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Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money
Lacy Hunt On Debt and Friedman’s Famous Quote Regarding Inflation and Money
Hoisington Quarterly Review and Outlook 2nd Quarter 2021
Here are some snips to the latest at Hoisington Management Quarterly Review (Emphasis Mine).
Too Much Debt
In highly indebted economies, additional debt triggers the law of diminishing returns. This fact is confirmed when the marginal revenue product of debt (MRP) falls, where MRP is the amount of GDP created by an additional dollar of debt. In microeconomics, when debt is already at extreme levels, a further increase in debt leads to an increase in the risk premium on which a borrower will default suggesting that the bank or other lender will not be repaid.
Combining both the falling MRP with a declining loan to deposit (LD) ratio, results in a reduction in the velocity of money. In terms of the impact on monetary activities, a drop in the LD ratio means that more of bank deposits are being directed to the purchase of Federal, Agency and state and local securities in lieu of private sector loans. The macroeconomic result is that funds are shifted to sectors that are the least productive engines of economic growth and away from the high multiplier ones.
More than thirty years ago, Stanford Ph.D. Rod McKnew demonstrated that the money multiplier, referred to as “m”, is higher for bank loans than bank investments in securities. The money multiplier, which is money stock (M2) divided by the monetary base should not be confused with the velocity of money. The latest trends strongly support McKnew’s analysis.
…click on the above link to read the rest of the article…
Still More Green Hypocrisy In the EU, This Time Hydrogen
Still More Green Hypocrisy In the EU, This Time Hydrogen
Hooray More Green Energy!
The EU is cheering a new hydrogen project at a refinery in Germany.
The plant will be built by Shell and ITM power and will be able to produce about 1,300 tonnes of hydrogen per year, which can be fully integrated into the refinery processes, such as for the desulphurisation of conventional fuels. It will be the world’s largest hydrogen electrolyser.
Tudor Constantinescu, Principal Advisor, DG ENER at the European Commission stressed the the contribution of green hydrogen to the Energy Union objectives, saying: “Renewable electricity can support decarbonisation not only of the power sector, but, through sectoral integration also of other carbon intensive industries, such as refining. Green Hydrogen is a key enabler in this process, contributing to the Energy Union objectives both in terms of emissions reductions and increased renewables share.“
Ten Times the Hydrogen, Ten Times the Cost?
Euractive has some interesting details of the undertaking, allegedly Set to Multiply Capacity tenfold by 2024.
The 10 MW electrolyser, while already Europe’s largest of its kind, is a pilot project for grander ambitions.
If the pilot works out well, the partnership around Shell wants to add another 100 MW of electrolysis capacity which would complete construction in 2024. That would then be the largest electrolyser in the world.
Yet the pilot project depended on financing by the FCH JU at a 50% rate, meaning that the business case for a project ten times larger without public funding would be questionable at best.
Whether those ambitions come to fruition will therefore depend on the carbon price and the amount of additional funding available, which could come from either the EU or Germany.
…click on the above link to read the rest of the article…
Swiss Reject Climate Change With Zoomers and Millennials Leading the Way
Swiss Reject Climate Change With Zoomers and Millennials Leading the Way
Swiss Reject Climate Change
Eurointelligence reports Swiss Reject Climate Change
After Switzerland dropped its negotiations with the EU, the country has now rejected a climate-protection law in a referendum. Concretely, they rejected all three parts of the law in separate votes: on CO2, on pesticides, and on drinking water.
We agree with the Swiss journalist Mathieu von Rohr that this failure is not merely important in its own right, but symptomatic for the difficulties facing Green politics in general. It is one thing for people to pretend they support the Green party, especially when it is cool to do so. It is quite another to make actual sacrifices as the Swiss were asked to do.
But what is particularly interesting about this referendum is that the strongest opposition came from young people. 60-70% of the 18-34 year old voted No in the three categories.
Each country is different, but the big yet unanswered question is whether people elsewhere would agree to make personal sacrifices for the greater good. The Swiss referendum tells us we should not take this for granted. The German elections will be the next big test.
Huge Shock
The referendum Failed 51-49. And it took a crushing rejection by Zoomers and millennials to do it.
The BBC comments on the Huge Shock.
A referendum saw voters narrowly reject the government’s plans for a car fuel levy and a tax on air tickets.
