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Are Vaccinated People Spending Differently than those not Vaccinated?

 

With over 20% of the U.S. now having received Covid shots (through April 2021), some interesting statistics have been collected on consumer behavior. There is a slow return to pre-Covid era consumer behavior; this suggests industries impacted most by the quarantines still have much more potential. It also reveals that despite the expectations that the vaccine would encourage many people to be out among others for live music, gym workouts, dining, etc., those that are more likely to be out in crowds are those that have not been vaccinated. This reaction has been as hard to predict as everything else over the past year.

 

Vaccinated Behavior vs. Unvaccinated

According to an April survey by Cardify, the most likely consumers to be out at gyms, restaurants, salons, and entertainment venues are those that have not been vaccinated and don’t plan on getting one. As an explanation as to why those that have received immunities aren’t as likely to be out, Derrick Fung, CEO of Cardify said, vaccinated consumers are “proceeding with cautious optimism.” The vaccinated are slow to behave as they did pre-Covid and are now less comfortable being around large crowds of people.

The Cardify survey data is confirmed by other research conducted by Earnest Research (ER). ER looked at consumer spending and foot traffic across the most and least vaccinated states, along with how well newly acquired customers during COVID have been retained across retailers.

The second report comes to the same conclusion. The vaccine rollouts have not been the big driver of spending outside the home that was expected. Digging deeper to see what is happening, it’s clear the least vaccinated states have experienced the most spending compared to the pre-Covid era. And, states having the most vaccinated have not performed.

For example, Georgia has had the slowest vaccine rollout with just 16% of its population having been “jabbed,” yet the state continues to be an outperformer in total consumer spending and traffic. Massachusetts is the most vaccinated state, with more than 25% of its population having received the precaution, and it is struggling to increase in-person commerce.

 

Source: earnestresearch.com

 

Spending

As demonstrated in the chart above, Massachusetts, with its above-average vaccination rate, has seen its year-on-year spending sitting well below a year earlier. The highest performer Georgia tops the rate of the data points even when Massachusetts is removed from the 25% or greater category. The measure of performance of states with less than 25% inoculated with Georgia removed is still much closer to year-ago traffic than the high vaccine state of Massachusetts. One explanation for the data running counter to what one may have expected is the states with the most in-person traffic are those that had fewer restrictions over the past year. Their citizenry has less re-adaption anxiety and is not uncomfortable mixing with strangers.

Curiously, the states with higher vaccination rates outperformed in the middle of 2020, a lead that narrowed at the end of the year before January’s stimulus-driven uptick and February’s post-stimulus drop. Early March saw an acceleration across all states but without any clear signs of outperformance in the most vaccinated states.

 

Take-Away

Vaccines are not the main economic driver. When it comes to people leaving the perceived protection of their homes to enjoy a show, have their haircut, or enjoy a prepared meal out. What they have become accustomed to may be more telling. For investors, it shows that there is much more potential for increased retail sales for the Covid-recovery stocks such as airlines, restaurants, and gyms. At no place in either the Cardify survey or the Earnest Research report was there a suggestion that the more cautious vaccinated populations would not eventually change over time.

 

Suggested Reading:

Is Inflation Going to Hurt Stocks?	Long Term Retirement Money and Fledgling Companies

Is it Smart to Avoid Brokers that Sell Order Flow?	Are Meme Stocks Improving Flawed Markets?

 

Sources:

https://www.earnestresearch.com/insights/

https://www.cardify.ai/

 

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Four Inflation Growth Possibilities and their Impact on Stocks

 

One data point does not make a trend. Yet, after the Bureau of Labor Statistics (BLS) posted a 0.08% increase of the most-watched inflation measure (CPI-U), debates exploded over whether we’re in a dangerous upward trend. If you listen close, they’re not two-sided debates. In my own discussions and observations, I count four positions on the important state-of-inflation question.

 

Implications of Each Position

Each position has a different implication. There are some that expect the Fed will backtrack significantly on their “low rates for years” language and quickly take the proverbial punch bowl away. These are the voices saying the Fed will notch up rates soon. Another contingent that also argues rates are going up suggests the Fed now has little control. They agree that rates are rising, but they think it will be market-driven and completely outside of intended monetary policy. Then there are those who believe rates will stay down in much the same way we have experienced low rates for the past 12 months – no change.  A fourth voice in the debate believes inflation levels will not stay too high, but the Fed would quickly change course if they do.  

 All four of these have different ramifications for the stock market. Should rates rise or be pushed up, money would be pulled out of the equity markets and reallocated to the more predictable returns of fixed income securities. The next inflation data release is scheduled for June 13; this will either begin to confirm or disprove a trend. Equity market investors should keep an eye on which of the four scenarios are unfolding.  Here’s why: In two of the four different scenarios rates rise, however, each is nuanced and could have different effects on stocks. Another two distinct scenarios are where rates stay near current levels, they could also lead to different paths for equity markets.  

 

Low Inflation Contained – Scenario #1

Let’s start with the scenario, of low inflation. Those supporting this forecast see modest price growth as deeply ingrained in economic activity, they believe sharper increases simply won’t happen. They don’t foresee overheating even with the promised 0.00-0.25%  interest rates for the next three years. Those embracing this scenario take reassurance that the CPI release that prompted the debate, was clouded by base effects and supply bottlenecks, both of which could be a short-term occurrence.

 

Base Effect: The impact of an increase in the price level (i.e. previous year’s inflation) over the corresponding rise in price levels in the current year.  If the inflation rate was low in the same period last year, then even a small increase in the price index will produce a high rate of inflation in the current year.

 

The supporters of this idea expect “business as usual.” And as we have learned, “usual” means we’ve had cheap money and low rates with no problem – inflation isn’t a concern, the results will continue to be a strong stock market that will march upward. This is the most bullish scenario for stocks (and bond prices).

 

Fed Will Fall Behind – Scenario #2

 Let’s look at the other extreme inserted here as scenario two. These folks view the Fed as having an overly dovish bias that will ignore the warning signs until it’s too late. Reeling inflation in, after it takes hold, is more difficult than maintaining stability by staying ahead of it. They are very concerned the Fed is already behind. Under this scenario the Fed loses control, long-term bond yields soar as bond investors require compensation (yields) above the expected level of purchasing-power erosion.  The Fed has been able to keep control over short-term rates, but they can lose the ability to impact the longer maturities out on the yield curve. In fact, keeping the short end anchored near zero could spook bond buyers even more.

 

Dovish: The Fed’s tone of Fed monetary policy and position toward inflation is dovish if it leans more toward inflation is not a problem so economic growth is a higher priority. When the Fed is dovish, they are likely to keep rates low. The opposite is when the Fed is looking to subdue growth to maintain an inflation target, it is called hawkish.

 

Under this second scenario, stocks react by selling off in many sectors. This is because borrowing costs of businesses rise, importers will have to pay more for their goods, costs they may not be able to fully pass on to customers, dividend-paying stocks will take a hit as competition intensifies with coupon levels paid on bonds. Any poor performance from equities could drive even more money out and into bonds and insured deposits. 

