U.S.: Short-Term Highs, Long-Term Lows
Despite warning signs of a global economic slowdown, Wall Street’s on a high.
The S&P 500 is up 27.3 percent this year, its biggest annual gain since 2013, the Dow’s up 21 percent, and Nasdaq 32.8 percent.
But for next year, the word on the Street is more growth but less robust. Average expectations for the S&P, however, is that the index will grow at a far more modest 4.6 percent.
J.P. Morgan sees the S&P up about 9 percent in 2020. Refinitiv, the analytics company, predicts 2020’s earnings per share among S&P companies up about 10 percent from last year.
A year ago, Goldman Sachs called cash “a competitive asset” to stocks for the first time in years. Now it’s joined J.P. Morgan at predicting a 3,400 S&P by 2020’s end.
But 2020 may hold the last cup from the punch bowl.
Longer-term forecasts see returns on equity investments in the 2020s being as slim as recent ones have been fat.
Glum forecasters point to the price-earnings ratio. It’s zoomed to 30, which is about twice its usual size, indicating that stocks may be grossly overvalued.
Meanwhile, $11.6 trillion in bonds are showing a negative yield.
The market’s recent strength has been due, in part, to the Fed opening the floodgates of cheap money that flowed into equities even though fundamentals weren’t strong. But that only “pulled future value into the present,” as one analyst put it.
Andrew Morgan, a chief investment strategist at J.P. Morgan, forecasts the 2020s to be “an abnormally low-return decade.”
In fact, investment firm GMO sees stocks shedding value at a rate of 3.9 percent annually for each of the next seven years.
Double-speaking of Inflation
The wheels of the PR machine are spinning at high velocity, as the spokespeople for powerful financial institutions stumble over themselves as they make one contradictory comment after another.
In its last meeting of 2019, the U.S. Federal Reserve left the interest rates between 1.5 percent and 1.75 percent, signaling that no further changes will be necessary through the end of next year… but maybe at the end of 2021 and 2022.
Because the decision was unanimous, the business press took it as both a definite and positive sign, despite an admitted lack of financial vision into the future:
“None of us have much of a sense of what the economy will look like in 2021,” said Board Chair Jerome Powell.
Despite not having “much of a sense of what the economy will look like,” Powell said, “Our economic outlook remains a favorable one,” citing the unemployment rate and the U.S. economy in expansion for the 11th year in a row.
TRENDPOST: The Fed is presenting a fragmented, contradictory picture of the economy, as Powell flips back and forth from optimism to pessimism within single statements. These leaders employ what George Orwell described as “double-think” in his novel 1984:
“To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them.”
As we continue to note in the Trends Journal, the low unemployment rate of 3.5 percent touted in the media is a euphemism for millions of low-paying in healthcare, hospitality, and retail sectors – so low that employees need to work multiple jobs to pay for basic needs such as food and housing.
For example, nearly half of U.S. workers earn less than $30,000 a year, and nearly 40 percent of Americans can’t cover a $400 emergency expense.
These official statistics also exclude the underemployed (part-time workers who prefer full-time work), the marginally attached (those who have not looked for work in the last for weeks), and the discouraged (those who no longer are searching). The “real” (or U-6) unemployment rate is typically double the rate reported in the media.
Powell seems to understand this, expressing it in ambiguous terms: “I like to say that the labor market is strong; I don’t really want to say that it’s tight. To call it hot, you’d… want to see higher wages.”
If the unemployment rate was as impressive as the media says it is, inflation would tick up and the Fed would be able to restore a higher interest rate.
“Inflation is barely moving,” Powell said, “notwithstanding that unemployment is at 50-year lows – and expected to remain there. And so the need for rate increases is less.”
Instead of acknowledging that something isn’t right, Powell said, “We’ve learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation.”
The Fed Job
The Federal Reserve maintains it has two main tasks: to maximize employment and to keep inflation at around 2 percent, its current target.
One monetary policy option is raising and lowering interest rates, as discussed.
So far, the fiscal operations have not raised U.S. inflation, with the exception of healthcare, housing, education, taxes, etc.
The Repo World
Since this overnight repo rate spike in mid-September, we have been detailing in the Trends Journal the amount of cash the U.S. central bank has injected into the repo market since 17 September. Since that time, the Fed reported its balance sheet had risen to $4.07 trillion as of yesterday, from $3.8 trillion in September.
On 12 December, the New York Fed announced that two-week term repo operations will be provided twice weekly, four of which span year end, and another longer-maturity term repo operation that also spans year end, totaling at least $50 billion.
In addition to the $360 billion of liquidity the Fed is pumping into the markets by buying back $60 billion a month in Treasury bills, last Thursday, the New York Fed announced they’ll be injecting another $2.93 trillion between 16 December and 14 January into Wall Street trading houses (primary dealers).
Yet, after the last Fed meeting, Fed Chair Powell proclaimed, “Our operations have gone well so far. Pressures in money markets over recent weeks have been subdued. We stand ready to adjust the details of our operations as necessary to keep the federal fund rate in the target range.”
PUBLISHER’S NOTE: Nightly interbank loans help make the U.S. financial system hum, and they go on interrupted for years without media attention. The overnight borrowing and lending helps ensure that banks have enough liquidity for their daily operations and to earn interests on any reserves. (Reserves are generally restricted to certain amounts, as determined by the Fed.)
Some loans are uncollateralized (that is, based solely on credit rating) and operate between banks only. These are called Fed funds.
The other type of loans, called repurchase agreements (or repos), are collateralized and can involve other financial institutions, not just banks.
Quantitative easing (QE) occurs when the Federal Reserve intervenes in these routine operations by flooding the banks and financial markets with cheaper money… in essence, they are providing banks with an excess of reserves.
In 2008, before the financial crisis, the excess reserves of banks were close to zero. After three rounds of QE, they jumped as high as $2.5 trillion.
The momentary sharp increase in repo rates indicates that the reserves are back to zero, suggesting that QE efforts have finished out their lifecycle and will no longer be as effective in stabilizing markets.
The Federal Reserve uses the Core Personal Consumption Expenditures (PCE) index to understand inflation.
The PCE, which measures rises in prices for U.S. household consumption, absent food and energy costs, dropped from 1.8 percent to 1.6 percent this year. Analysts predict inflation will remain under this target level for at least five years.
If you ask your average American, there’s plenty of inflation going around.
National per capita health expenditure in the U.S. jumped from $11,121 in 2018 to around $11,559 in 2019, a 4 percent increase in a single year. These numbers are among the highest in the world, and the are a radical departure from the annual $161 per capita in 1960.
Housing costs are also increasing at a rate of 5.4 percent per year, as the shortage of affordable housing continues to intensify.
Almost 31.5 percent of American households, about 38 million, pay more than 30 percent of their income on housing. (More than 30 percent is considered a severe cost burden.)
The Fed, however, looks at the Core PCE number as the marker of inflation.