near term, the economy is very likely going to be enjoying what would appear to be vigorous growth, if only because there is a lot of catching up to do as the Covid crisis winds down. I have posted charts showing that while the federal debt is approaching record levels relative to GDP, the interest payments on the debt are not onerous at all. For now.

In the same vein, I have argued that the ultimate burden of the federal debt will be born not by taxpayers but by those who own the debt, since today's nominal interest rates are almost certainly going to be less than the future rate of inflation. "Safe" assets like T-bonds and cash are going to suffer a signficant loss in terms of purchasing power. It's better therefore to be a borrower than a lender. "Borrow and buy" has been a theme of this blog for most of this year, in fact. Owning assets tied to the real economy (real estate, equities) are better than fixed-rate assets, since they will act like an inflation hedge.

Anyone calling this outlook "rosy" should go back through the posts of recent months and think again.

The long-term outlook has dimmed further, unfortunately, in the wake of Biden's GARGANTUAN tax and spending proposals announced last night. As with almost every attempt by politicians to "stimulate" the economy and address income inequalities, the likely result will be to depress economic activity and increase income inequality.

There is a strong socialist current driving policy in Washington these days, and it is painful to see. When policies don't produce their desired results, the response is to do more of the same. That's Biden's central argument: times are tough so we have to THINK BIG. Of course that is just the exact wrong thing to do. The government needs to get out of the way and let the private economy flourish.

As much as I worry about the future, I'm not going to be selling my stocks, because I don't see a better alternative. I'm prepared to see very modest returns on equities in coming years. The big risk comes when the Fed eventually has to tighten policy in response to an uncomfortably high rate of inflation. We're on track to see that happen sometime in the next few years, I'm afraid.

But selling is not exactly the right thing, because all the safe investments are priced with these fears in mind. The market is very risk averse. HDX is not the only one who is worried. Most serious investors are worried these days, and I've made that point several times in recent months.

The best course of action is not obvious, unfortunately.

For now, though, the economy is going to be doing fine for at least the next several months and possibly through the end of the year. Beyond that, danger begins to really rise.

Scott Grannis said...

I would go further and say that my best hope for the future is to see the public push back strongly against Biden's big tax and spending policies. Government has already done enough damage for a generation with the tragically unnecessary and damaging lockdown. Remember my slogan: The shutdown of the US economy will prove to be the most expensive self-inflicted injury in the history of mankind.™ I think most people would have to agree that this prediction has been fulfilled in spades.

If the Democrats ram through big spending and tax policies in nonpartisan fashion, then the outlook will be indeed troubling, to say the least. Doing away with the filibuster would be dangerous. Packing the Supreme Court would be foolish. Giving Washington DC and/or Puerto Rico congressional representation would also be dangerous.

This is not the time for radical policies. We need relative peace, no an activist government.

Socialism has always failed. Our educational system (dominated by state education and unions) has utterly failed to educate generations of kids about the dangers of too much government. Teachers' unions have done serious damage to the health and education of our kids this past year. It's a tragedy.

Benjamin Cole said...

On the brighter side, we now have two "pro-business" parties.

Just make the right campaign contributions, hire the right people, lobbyists, think tanks and foundations, present the right public profile, and you will find your government is "pro-business," for you.

Scott Grannis said...

The corruption that is increasingly evident on both sides of the political aisle is deplorable. As is the disregard for the rule of law, where some folks seem to be above the law while most of the rest of us can be crushed by the law.

That's why it is imperative to always keep government as small as possible.

Many lament that "there is too much money in politics." But the reality is that there is too much of the government that is for sale. Politicians these days possess power that would have been unthinkable only a few decades ago. The temptation for the abuse of power is therefore practically irresistible.

Benjamin Cole said...

Unit labor costs fell in the first quarter from a year earlier.

wkevinw said...

Stealthy Bailouts by the Taxpayers.

Pensions are on the list where the "math doesn't work". As such, the government will try to figure out ways to quietly bail them out. What are the unintended consequences? (something has to happen to interest rates/bond markets because of this, I think).,sum%20payment%20to%20eligible%20multiemployer

Ataraxia said...


Can you point me to a good reference for the costs and benefits of using what was the gold standard?

Scott Grannis said...

Ataraxia, re gold standard: George Gilder has written good stuff about the gold standard, as has Nathan Lewis. Jude Wanniski wrote an essay on the subject back in 1995 that is different and worthwhile: ("A Gold Polaris")