 

Fed too Slow on the Draw – Scenario #3

 In a third scenario, there are those who expect the Fed to respond to a climb in inflation pressures, but not in time. These Fed-watchers, pundits, and everyday investors see the central bank as more committed to their forward guidance on rates than to their other pledge to act if core prices stay above their 2% target. My former colleague, ex-Federal Reserve Bank of New York President, Bill Dudley, put himself firmly in that group. In a recent Bloomberg interview, he suggested that the Fed would start chasing inflation’s tail after it ran away and that we would then need much higher nominal rates to get real rates to the levels that would cool growth and inflation pressures. His experienced projection is that policy rates could top 4%.

 

BLS CPI Data Release Dates June 2021 Jul. 13, 2021 08:30 AM July 2021 Aug. 11, 2021 08:30 AM August 2021 Sep. 14, 2021 08:30 AM September 2021 Oct. 13, 2021 08:30 AM October 2021 Nov. 10, 2021 08:30 AM November 2021 Dec. 10, 2021 08:30 AM

 

This scenario would likely cause an erratic stock market. Some days traders and other participants may take solace over the Fed’s occasional calming words and then markets could spike up on other days as it gets spooked by numbers suggesting economic overheating was ignored. This push and pull create opportunities for traders that do better with volatility, most investors prefer clearly trending markets.

 

The Fed’s Got This – Scenario #4

Janet Yellen, who also has some insight into what goes on behind closed doors at FOMC meetings, hasn’t gone against the official stance, which says that the mega-stimulus meant to encourage full employment won’t push inflation past 2% for any sustained period.  She has however noted that if the stimulus is overdone, the Fed can simply start the ball rolling on a gradual climb in rates to preempt a serious overshoot.

This may sound like the first scenario, but in that scenario, the policy action was too late. This last scenario suggests the Fed can and will change if it needs to and everything will turn out fine.

Confidence and trust are important for investors. Should this trust be established and maintained, even in the face of rising inflation and rates, markets will be orderly as investors won’t expect a return to the inflation of the ’70s. Perhaps investors would experience equity indices growing along the more historical trend line.

 

Take-Away

Anyone who says they know the market is going to have an inevitable outcome may not be worth listening to. Professional money managers form scenario analysis and try to handicap the certainty of each outcome when allocating risk positions. Investors at all levels should view what the possibilities are and observe to see which are unfolding, shifting allocations in response.

We have had a very transparent Fed under Bernanke, Yellen, and the current Chair Powell. It has, in my observation, done everything that has been promised as it relates to conducting policy.  One tool the Fed has used consistently since 2009 is the incredible power of their telling the market exactly what their plans are. Promising the markets, they will keep rates very low through next year has acted to keep bond investors from betting against the Fed’s word. Those who have bet against the Fed over the past ten-plus years have probably had bad outcomes. One question that may never be answered is: if the Fed does need to act to raise short-term rates in advance of next year, and they do act, will they lose the power of their promise?

I enjoy hearing from readers; feel free to comment directly to my email by clicking on my name below.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

The Sustainability of Growing Margin Debt	Is Inflation Going to Hurt Stocks?

Should Stock Market Investors Worry About Inflation?	Money Supply is Like Caffeine for Stocks

 

Sources:

https://www.bls.gov/news.release/pdf/cpi.pdf

https://www.fincash.com/l/basics/base-effect

https://www.bloomberg.com/news/videos/2021-04-12/dudley-says-fed-will-be-much-slower-to-tighten-video

https://www.wsj.com/articles/yellen-says-interest-rates-may-have-to-rise-to-keep-economy-from-overheating-11620151101#:~:text=Yellen%20told%20The%20Wall%20Street,the%20coming%20months%20will%20subside

 

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image credit: Paul Boudreau (Flickr) - Inverted from Original

Four Inflation Growth Possibilities and their Impact on Stocks

 

One data point does not make a trend. Yet, after the Bureau of Labor Statistics (BLS) posted a 0.08% increase of the most-watched inflation measure (CPI-U), debates exploded over whether we’re in a dangerous upward trend. If you listen close, they’re not two-sided debates. In my own discussions and observations, I count four positions on the important state-of-inflation question.

 

Implications of Each Position

Each position has a different implication. There are some that expect the Fed will backtrack significantly on their “low rates for years” language and quickly take the proverbial punch bowl away. These are the voices saying the Fed will notch up rates soon. Another contingent that also argues rates are going up suggests the Fed now has little control. They agree that rates are rising, but they think it will be market-driven and completely outside of intended monetary policy. Then there are those who believe rates will stay down in much the same way we have experienced low rates for the past 12 months – no change.  A fourth voice in the debate believes inflation levels will not stay too high, but the Fed would quickly change course if they do.  

 All four of these have different ramifications for the stock market. Should rates rise or be pushed up, money would be pulled out of the equity markets and reallocated to the more predictable returns of fixed income securities. The next inflation data release is scheduled for June 13; this will either begin to confirm or disprove a trend. Equity market investors should keep an eye on which of the four scenarios are unfolding.  Here’s why: In two of the four different scenarios rates rise, however, each is nuanced and could have different effects on stocks. Another two distinct scenarios are where rates stay near current levels, they could also lead to different paths for equity markets.  

 

Low Inflation Contained – Scenario #1

Let’s start with the scenario, of low inflation. Those supporting this forecast see modest price growth as deeply ingrained in economic activity, they believe sharper increases simply won’t happen. They don’t foresee overheating even with the promised 0.00-0.25%  interest rates for the next three years. Those embracing this scenario take reassurance that the CPI release that prompted the debate, was clouded by base effects and supply bottlenecks, both of which could be a short-term occurrence.

 

Base Effect: The impact of an increase in the price level (i.e. previous year’s inflation) over the corresponding rise in price levels in the current year.  If the inflation rate was low in the same period last year, then even a small increase in the price index will produce a high rate of inflation in the current year.

 

The supporters of this idea expect “business as usual.” And as we have learned, “usual” means we’ve had cheap money and low rates with no problem – inflation isn’t a concern, the results will continue to be a strong stock market that will march upward. This is the most bullish scenario for stocks (and bond prices).

 

Fed Will Fall Behind – Scenario #2

 Let’s look at the other extreme inserted here as scenario two. These folks view the Fed as having an overly dovish bias that will ignore the warning signs until it’s too late. Reeling inflation in, after it takes hold, is more difficult than maintaining stability by staying ahead of it. They are very concerned the Fed is already behind. Under this scenario the Fed loses control, long-term bond yields soar as bond investors require compensation (yields) above the expected level of purchasing-power erosion.  The Fed has been able to keep control over short-term rates, but they can lose the ability to impact the longer maturities out on the yield curve. In fact, keeping the short end anchored near zero could spook bond buyers even more.

 

Dovish: The Fed’s tone of Fed monetary policy and position toward inflation is dovish if it leans more toward inflation is not a problem so economic growth is a higher priority. When the Fed is dovish, they are likely to keep rates low. The opposite is when the Fed is looking to subdue growth to maintain an inflation target, it is called hawkish.