The measures were designed to help Switzerland meet targets under the Paris Agreement on climate change.
Opponents also pointed out that Switzerland is responsible for only 0.1% of global emissions, and expressed doubts that such policies would help the environment.
The vote, under Switzerland’s system of direct democracy, went 51% against, 49% in favour.
…click on the above link to read the rest of the article…
A World that Operates by Financial Cheating and Unsound Money Is Doomed
Please consider A World that Operates by Cheating Is Doomed
In ages past, gold and silver provided humanity with a system of economic co-operation among productive humans, which was fair to all participants.
With gold and silver, humans were trading value-for-value: what changed hands were amounts of physical gold or silver, or at least, Bills which were unquestioned claims upon gold or silver.
When the exchange had taken place, everyone was happy! The seller because he had gold or silver, in exchange for the goods or services he offered; and the buyer was pleased because he had the goods or services he wanted, and he got them by tendering gold or silver in exchange.
So, everyone was pleased: the buyer because he got the goods or services he wanted, in exchange for his gold or silver; and the seller was pleased because he traded the goods or services he had to offer, tor gold or silver.
Under the present monetary system, there can be no justice or “fair trading”, because all the World’s MONEY IS FAKE MONEY. No money in today’s world is gold or silver, nor does it represent an unquestioned claim upon a stated amount of gold or silver.
And a gigantic shooting war will mark the end of our times, as a result of the cheating involved – all because fake money was forced upon humanity.
No Consequences, Yet
Except in isolated hyperinflation cases, governments have learned there are no consequences to the ruling class (at least yet) for unsound money.
…click on the above link to read the rest of the article…
Fed’s New Paradigm Adds Helium to the Stock Bubble
It has been an odd year with the Covid-19 crisis hammering the economy, but stocks recovering from sharp losses and then powering to new highs. As a result, standard measures show valuations are at rarely-seen levels that have typically ended in tears.
The S&P 500 trades at 22 times analysts’ expected earnings—its most expensive level since the dot-com bubble. It also trades at its richest multiple to its inflation-adjusted earnings over the past decade—the valuation method popularized by economist Robert Shiller —in nearly 20 years. The total value of U.S. stocks as a percentage of the U.S. economy, which Warren Buffett once called “the best single measure of where valuations stand at any given moment,” is now higher than at any point during the dot-com years.
Stocks vs Interest Rates
Some suggest stocks may not be as expensive as they seem because that interest rates are extremely low.
John Hussman has pointed out the fallacy of that theory many times. The Journal explains the fallacy this way.
The 10-year Treasury largely reflects investor expectations of what the overnight rates set by the Fed will average over the next decade. The Fed responds to what is going on with the economy, setting rates higher when it is trying to cool things down, lower when it is trying to heat things up. So low yields are tantamount to a low-growth, low-inflation economy—one in which profit growth would be low, too. Why pay up for stocks under that scenario?
…click on the above link to read the rest of the article…
New Covid Mutation Is ‘Out of Control’ in the UK
U.K. Health Secretary Matt Hancock warns a new strain of the coronavirus is “Out of Control”.
More than 16 million Britons are now required to stay at home after a lockdown came into force Sunday in London and southeast England and the government scrapped plans to relax rules on socializing at Christmas.
The measures to control the fast-spreading new variant of the virus forbid household mixing in those areas and restrict socializing to just Christmas Day across the rest of England. Residents across the country were told to keep to their local areas, and extra police were being deployed at rail stations to stop people traveling out of London.
“Cases have absolutely rocketed, so we’ve got a long way to go,” Hancock told Sky News. “I think it will be very difficult to keep it under control until the vaccine has rolled out.” People in the new Tier 4 areas “should behave as though they have it,” he said.
Race to Block the New Strain
In a race to block the new Covid-19 strain, Countries Ban Travel From U.K.
Countries across Europe and beyond raced Sunday to stem a more-infectious strain of Covid-19 by banning travel from the U.K., following a British announcement Saturday that it is imposing fresh lockdowns.
Germany, France, Spain, Italy and Israel on Sunday were preparing to join the Netherlands and Belgium, which hours earlier had banned passenger air travel from the U.K., while other countries considered similar moves in an effort to prevent a worsening of the pandemic before Christmas.