 

Under this second scenario, stocks react by selling off in many sectors. This is because borrowing costs of businesses rise, importers will have to pay more for their goods, costs they may not be able to fully pass on to customers, dividend-paying stocks will take a hit as competition intensifies with coupon levels paid on bonds. Any poor performance from equities could drive even more money out and into bonds and insured deposits. 

 

Fed too Slow on the Draw – Scenario #3

 In a third scenario, there are those who expect the Fed to respond to a climb in inflation pressures, but not in time. These Fed-watchers, pundits, and everyday investors see the central bank as more committed to their forward guidance on rates than to their other pledge to act if core prices stay above their 2% target. My former colleague, ex-Federal Reserve Bank of New York President, Bill Dudley, put himself firmly in that group. In a recent Bloomberg interview, he suggested that the Fed would start chasing inflation’s tail after it ran away and that we would then need much higher nominal rates to get real rates to the levels that would cool growth and inflation pressures. His experienced projection is that policy rates could top 4%.

 

BLS CPI Data Release Dates June 2021 Jul. 13, 2021 08:30 AM July 2021 Aug. 11, 2021 08:30 AM August 2021 Sep. 14, 2021 08:30 AM September 2021 Oct. 13, 2021 08:30 AM October 2021 Nov. 10, 2021 08:30 AM November 2021 Dec. 10, 2021 08:30 AM

 

This scenario would likely cause an erratic stock market. Some days traders and other participants may take solace over the Fed’s occasional calming words and then markets could spike up on other days as it gets spooked by numbers suggesting economic overheating was ignored. This push and pull create opportunities for traders that do better with volatility, most investors prefer clearly trending markets.

 

The Fed’s Got This – Scenario #4

Janet Yellen, who also has some insight into what goes on behind closed doors at FOMC meetings, hasn’t gone against the official stance, which says that the mega-stimulus meant to encourage full employment won’t push inflation past 2% for any sustained period.  She has however noted that if the stimulus is overdone, the Fed can simply start the ball rolling on a gradual climb in rates to preempt a serious overshoot.

This may sound like the first scenario, but in that scenario, the policy action was too late. This last scenario suggests the Fed can and will change if it needs to and everything will turn out fine.

Confidence and trust are important for investors. Should this trust be established and maintained, even in the face of rising inflation and rates, markets will be orderly as investors won’t expect a return to the inflation of the ’70s. Perhaps investors would experience equity indices growing along the more historical trend line.

 

Take-Away

Anyone who says they know the market is going to have an inevitable outcome may not be worth listening to. Professional money managers form scenario analysis and try to handicap the certainty of each outcome when allocating risk positions. Investors at all levels should view what the possibilities are and observe to see which are unfolding, shifting allocations in response.

We have had a very transparent Fed under Bernanke, Yellen, and the current Chair Powell. It has, in my observation, done everything that has been promised as it relates to conducting policy.  One tool the Fed has used consistently since 2009 is the incredible power of their telling the market exactly what their plans are. Promising the markets, they will keep rates very low through next year has acted to keep bond investors from betting against the Fed’s word. Those who have bet against the Fed over the past ten-plus years have probably had bad outcomes. One question that may never be answered is: if the Fed does need to act to raise short-term rates in advance of next year, and they do act, will they lose the power of their promise?

I enjoy hearing from readers; feel free to comment directly to my email by clicking on my name below.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading

The Sustainability of Growing Margin Debt	Is Inflation Going to Hurt Stocks?

Should Stock Market Investors Worry About Inflation?	Money Supply is Like Caffeine for Stocks

 

Sources:

https://www.bls.gov/news.release/pdf/cpi.pdf

https://www.fincash.com/l/basics/base-effect

https://www.bloomberg.com/news/videos/2021-04-12/dudley-says-fed-will-be-much-slower-to-tighten-video

https://www.wsj.com/articles/yellen-says-interest-rates-may-have-to-rise-to-keep-economy-from-overheating-11620151101#:~:text=Yellen%20told%20The%20Wall%20Street,the%20coming%20months%20will%20subside

 

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image credit: Mikhail Nilov (Pexels)

Margin Debt Increases are Eye-Popping

 

Stock market margin debt jumped by $25 billion in April and $48.5 billion since the beginning of the year based on FINRA statistics. The level reached a historic high of $847 billion from $552.5 billion a year ago. This 53% increase in a year is growth well above average. The unsustainability of this pace, and the idea that margin rates charged by brokers will rise as interest rates do, add an overlooked element of risk in today’s stock market.

The seeming precariousness of the level of leverage measures only two types of accounts, this includes brokerage accounts and advisory customers that are overseen by FINRA. It excludes unreported borrowing by professionals and others that have used debt for investments in the financial markets.

 

 

The below graph shows weekly data on the growth of margin debt reported by FINRA. The current pace is faster than at any point found on the FINRA website. The market, as measured by the S&P 500, is following the same path of growth (see second chart). Although correlation is not proof of cause; experience has shown that as the market rises, people will borrow to compound their returns. Further, as the value of the accounts that serve as collateral then rise, they are capable of leveraging up even more.

 

 

The snowball effect of the increases in both the S&P performance and the borrowing that is in part fueling the market increases could continue until something disrupts the chain reaction.

 

Possible Disruptors to Margin and Market Growth

This disruption could come in the form of an increase in interest rates. This would cause brokers to raise their broker’s call rate.  Investors would then have to weigh their expected return versus the cost of the borrowing. The cost of borrowed funds to the expected return equation would not be as favorable even if their market view has not changed. This could cause some investors to retreat from their aggressive position. It wouldn’t take much at these levels to create a chain reaction of selling to reduce borrowed capital.

Another potential disruptor could be a few bad days in a row for the market. Again this impacts expected return versus the cost of (borrowed) money. The chart above suggests just how large the profits are that many investors are sitting on. A few days of market decline can signal ti investors that it’s time to book some of those profits. This further weakness could trigger enough margin calls where investors either sell positions and pay off the interest, or cough up additional cash. The margin calls could create a march downward as the same forces that brought it up, act in reverse to tear it down.

 

 

Other Borrowing

In a previous article, Channelchek reported that 2.5 million homes or 4.9% of homeowners’ mortgages are in forbearance. The hurdle to pause payment on a federal agency-backed mortgage is quite low. It’s suspected that some of this money that will be owed later has been finding its way into the market. In reality, this is borrowed money, and the payments are (under current stipulations) required to resume by mid-year 2021. This could curtail the flow of these borrowed funds, not accounted for by FINRA, from entering the market. The reduced inflows and possible outflows would reduce investment growth and the upward pressure on prices.

In another Channelchek article, we described how family offices are not overseen by regulatory authorities like FINRA, any borrowing from money managers is not accounted for in much the same way hedge fund borrowing is not regulated or overseen. The leverage from these investment groups is not known. Earlier this year, there was an instance when the firm Archegos Capital Management suffered losses large enough to impact markets and earnings of some of their large banking relationships. The amount of risk and, therefore, the potential impact on the market to trade-off from this category is not known.

 

Take-Away

The strength of the market comes from many places. The amount of cash in the system undoubtedly has driven prices up. The low return on interest rate investment alternatives is another which pushed money into higher-risk investments, and then there is the availability of borrowed money. The use of borrowed money is at historic highs.

Borrowed money has a cost. That cost is measured against the expected return. If the expectations change or the cost of money increases, the market could sink to find a new balance from which to try to build again. Just as sure as markets go up and down, this will occur to some degree. Why a selloff may be triggered is debt-funded investing. When a larger selloff may be triggered, is unknown.

 

Suggested Reading:

Is Inflation Going to Hurt Stocks?	The Limits of Government Economic Tinkering (June 2020)

A Look at Real Estate Risks to the Stock Market	Understanding Family Offices

 

Sources:

https://www.finra.org/investors/learn-to-invest/advanced-investing/margin-statistics

https://www.federalreserve.gov/publications/files/financial-stability-report-20210506.pdf

 

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Which Generation Holds the Most Power?

 

The overall differences in age groups or generations result from each being shaped or encultured by their own shared experiences, memories, and surroundings (technical, political, financial, etc.).

The Visual Capitalist has created what they call the Generational Power Index (GPI) with the aim of accurately breaking down the ingredients of generational power at present. The index measures three categories, Economic Power, Political Power, and Cultural Power.   All three categories are then combined to form the overall comparison. Shared below are sections of their GPI
Report on Cultural Power.

The Channelchek Content Team are fans of the work created by the Visual Capitalist so, when it is of interest to our followers, we are grateful that they let us share some of it with you.

 

The visual below shows the age ranges used and their overall economic score

The following graphic breaks down the components and the ranking

Behind the visuals

Earnings represent the median weekly earnings of full-time workers in the U.S. Among the four, earnings was the most evenly distributed. Gen Z had the lowest median weekly earnings ($614), while Gen X had the highest ($1,103).

 

Net Worth was led by Boomers. This variable is each generation’s share of overall U.S. wealth. As it turns out, Boomers hold 53% of all wealth in the country—more than all other generations combined.

 

Billionaire Wealth was dominated by Boomers, and the Silent Gen. Visual Capitalist calculated this variable by starting with the top 1,000 billionaires globally, then filtering for Americans only.

 

Business Leaders is based on two underlying measures, the generational share of both S&P 500 CEOs and small business owners. This allowed capturing data from two sides of the business spectrum to see who holds power there.

 

In Parting

They say a picture is worth 1000 words. We hope these 350 words, along with two pictures, provides you a better understanding of where power currently resides. This is the first GPI Report, and they promise annual updates. Watching the transfer of wealth and power through the years will be interesting.

image credit: Brett Rogers (Pexel)

Some Color on Prices and the Market’s Fixation on Inflation

 

Stock market investors as a whole tend to rotate their worries and fixations. At times they place heightened importance on economic releases such as unemployment, consumer confidence, exchange rates, or inflation, at other times the focus is on other factors that will impact the economy and stock prices. We’ve recently seen these other factors include Covid19 vaccine availability, natural resource scarcity, and interest rates.

The current fixation is inflation. Is this worry appropriate under the current circumstances? We’ll explore this with an eye toward where further price increases may come from.

 

Demand-Pull Inflation

The market’s current fixation is on inflation – more specifically it’s on something called demand-pull inflation. Equity investors have become nervous that the money that continues to be created in trillion-dollar increments will pull prices upward as the increased ability or desire to spend remains in place. Demand-pull, which in the most simple terms means increased availability of money (wage increases, stimulus checks, higher employment levels) can spark inflation causing demand. The primary concerns that many view are at work now are money supply expansion, the growing economy, inflation expectations, government spending, and asset price increases.

Outside of the demand-pull theory, there are also supply-driven shortages caused by shutdowns and uneven demand that have driven up prices on lumber, paint, electronics, cars, and more. These are viewed as more temporary.

 

Causes of Demand-Pull Inflation

Money Supply Expansion- If there is an excess of money created and in circulation, prices of goods and services are bid up as demand for those goods and services increases. The same effect is created if interest rates are low and credit is easy; in these cases, more people have the ability to purchase a limited amount of goods.

The chart below shows the growth of M2, a money supply measure that includes cash, bank deposits, and other “cash-like” instruments such as money market accounts. The chart covers the period from February 2006 through February 2021. There is a very steep spike in the supply of M2 beginning in March of last year. The chart is not current as the Federal Reserve discontinued reporting this popular data series.

 

 

Growing Economy-  An economy where jobs are being created and confidence is escalating feeds on itself as more people have a higher income to spend. This creates demand for products and services and the ability for businesses to increase prices. Workers may also review the price tag they put on their own labor as demand for employees grows. The employer then decides if the increased wage costs are passed along to the customers. In a growing economy, it’s much easier to pass along the increased cost of employees, which adds to consumer prices.

The chart below is of quarterly GDP and demonstrates just how remarkably strong the economic growth has been.

 

 

 

Inflation Expectations- Last month there was a dramatic increase in the price of used cars (10%), lumber prices have been climbing as well. Overall the consumer price index (CPI) has been surprised the markets by being even higher than expected. Seeing reported inflation tick up along with the increased money supply and economic growth causes consumers to buy sooner rather than later. This increases demand and of course, this demand pulls prices up.

The excerpt below is from the Bureau of Labor Statistics (BLS) released in mid-May. It highlights that the increase in used car prices for April 2021 is the highest ever recorded.

 

 

Government Spending- Increased spending increases demand for both raw materials and products. For example, if there are government-led infrastructure projects that require copper and steel, the cost for these may increase, this would then increase the cost of manufacturing homes, cars, and electronics that use the same raw materials. When those costs are passed along, it contributes to consumer inflation.

Similarly, a tax cut places more money in the hands of consumers; this also has a demand-pull impact on prices.

The chart below is of government expenditures. The peak period is Q2 2020, the dip and turnaround were Q4 2020. The trend appears to be continuing upward; recent announcements and proposals out of Washington suggest that it will accelerate sharply.

 

 

Asset Inflation- The changes that households are going through to make remote working easier and more productive is a good example of demand-pull inflation. With the new need for workspace at home, prices of larger homes have increased faster than smaller homes. In the case of furniture and electronics, they are also experiencing supply shortages which creates an almost frenzy-like behavior from consumers. 

Below is a chart of median home prices over the past 10 years. Prices began accelerating in March of 2020 and appear to have tapered recently.

 

 

Take-Away

The behavior of the stock market, despite the inflation worries, has been remarkably strong. Most of the concern is that inflation would cause interest rates to rise, higher rates on bonds would give investors an alternative, and at the same time, higher interest rates paid would cut into company earnings.  The bond market, which is impacted more directly by inflation, has not been panicking. Financial markets, although nervous and maybe even keeping one finger on the “sell” trigger may be taking the Fed at its word. Fed Chairman Powell has said, “An episode of one-time price increases as the economy reopens, is not likely to lead to persistently higher year-over-year inflation into the future.”

Whether this is true remains to be seen. The official stance is in line with what one would expect out of the nation’s central bank chair. If Powell in any way indicates concern over price increases, demand-pull would increase as inflation expectations would take firmer root in people’s minds, increased demand and higher prices would then become self-fulfilling.