…click on the above link to read the rest of the article…
The Eurozone Economy Plunges Back Into a Severe Decline
IHS Markit reports PMI Signals Steep Downturn in November Amid COVID Lockdowns.
Key Findings
- Flash Eurozone PMI Composite Output Index at 45.1 (50.0 in October). 6-month low.
- Flash Eurozone Services PMI Activity Index at 41.3 (46.9 in October). 6-month low.
- Flash Eurozone Manufacturing PMI Output Indexat 55.5 (58.4 in October). 4-month low.
- Flash Eurozone Manufacturing PMI at 53.6 (54.8 in October). 3-month low.
The flash IHS Markit Eurozone Composite PMI® slumped from 50.0 in October to 45.1 in November, its lowest since May. With the exceptions of the declines seen in the first two quarters of this year, the average PMI reading of 47.6 in the fourth quarter so far is the lowest since the closing quarter of 2012 (during the region’s debt crisis) and indicative of a steep decline in GDP.
The deteriorating performance was broad-based, albeit with the service sector hardest hit from virus containment measures. While manufacturing output growth merely slowed in November to the lowest since the start of the sector’s recovery back in July, attributable to a marked slowing in order book growth, service sector output fell for a third month running, with the rate of decline accelerating sharply to the fastest since May.
A near-stalling of manufacturing output growth was exacerbated by an increasingly severe drop in services activity, pushing the flash composite PMI down from 47.2 to 42.4
Employment meanwhile fell across the eurozone as a whole for a ninth consecutive month, with the rate of job losses holding steady on the post-pandemic low seen in October.
By country, employment rose in Germany for the first time since February, and France saw the lowest number of job losses since the pandemic struck. Job cuts deepened in the rest of the region as a whole, however, to the steepest since June.
…click on the above link to read the rest of the article…
Fed’s GDP and Unemployment Projections: Who Believes Them?
Please consider the Economic Projections of FOMC Participants under their individual assumptions of appropriate monetary policy, September 2020.
Fed’s GDP, Unemployment, PCE Inflation Projections
GDP Projection
The Fed believes GDP will only contract 3.7% in 2020 then rebound 4% in 2021, and 3% in 2022.
Do you believe this?
Unemployment Projection
The Fed believes the Unemployment Rate will be 7.6% in 2020, 5.5% in 2021, and 4.6% in 2022.
Do you believe this?
PCE Inflation Projection
The Fed believes Core Personal Consumption Expenditure inflation (excluding food and energy) will be 1.5% in 2020, 1.7% in 2021, and 1.8% in 2022.
Do you believe this?
GDP Poll
Unemployment Poll
PCE Poll
My Take
- GDP: I will take the under. Way under. Much of the rebound was due to $600 pandemic stimulus checks that expired on July 25. This will be a huge headwind going forward.
- Unemployment: I am leery of games with the participation rate and labor force but I will go with higher.
- PCE : This one is humorous. For months, the Fed has committed not only to 2% but letting inflation run hotter than expected for some time to make up for needed lost inflation. Yet the Fed admits it will not hit its targets until 2023. PCE inflation, as measured, is a joke. So perhaps the Fed is on target.
The Wonders of Free Money in Two Pictures
Lesson of the Day
Census Report on Advance Retail Sales
The Census report on Advance Retail Sales provides half of our “Lesson of the Day“.
Adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, July sales were $536.0 billion, an increase of 1.2 percent from the previous month, and 2.7 percent above July 2019.Total sales for the May 2020 through July 2020 period were down 0.2 percent from the same period a year ago.
The May 2020 to June 2020 percent change was revised from up 7.5 percent to up 8.4 percent. Retail trade sales were up 0.8 percent from June 2020, and 5.8 percent above last year.
Nonstore retailers were up 24.7 percent from July 2019, while food and beverage stores were up 11.1 percent from last year.
Retail spending rose for the third straight month despite a rise in coronavirus infections with reopenings stalled.
Spike in Government Spending
The chart from Pew shows stimulus and deficits exceed that in the Great Recession.
Since March, government stimulus authorizations (not all spent yet) total at least $3 trillion. Another $2 trillion is on the deck when Democrats and Republicans agree to another package.
That is the second half of the Free Money Wonder.