 

Paul Hoffman

Managing Editor, Channelchek

 

Suggested Reading:

A Look at Real Estate Risks to the Stock Market	The Limits of Government Economic Tinkering (June 2020)

Long Term Retirement Money and Fledgling Companies	$1.9 Trillion in Terms We Can Better Relate To

 

Sources:

www.bls.gov

https://fred.stlouisfed.org/

 

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image credit: Alan Kotov (flickr.com)

Pros and Cons of FDA Partly Funded by the Companies it Oversees

 

The Food and Drug Administration has moved from an entirely taxpayer-funded entity to one increasingly funded by user fees paid by manufacturers that are being regulated. Today, close to 45% of its budget comes from these user fees that companies pay when they apply for approval of a medical device or drug.

 

Positive and Negative Impact

As a pharmacist and medication and dietary supplement safety researcher, I understand the vital role that the FDA plays in ensuring the safety of medications and medical devices.

But I, along with many others, now wonder: Was this move a clever win-win for the manufacturers and the public, or did it place patient safety second to corporate profitability? It is critical that the U.S. public understand the positive and negative ramifications so the nation can strike the right balance.

Americans in the early 20th century were outraged when they found out that manufacturers used poor-quality methods for producing food and medication, and used unsafe, ineffective, and undisclosed addictive ingredients in medications. The resulting Food, Drug, and Cosmetic Act of 1938 gave the taxpayer-funded Food and Drug Administration new authority to protect the U.S. consumer.

One of the FDA’s most shining successes occurred in the late 1950s when the agency refused to approve thalidomide. By 1960, 46 countries allowed pregnant women to use thalidomide to treat morning sickness, but the FDA refused on the grounds that the studies were insufficient to demonstrate safety. Debilitating birth defects resulting from thalidomide arose in Europe and elsewhere in 1961. President John F. Kennedy heralded the FDA in 1962 for its stance. An FDA driven by the data – and not corporate pressure – prevented a major tragedy.

 

 

How AIDS Changed How the FDA is Funded

The FDA continued its work fully funded by U.S. taxpayers for many years until this model was upended by a new infectious disease. The first U.S. case of HIV-induced AIDS occurred in 1981. It was rapidly spreading, with devastating complications like blindness, dementia, severe respiratory diseases, and rare cancers. Well-known sports stars and celebrities died of AIDS-related complications. AIDS activists were incensed about long delays in getting experimental HIV drugs studied and approved by the FDA.

In 1992, in response to intense pressure, Congress passed the Prescription Drug User Fee Act. It was signed into law by President George H.W. Bush.

With the act, the FDA moved from a fully taxpayer-funded entity to one funded through tax dollars and new prescription drug user fees. Manufacturers pay these fees when submitting applications to the FDA for drug review and annual user fees based on the number of approved drugs they have on the market. However, it is a complex formula with waivers, refunds and exemptions based on the category of drugs being approved and the total number of drugs in manufacturers’ portfolios.

Over time, other user fees for generic, over-the-counter, biosimilar, animal, and animal generic drugs, as well as for medical devices, were created. As time passed, the FDA’s funding has increasingly come from the industries that it regulates. Of the FDA’s total US$5.9 billion budget, 45% comes from user fees, but 65% of the funding for human drug regulatory activities are derived from user fees. These user fee programs must be reauthorized every five years by Congress, and the current agreement remains in effect through September 2022.

 

Have User Fees Worked?

The FDA and the drug or device manufacturers negotiate the user fees. They also negotiate performance measures that the FDA has to meet to collect them and proposed changes in FDA processes. Performance measures include things such as how quickly the FDA responds to meeting requests, how quickly it generates correspondence, and how long it takes from submission of a new drug application until the FDA approves or refuses to approve a drug or product.

Because of the additional funding generated by user fees and performance measures that the FDA has to meet, the FDA is quicker and more willing to discuss what it wants to see in an application with manufacturers. It also offers clearer guidance for manufacturers. In 1987, it took 29 months from the time a new drug application was filed by the manufacturer for the FDA to decide whether to approve a medication in the U.S. In 2014, it only took 13 months and by 2018, it was down to 10 months.

Changes in more recent years have also increased the number of standard new drug applications approved the first time around by the FDA from 38% in 2005 to 61% in 2018. In diseases where there are not many medication options for patients, the FDA has a priority review process, where 89% of new drug applications were approved the first time around and the approvals were completed in eight months in 2018. All this occurred while the number of new drug applications have been increasing over time.

Most recently, the COVID-19 pandemic has seen the FDA provide emergency use authorization for potential treatments in a matter of weeks, not months. The infrastructure and capacity to review the available information so rapidly is due in large part to the funding from user fees.

 

 

While the number and speed of drug approvals have been increasing over time, so have the number of drugs that end up having serious safety issues coming to light after FDA approval. In one assessment, investigators looked at the number of newly approved medications that were subsequently removed from the market or had to include a new black box warning over 16 years from the year of approval. These black box warnings are the highest level of safety alert that the FDA can employ, warning users that a very serious adverse event could occur.

Before the user fee act was approved, 21% of medications were removed or had new black box warnings as compared to 27% afterward.

Some potential reasons that more adverse effects are coming to light after drug approval include senior FDA officials overturning scientist recommendations, a lower burden of proof for medication approval, and more clinical data in new drug applications coming from foreign clinical trial sites that require additional time to assess in an environment where regulators are rushing to meet tight deadlines.

 

Lack of Money Limits FDA

User fees are a viable way to shift some of the financial burden to manufacturers who stand to make money from the approval and sale of drugs in the lucrative U.S. market. Successes have occurred and provided U.S. citizens with medication more quickly than before.

However, without careful consideration of what is being negotiated, the FDA can become weak and ineffective, unable to protect its citizens from the next thalidomide. There are some signs that the pendulum may be swinging too far in the direction of the manufacturers. Additionally, while drug approval functions at the FDA are well funded, the FDA is insufficiently funded to protect consumers from other issues such as counterfeit drugs and dietary supplements because they cannot collect user fees to do so. In my view, these functions need to be identified and require additional taxpayer funding.

 

 

This article was republished
with permission from The
Conversation, a news site dedicated to sharing ideas from academic
experts.  Written by , C. Michael White  Distinguished Professor and Head of the
Department of Pharmacy Practice, University of Connecticut.

 

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Tweets, Tips, and Taxes

It isn’t news at this point that Twitter instituted what they’re calling a “Tip Jar.”  This was announced on Twitter’s Blog on May 6, by Esther Crawford. Ms. Crawford wrote, “You drive the conversation on Twitter, and we want to make it easier for you to support each other beyond Follows, Retweets, and Likes. Today, we’re introducing Tip Jar – a new way for people to send and receive tips.” 

About the
Feature

This new tipping feature has been rolled out in English to a test group to start. It invites users to enable a tipping method (Spaces, Bandcamp, Cash App, Patreon, PayPal, or Venmo). This opens the door for those that have a reason or desire to financially support a Twitter account owner to do so if that owner has invited payment by opening a “tip jar” the method of payment is already orchestrated by Twitter.

Shortly after launching this feature, there were a few bugs to work out regarding privacy and disclosure of the tipper’s information. That has been adjusted — this is why companies choose slow rollouts and only invite some customers to test new features or products.