The federal government has run deficits nearly every year since the Great Depression and consistently since fiscal 2002. Through the first 10 months of fiscal 2020, the government took in $2.82 trillion in revenue and spent $5.63 trillion, for a year-to-date deficit of just over $2.8 trillion, according to the Treasury Department’s Bureau of the Fiscal Service. Through the first 10 months of fiscal 2019, by comparison, the deficit stood at $866.8 billion.
…click on the above link to read the rest of the article…
More Than Half of Business Closures are Permanent
More Than Half of Business Closures are Permanent
A Yelp study finds that 55% of business closures are closed for good.
Yelp reports Increased Consumer Interest in May correlates with more Covid outbreaks and closures in June and July.
Consumer Interest vs Outbreaks
Business Closures Fluctuate Across the Nation
- There were 140,000 total businesses closures on Yelp from March 1 to June 15. This increased to more than 147,000 total business closures on June 29 and then dropped again to just more than 132,500 total business closures as of July 10.
- In April, there were more than 175,000 business closures indicating that only 24% of businesses that were closed in April have reopened.
- Even as total closures fall, permanent closures increase with 72,842 businesses permanently closed, out of the 132,580 total closed businesses, an increase of 15,742 permanent closures since June 15.
- This also means that the percentage of permanent to temporary business closures is rising, with permanent closures now accounting for 55% of all closed businesses since March 1, an increase of 14% from June when we reported 41% of closures as permanent.
- Overall, permanent closures have steadily increased since the peak of the pandemic with minor spikes in March, followed by May and June.
Total Businesses Closures
States with the largest populations have the most closures.
Total Business Closures Per 1,000
On a metro level, Las Vegas, NV, is suffering from the highest rate of permanently closed businesses with 861 businesses permanently closed, as the city reacts to a decrease in tourism. Meanwhile, Los Angeles, CA, has the most closures with 11,342 total temporary and permanent business closures.
Restaurants Struggle
…click on the above link to read the rest of the article…
A Surge in Small Business Bankruptcies is Underway
A Surge in Small Business Bankruptcies is Underway
The new rules make it easier for small businesses to file for chapter 11. And they are.
Small Businesses Walking Away
In 2008, homeowners walked away from mortgages.
Thanks to the Small Business Reorganization Act of 2019 (SBRA), in effect as of February 19, 2020, small businesses have an easier shot at doing the same.
For example, the Twisted Root Burger grew quickly, but co-founder now says ‘I’m gonna walk away’ from some locations.
Twisted Root Burger was a Texas success story, expanding from one casual restaurant in 2006 to 24 sites including restaurants, bars, a brewery and a theater. Now, the company is moving fast in another direction—into bankruptcy.
“I’m not gonna open that restaurant at half the revenue,” said co-founder Jason Boso. “I’m gonna walk away from those restaurants. I’m not gonna set myself up for failure.”
More than 500 companies filed for bankruptcy under the small-business bankruptcy rules since February, according to the American Bankruptcy Institute. June was the top month for filings with 131 cases; many were filed in states hit hard by the pandemic like Florida, Texas, California, New York and Illinois.
“It was somewhat prescient,” said Ryan Wagner, a restructuring and bankruptcy attorney with international law firm Greenberg Traurig LLP. “It was passed without the foresight of the pandemic.” The law is the most significant change to the bankruptcy code since 2005.
SBRA Highlights
- Applies to businesses with $2.7 million in liabilities, raised to $7.5 million under coronavirus stimulus
- Owners continue operating their business while in court
- Owners can retain equity after exiting bankruptcy
- Owners can modify residential mortgages if home was collateral for a business loan
- Faster turnaround to save time and minimize legal fees
- Owners generally have three to five years to repay creditors
- Creditors can be paid based on a business’s projected income
Walking away gets a new lease on life, this time for small businesses.
Industrial Production Declines Most in 101 Years
Industrial Production Declines Most in 101 Years
On the heels of miserable retail sales numbers comes the worst ever industrial production numbers.
The Fed’s Industrial Production report provides another grim look at the Covid-19 wrecked economy.
Total industrial production fell 11.2 percent in April for its largest monthly drop in the 101-year history of the index, as the COVID-19 (coronavirus disease 2019) pandemic led many factories to slow or suspend operations throughout the month.
Manufacturing output dropped 13.7 percent, its largest decline on record, as all major industries posted decreases. The output of motor vehicles and parts fell more than 70 percent; production elsewhere in manufacturing dropped 10.3 percent.
The indexes for utilities and mining decreased 0.9 percent and 6.1 percent, respectively. At 92.6 percent of its 2012 average, the level of total industrial production was 15.0 percent lower in April than it was a year earlier.
Capacity utilization for the industrial sector decreased 8.3 percentage points to 64.9 percent in April, a rate that is 14.9 percentage points below its long-run (1972–2019) average and 1.8 percentage points below its all-time (since 1967) low set in 2009.
No V-Shaped Recovery
As noted earlier today Retail Sales Plunge Way More Than Expected
Despite talk from hopers, even the fed understands there will not be a V-Shaped recovery.
Instead they are promoting a helicopter drop of money. For details, please see Panic Sets In: Fed Promotes More Free Money
Panic Sets In: Fed Promotes More Free Money
Panic Sets In: Fed Promotes More Free Money
Lawmakers need to do more says Minneapolis Fed President Neel Kashkari.
Free Money for 18 Months
The Fed cannot directly give money away so that burden falls on Congress. Kashkari follows Fed Chair Jerome Powell in seeking Congressional Action.
“They are going to need more. If this is a slow recovery, the way I think it is — I think we’re in this for months, a year, 18 months — there are going to be a lot of families that are going to need direct financial assistance,” Kashkari said Thursday during a virtual event with CBS. “I think a V–shaped recovery is off the table.”
“Putting money directly in the hands of laid-off Americans is, I think, the most direct way to get assistance, and then they will spend the money where they need it,” Kashkari said. “I just think money in the pockets of people who have lost their jobs is what we need right now until we can get the health care system to catch up and get control of this virus.”
I case you were wondering what sent the S&P in a huge 70-point S&P 500 U-Turn today, that reason is as good as any.
Powell’s Message
Yesterday, Powell made similar statements, just not as forceful.
Recall that the Fed has lending powers, not spending powers. A loan from a Fed facility can provide a bridge across temporary interruptions to liquidity, and those loans will help many borrowers get through the current crisis. But the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.
…click on the above link to read the rest of the article…
Negative Rates Are Not an Option
Negative Rates Are Not an Option
Today, Fed Chair Jerome Powell reiterated the Fed’s position on negative rates and gave his economic assessment as well.
Economic Outlook “Highly Uncertain”
In a live economic interview with PIIE, Jerome Powell discussed the Fed’s outlook for the economy and the advisability of negative interest rates.
The video interview is above and here is Here is Powell’s Prepared Transcript.
Key Transcript Snips
The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased. Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs. A Fed survey being released tomorrow reflects findings similar to many others: Among people who were working in February, almost 40 percent of those in households making less than $40,000 a year had lost a job in March.
While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks. Economic forecasts are uncertain in the best of times, and today the virus raises a new set of questions: How quickly and sustainably will it be brought under control? Can new outbreaks be avoided as social-distancing measures lapse? How long will it take for confidence to return and normal spending to resume? And what will be the scope and timing of new therapies, testing, or a vaccine? The answers to these questions will go a long way toward setting the timing and pace of the economic recovery. Since the answers are currently unknowable, policies will need to be ready to address a range of possible outcomes.
…click on the above link to read the rest of the article…
Eurozone Collapse: V-Shaped Recovery Mirage Is Gone
Eurozone Collapse: V-Shaped Recovery Mirage Is Gone
Eurozone Economy Collapses 3.8% in the first quarter, the worst on record. Spain (-5.2%) and France (-5.6%) GDP were much worse than Italy (-4.7%).
Economist Daniel Lacalle offers his thoughts on the European economy in a YouTube video.
EUROZONE COLLAPSE
The V-Shaped Recovery Mirage Is Gone.
https://www.youtube.com/watch?v=kO_RxjESCk4 … YouTube at 🏠 @YouTube
What LaCalle says about the Eurozone also applies to the US.
What’s Next for America?
For a 20-point discussion of what to expect, please see Nothing is Working Now: What’s Next for America?
No V-Shaped Recovery
Here’s the correct viewpoint: The Covid-19 Recession Will Be Deeper Than the Great Financial Crisis.
Simply put, a quick return to business as usual is not in the cards.
Inflation or Deflation?
Meanwhile, the debate over inflation or deflation continues.
Will it be Inflation or Deflation?
If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.