How Tippees May
Be Taxed

One possible impact Twitter users should understand is; if the account owners are opening this window with the expectation of getting paid for “driving the conversation,” this money may be subject to income taxation? If it is, it has the potential to alter users’ tax brackets, perhaps reduce or disallow any new stimulus payment, impact Social Security, break employers rules on outside work, child support, and a long list of others.

My primary interest is, under what circumstances could this be a taxable event. I reached out and asked Thomas W. Aldous Jr., JD, of Fennemore Law. Mr. Aldous practices Trust and Estate law and holds a   Master of Laws (in taxation) from NYU. My question was simple “Are payments over a certain amount to the new Twitter Tip jar taxable?” Like most everything involving the IRS and relevant laws, the answer was not simple.

The Tipping Point

Mr. Aldous response to Channelchek is worth every taxpayer understanding. He explained:

“Amounts you receive for services are taxable. It does not matter whether you are self-employed or if you are an employee.

Amounts received as a gift are not income.

The motivation of the person giving money must be considered. Yet, if someone looking objectively at the circumstances can see that a “gift” is not really a gift, it does not matter what the parties claim. Per the US Supreme Court, a judge or jury can use ‘informed
experience with human affairs’ to determine what is or is not actually a gift.

For example, Friend and Businessman are friends. Friend occasionally gives Businessman the names of persons who might be interested in Businessman’s products. Friend’s referrals benefit Businessman’s business. After a while, Businessman tells Friend that he wants to give Friend a new car as a gift. Friend does not want or need another car. He initially rejects the car, but with Businessman’s insistence Friend eventually accepts the car. Businessman deducts the gift as a business expense. Friend believes the car is a gift. In this situation, informed experience with human affairs indicates that Businessman’s gift to Friend was actually compensation for the referrals. The car is income to Friend.

Tips may look like gifts. They are given voluntarily for a service rendered. They are over and above an obligation. However, in practice, tips are often customary and expected. Per the IRS regulations, tips are taxable income.

If L tips his barber X dollars each time he gets a haircut, L’s barber would include the tip in his income. If L gives his barber an additional Y dollars for the barber’s birthday (on top of L’s regular tip), that should be treated as a gift and not taxable income.

Twitter uses the term “Tip Jar”. With a payment through the Twitter Tip Jar, one should start with the assumption that any amounts received are taxable. There is no hard and fast rule, but if someone is requesting and receiving tips on Twitter to support their efforts, most likely any tips that person receives will be taxable income. Unless there is some type of charitable purpose, saying “this Tip Jar is for gifts only” is probably not going to turn “tips” into “gifts.”

Take-Away

We don’t live in a vacuum; everything has consequences. The internet and social media have created brand new sets of circumstances we never had to consider before. In the case of Twitter’s add-on feature, an innocent acceptance of payments from those who appreciate what you provide may alter your income in ways that have unintended consequences.

I now wish I had followed up my question with Thomas Aldous, I’d have asked, “if I receive tips from those that appreciate the value of my tweets, might I take write-offs on the cost of my computer and office space?”

Paul Hoffman

Managing Editor, Channelchek

 

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Sources:

https://blog.twitter.com/en_us/topics/product/2021/introducing-tip-jar.html

 

Special Thanks and appreciation to Thomas
Aldous of Fennemore Law.

TAXES – Do You Pay More Than Your “Fair Share”?

 

The Pew Research Center performs a regular survey related to taxes, including individuals’ attitudes toward what they pay. In the most recent survey done between April 5 and 11, a touch less than half of Americans (49%) say they pay more than their fair share in taxes when considering what they get from the federal government. Another 44% say they pay about the right amount in taxes. Only 6% responded they pay less than their fair share in taxes.

 

 

Age differences relative to attitude were also measured in the survey. This is how those attitudes are split:

Americans 65 and older are the only age group in which a majority (56%) say they pay about the right amount in taxes. Those ages 30 to 64 are more critical, with a little over half (53%) saying they pay taxes than their fair share.

Opinions among those ages 18 to 29 were mixed. 43% said they pay more than their fair share, and 42% say they pay the right amount. Similar splits of middle-income and upper-middle-income Americans say they pay more taxes than their fair share, but fewer lower-income adults (38%) said the same.

Source:

https://www.pewresearch.org/fact-tank/2021/04/30/top-tax-frustrations-for-americans-the-feeling-that-some-corporations-wealthy-people-dont-pay-fair-share/

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TAXES – Do You Pay More Than Your “Fair Share”?

 

The Pew Research Center performs a regular survey related to taxes, including individuals’ attitudes toward what they pay. In the most recent survey done between April 5 and 11, a touch less than half of Americans (49%) say they pay more than their fair share in taxes when considering what they get from the federal government. Another 44% say they pay about the right amount in taxes. Only 6% responded they pay less than their fair share in taxes.

 

 

Age differences relative to attitude were also measured in the survey. This is how those attitudes are split:

Americans 65 and older are the only age group in which a majority (56%) say they pay about the right amount in taxes. Those ages 30 to 64 are more critical, with a little over half (53%) saying they pay taxes than their fair share.

Opinions among those ages 18 to 29 were mixed. 43% said they pay more than their fair share, and 42% say they pay the right amount. Similar splits of middle-income and upper-middle-income Americans say they pay more taxes than their fair share, but fewer lower-income adults (38%) said the same.

Source:

https://www.pewresearch.org/fact-tank/2021/04/30/top-tax-frustrations-for-americans-the-feeling-that-some-corporations-wealthy-people-dont-pay-fair-share/

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The Fed Doubles Down on Keeping Rates Down – Winners and Losers

 

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I said.”  – Alan Greenspan

 

The announced move by the Federal Reserve last week to keep the interest rates it has control over steady was not a surprise to those that can translate today’s Fed-speak. In the past, two or more announcements Fed Chair Powell’s comments have been very consistent about being a long way from raising interest rates and they are wanting to see significant improvement in the labor market and inflation sustained above 2 percent before any tapering or tightening. In Fed-speak this means, well, it means exactly what he said. Fed Chair Powell has been abundantly clear and has not thrown the market any curveballs since being appointed. With this in mind, consider that by last measure inflation stood at 1.8%, unemployment at an unacceptable 6% and that is not including the 2 million fewer Americans in the labor force (relative to pre-covid).

 

What it Could Mean for You

As an investor, as someone that is an active producer and consumer in the economy, you may want to ask yourself, not what the Fed statement means, but “what does it mean to me?”  How can I take advantage of their plan, how do I avoid being hurt, what investment sectors could continue to do well because of low rates, and even what should be the course of action if rates tick up? To be more direct, Fed Chair Jay Powell has said that highly accommodative monetary policy will continue for the foreseeable future. Ask, who wins and who loses, how can I benefit?

To better understand the complete Fed actions, remember the central bank has also taken steps to keep longer interest rates near its target range too. They’ve injected hundreds of billions of dollars into the system through securities repurchases. The Fed has had a seemingly unlimited pot to pull from to buy Treasuries and even mortgage-backed securities at more expensive levels than the market. Previously it announced that it held unlimited bond-buying abilities.

As there seems little doubt that the  Fed will continues to sit tight on 0%-.25% overnight and other very low targets, here is who can be expected to benefit and who may lose from the ongoing promise by the Fed.

 

Bank Deposits

The Fed funds rate is what banks charge each other to borrow reserves from each other overnight. So a 0%-.25% Fed funds rate is what you are competing with on your savings and longer-term Certificates of Deposit (CDs). CD rates saw a substantial decline after the Fed lowered rates in early 2020.

CD owners locking in rates now will have to commit to earning those rates for the term of the CD. The Fed promised low rates through next year, those not beating the 1.8% inflation rate may be worse off.

Savings accounts are paying just above zero. It’s important to note that the return (within limits) is guaranteed by the FDIC. Other than U.S. Treasury securities, this kind of assurance is largely unavailable, so if you expect negative returns on alternatives, this is an easy safe harbor. If this level of security is important to the saver, shopping online for the best rate makes more sense than settling for the rate of the bank down the road. Remember the rate may only be slight;y more, but after compounding over the years the difference is more impactful.

 

Mortgages

The Fed funds rate doesn’t directly impact mortgage rates. But they do set the starting rate in the yield curve which measures risk-free (U.S. Treasury) rates through 30 years. Thirty-year mortgages are generally spread to 10-year U.S. Treasury notes. This is because their durations (average time to repayment) are similar. This has kept mortgage rates exceedingly low, as an added bonus the Fed remains a buyer of mortgage-backed securities, this demand helps keep mortgage rates low.

This low-rate environment makes winners of those getting a mortgage or able to refinance. Those with adjustable-rate mortgages also have benefitted from low rates. Demand for mortgages has surged over the past year as low rates have increased demand. Those owning mortgage securities have benefitted from the bond bull market.

 

Investors in Stocks

The Fed’s near-zero interest rate policy and open-ended buying of bonds provide both money for equity investors and few alternatives other than the stock market.

Low rates are likely to keep a floor under stocks. After the market drop in stocks following the novel coronavirus in the U.S., the government’s reaction has caused stocks to spring back and then some. The Standard & Poor’s 500 Index sits near all-time highs. More attractive alternative investments for all the money created are few. 

 

The Federal Government

Those that borrow embrace low interest rates because their payments are based on a lower rate. There is no bigger borrower than the U.S Federal government. As the national debt passes $28 trillion, low rates allow higher rate debt rolling off to be refinanced at lower rates. This saves billions of dollars in interest. According to the Congressional Budget Office, the U.S. government increased the national debt by an additional $3.1 trillion in the last fiscal year (ended Sept. 30, 2020). Low rates mean the borrowing cost of spending more remains is less costly at this time.

Increased borrowing and lower return have hurt the value of the $US dollar. Exchange rates versus other large currencies and even many cryptocurrencies have weakened the greenback over the last year. Declining exchange rates tend to lower how much those savvy with their finances want to hold U.S. dollar-denominated securities.

 

 

Home Equity

Homeowners have mostly seen the price of their real estate rise. The cost of a home equity line of credit (HELOC) remains low since HELOCs adjust in synch to changes in short-term rates.

Since rates on HELOCs remain low, those with outstanding balances on their lines of credit will continue to have low-interest expenses and options.

 

Credit Card Debt

Many variable-rate credit cards change the rate they charge customers based on the prime rate, which is banks tend to adjust relative to the Fed funds rate. The Fed’s announced position to keep overnight rates low for an extended period means that interest on variable-rate cards is

 

Take-Away

The Fed is looking for fuller employment and a hot economy. They are adding money to the system, reducing the cost of spending, and creating few alternatives better than owning equity investments and real property. The US dollar weakening has the effect of lowering the buying power of any investment return, but liquidity is running high in both markets. For low return savings such as bank deposits, the erosion of US currency may exceed their return on the savings.

 

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A Look at Real Estate Risks to the Stock Market

 

Mortgage service providers, under a new rule, proposed last week, would be required to delay foreclosures on primary residences until after 2021. This proposed rule would affect all servicing lenders, not just FNMA, FHLB, FHA, and VA mortgages that had previously fallen under the original forbearance mandates in the CARES Act. Recent figures by the Consumer Protection Financial Bureau (CFPB) show nearly 3 million homeowners are behind on their mortgage payments presently. This is an improvement from the high last June when, according to data from the Mortgage Bankers Association (MBA), there were 4.3 million households in arrears or 8.53% of single-family home mortgages. This month (April 2021), the MBA reported an estimated 2.5 million homeowners, or 4.9%, are in forbearance. This is a very slight reduction from the 4.96% in forbearance recorded the month before.

 

About the Consumer Protection Finance Bureau The CFPB was created in the aftermath of the 2008 financial crisis that triggered a huge increase in foreclosures. The agency is resolute to prevent that from happening in the current financial downturn and is encouraging lenders to be proactive about working with and protecting their borrowers from being forced out of their homes.

 

Importance of RE Markets
for Stock Investors

Still fresh in the minds of many is the impact the mortgage crisis of 2008 had on asset prices, including equities. Problems similar to 2008 were circumvented in 2020 even as unemployment spiked upward to 14.7% last April. The latest unemployment report for March shows only 6% unemployed. With millions behind on mortgage payments and landlords unable to evict renters for non-payment, investors need to determine if extensions to give more time to those behind on payments a solid solution to a unique problem, or a delay that may even exacerbate an inevitable economic problem. Theories and arguments can be found on both sides; some see forbearance as the piece that could have prevented devastation in 2008 and is now proving its effectiveness as the economy has put many people back to work. Others believe any delay in dealing with market-related pain only creates larger problems down the road.

Contrasting opinions and analysis are what markets. If we all thought “buy” was the only direction, or “sell” was the only sane action, there would be no market. With no one to take the other side of a trade, transactions would quickly cease. However, with economic orchestration in housing now measuring over 500 billion, being wrong (in either direction) could be costly to stock market investors. 

Therefore it’s necessary to understand both sides to the legitimized deference of payment (forbearance) reality. It has been extended before, and with its creation and extension, it either helps households out who will be better equipped to pay their mortgages or exacerbates a problem that will become larger as it has been allowed to fester.

Doomsayers Awaiting Opportunity

“Doom” may not be the right word.  Of those expecting that real estate will crumble and bring other assets with it, they see an opportunity for those that are keeping some powder dry as they wait for lower prices.

Fitting in this camp is Marc Snydeman. Marc is the Founder and CEO of Snyderman Law Group. His firm provides strategic business and legal solutions to small and medium-sized businesses. They also specialize in helping businesses grow, and investors find opportunities to disrupt and better marketplaces. Snyderman is positive on the opportunities the current situation will bring.  Marc’s reply to Channelchek when asked about his thinking was blunt. He said, ”The continued mortgage forbearances are essentially a ticking time bomb for real estate on both the residential and commercial sides that will affect the economy across the board. When the forbearance runs out after having that proverbial can kicked down the road multiple times the flood of foreclosures will likely eclipse 2008.” Although Snyderman recognizes the conditions are different than 2008, he believes there are big challenges and opportunities yet to come. “While there’s no securitization of those mortgages at risk like in 2008 the overall economic effects of this bomb going off will create significant issues and opportunities in real estate to pick up properties well below market value.” Snyderman said. It can be expected that any “across the board” negative economic impact could take stock prices down with it.

 

 

Light at End of the Tunnel

When the strong economy was abruptly altered for the novel coronavirus last March, unemployment spiked; meanwhile, delinquency rates on loans plunged. This is the opposite of what happened in the financial crisis of 2008 and in virtually all other downturns. For example, looking back to the financial crisis, mortgage delinquencies jumped from 2% to 8%. Compare this to the pandemic’s first seven months when they fell from 3% to 1.8%. Historically unemployment leads to mortgage foreclosures; depressed housing generally snowballs down, creating lower economic activity and higher defaults. This is why the CARES Act included a section requiring forbearance of federally insured mortgages (70% of all mortgages) was instituted.

The pandemic has not to date resulted in house price declines that history suggests should occur at some point. Keifer
Rowlands of Keifer
Rowlands Real Estate is a veteran real estate professional based in the Los Angeles area. Rowlands focuses on residential real estate and has experienced 25 years of market swings. He believes the current guidance and regulatory support is leading to a soft landing and suspects lower interest rates could place the economy in a stronger position later on.  “I think this will be a smooth ending for all involved. I’d urge everyone to think positive. All factors are pointing towards good news on the horizon — borrowers will likely return to the workforce, and now they will most likely have a lower house payment than they did before the pandemic. This suggests that with the return of the economy, a vast majority of borrowers that received forbearance will be in a position to bring their mortgage current and keep it there.” Keifer said. He doesn’t think this is misaligned with historical experience as he offered some additional history and how the lessons from it are helping today. “When banks did mortgage forbearance after the Great Recession they found that borrowers, unfortunately, ended up back in default at an alarming rate. Based on data from Freddie Mac, the current forbearance packages being offered to borrowers are not fairing significantly better. Freddie Mac states that last year after the 7th-month post forbearance, barely half of borrowers were current. There may be several factors that kept borrowers from being successful. The main reason is most likely that during this period that Freddie Mac analyzed the United States was still at a very high level of unemployment. The highest since the Great Recession (2007-2009). This means that with the end of the pandemic nearing, and the economy having record output and returning to full employment, the prospects for borrowers in forbearance are extremely positive.”

With unemployment levels now in the mid-single digits, any further improvement could bring many more borrowers who have deferred payments back from their hiatus. This would mean that a deeper asset value crisis was avoided.

Take-Away

Although the long-term correlation of stocks to real estate is only .20%, 2008 has shown us the potential impact in severe cases.  We also know the statistics for a deep recession; no matter the cause, takes everything except US Treasuries down with it. If the CFPB proposal eventually gets approved and foreclosure proceedings can’t start until next year, many more at-risk borrowers will likely find financially meaningful jobs, thereby getting back on mortgage track. The impact so far has been an increase in real estate prices that has served to prevent people from buying a home. Is this a bubble? How will all the borrowers who lost months repaying make up that time? What will be their ultimate cost? There are many factors in play, interest rates, joblessness, government-supported deferment, worker inertia, contract law, and tax impact.  Stock market investors need to keep aware of what is occurring in all the other markets, including real estate, as it could either provide an opportunity or signal a time to take some chips off the table. 

 Paul Hoffman

Managing Editor, Channelchek

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Sources:

https://www.mba.org/2021-press-releases/april/mortgage-applications-decrease-in-latest-mba-weekly-survey-x278966

https://www.youtube.com/user/CitrusValleyRealtors

http://sp2018zaqfqqg.wpengine.com/

https://www.consumerfinance.gov/rules-policy/rules-under-development/protections-for-borrowers-affected-by-the-covid-19-emergency-under-the-real-estate-settlement-procedures-act-regulation-x/

https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/29/fact-sheet-the-biden-harris-administrations-multi-agency-effort-to-support-renters-and-landlords/

 

Photo: Levittown, PA / Tom Sofield

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Consumer Inflation and the Impact of Producer Prices

 

Inflation, its impact on interest rates, the cost of employees, corporate profits, and global competitiveness, is creating more anxiety than it has in decades. Since 2008, economists were more likely to be concerned and debate how to stave off deflation. That fear seems like a distant memory since $6 trillion has been added to the economy over the past year. March’s change in consumer inflation is released this week. The release will give the market a renewed glimpse of how much price appreciation consumers have sustained from shortages and trillions of more dollars chasing the same or fewer goods and services.

One factor that may have already had a big impact on March consumer inflation are the quickly rising producer prices. The Bureau of Labor Statistics reports Producer Price Index (PPI) monthly on the previous month’s data for a few days before the Consumer Price Index (CPI) is released for the same month (PPI was released 4/9. CPI will be reported on 4/13).

PPI’s Warning

Producer prices, as reported Friday, April 9, increased 1%. This is a significant jump. In fact, it is double the rate economists expected and up from 0.5% in February. This sharp rise of costs to produce and the reported success in passing the higher wholesale costs on to consumers and small business owners indicates it will work its way into final CPI numbers in short order.

Comparing the increase to March of last year, the PPI jumped by 4.2%, this was the sharpest year-over-year increase since 2011, according to the BLS.

Producer Price Index, Month Over Month Change

 

Next month’s release of both PPI and CPI are more than likely to show dramatic YOY increases. Much of this can be discounted as inflation during April last year plunged by 1.1% in response to new lockdown orders. This low inflation month is the basis for one-year measurement. The name for this distortion is the “base effect,” and investors should be aware of it before they are startled by what looks to be rampant inflation without the context of what happened last April distorting the YOY measure.

We can see from the BLS chart below that PPI hit a high in January 2020 with an index value of 119.2. In February and March last year, it dropped 0.5% from the prior month, and in April, it plunged 1.1% to an index value of 116.7, partly driven by the collapse in fuel prices. It has been rising ever since.

 

Source: U.S. Bureau of Labor Statistics

 

Looking Forward

What might April prices look like? The most recent index value is 123.1, which is 5.5% higher than April 2020. If the PPI rises 0.5% this month (April) from 123.1, it adds up to a 6% year-over-year increase. This would be the highest since November 2009, when the U.S. economy was awakening from the financial crisis. After April’s data, the issue with base measurement will have already been taken into account, leaving May’s numbers (reported in June) as a fresh start without basis problems.

 

 

Take-Away

Inflation pressures are giving way to higher prices in the manufacturing and services pipeline. The producer price index is showing significant increases even when netting out the base effect. Companies are reporting they are successfully passing these costs on to the consumer.  This means higher CPI down the road, which will lead to greater challenges for the Fed to fulfill its commitment to low rates through next year.

 

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Are Inflation and Interest Rates Expected to Rise	$1.9 Trillion in Terms We Can Better Relate to

 

Sources:

 

https://www.bls.gov/news.release/pdf/cpi.pdf

https://www.bls.gov/ppi/

https://www.bls.gov/news.release/ppi.nr0.htm

https://www.markiteconomics.com/Public/Home/PressRelease/6123ab3169954de186a8b7c543eb6035

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