It's important to note that Fed tightening this time around is fundamentally different from tightening cycles in the past. The main difference this time is that the Fed is not draining reserves from the banking system. Reserves are still plentiful at over $3 trillion. That's a huge deal. [Making] the point another way: there is no shortage of liquidity in the financial markets, unlike during periods leading up to recessions in the past.
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Economic & Investment Blog
No Boom, No Bust
September 18, 2023The End of LIBOR
August 7, 2023We lose a market indicator: For years, one of the key indicators of market stress was the T-bill over Eurodollar spread, commonly called the “TED spread.” Since LIBOR represented nongovernment guaranteed dollar deposits, there was credit risk embedded in the rate. Market participants began to notice that when credit stress developed in the financial markets, the TED spread would widen, with LIBOR rates rising above T-bill rates.
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Inflation has Peaked and will be Headed Down
October 19, 2022Inflation as measured by government indices (e.g., CPI, PCE Deflator) is a lagging indicator of true inflation. True inflation is defined as the loss of purchasing power of a currency. Right now that is just not the case: the dollar is soaring against nearly every currency in the world and virtually all commodity prices are collapsing. Don't pay attention to inflation; pay attention to sensitive market-based prices—they tell you where inflation is headed.
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The Fed: What to Expect and What to Watch
October 19, 2022The M2 measure of the money supply grew a very rapid 24.8% in 2020 and 12.4% in 2021. Year-to-date through July, M2 has grown at only a 1.8% annual rate in 2022. Since inflation came from this money printing, we see this as progress!
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Expect Normalization, Not Severe Recession
July 7, 2022Sentiment surveys are registering lower readings today than even in the midst of the 2008 financial crisis. But while consumers aren’t talking the talk, they are walking the walk: growing their spending well in excess of inflation. Rising net worth and job security are far more important predictors of consumer behavior than comments people are willing to share with survey takers
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M2 Growth Slows: Light at the End of the Inflation Tunnel
June 8, 2022M2 is no longer exploding. In fact, its annualized growth rate over the past 3 months has fallen to a mere 1.3%, down from its all-time, year-over-year high of 26.9% in February of last year.
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Better Measures of the Yield Curve
April 13, 2022The spread I have generally preferred is the 1-10, but there's one I think is even better: the spread between the real Fed funds rate and the real yield on 5-yr TIPS. Here I'm referring the real yield curve, not the commonly-used nominal curve. Real yields, after all, are far more important than nominal yields because they reflect the true cost of borrowing and the true returns to saving, and those are what create the most powerful incentives in the economy.
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S&P 500 Earnings Season Update
March 14, 2022For the full year, the blended earnings growth rate for CY 2021 is 47.4%. Looking ahead to the first half of CY 2022, analysts expect earnings growth of 5.5% for Q1 2022 and 4.8% for Q2 2022
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Piloting Through: Why Investors Should Stay the Course
March 14, 2022We expect S&P 500 earnings to be up, actually, about 12 percent. We think the market is going to not be willing to pay as much as they did at the end of 2021 for the same earnings. So, we expect market multiples, the valuations that you highlighted, to actually contract a little bit.
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Pandemic has Accelerated the Pace of Deglobalization
January 10, 2022Globalization was under pressure before the pandemic. The rise of populism in the West since the Great Financial Crisis was, in part, a reaction against globalization. The pandemic has accelerated the pace of deglobalization. Lengthy supply chains have been exposed as wanting ...As supply chain resilience becomes paramount, we expect a shift from just-in-time to just-in-case inventory management.
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August Employment Report
September 7, 2021Still, the economy has a long way to go before a full recovery. We are still 5.3 million payrolls short of where we were in February 2020; down 5.6 million for civilian employment. The labor participation rate is at 61.7% versus 63.3% pre-COVID; the employment-population ratio – the share of adults who are working – is 58.5% versus 61.1% pre-COVID. We project that it will take until about mid-2022 to recover all the jobs lost during COVID
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Mid-Cycle Transition No Reason to Sell
August 9, 2021Although some market participants appear to be worried about an impending slowdown, we continue to believe the economy is undergoing a somewhat typical handoff from the early- to mid-cycle. This period often is accompanied by choppier equity markets as investors seek to ascertain the dominant themes of the next expansion
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Third Quarter 2021 Asset Allocation Outlook
July 26, 2021There is no recession within our forecast period. Monetary and fiscal stimulus should continue in the U.S. over our three-year forecast period, yet at a decreasing rate as the economy recovers.
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Recession Indicators: Strong...to Quite Strong
June 23, 2021the best years for economic growth have gone hand-in-hand with more mixed but above-average stock market performance. Further, it isn’t unusual to see a correction of over 10% in periods of economic strength, as investors try and handicap just how much growth will slow in the following year
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The Coming Disinflation
May 5, 2021higher prices from supply bottlenecks in the manufacturing sector are typically short-lived. High prices and an improving COVID situation will bring more capacity online by the end of 2021, in turn dampening inflation pressure next year
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Housing Boom but No Bubble
April 20, 2021The primary problem is a lack of homes. Based on population growth and scrappage (voluntary knockdowns, fires, floods, hurricanes, tornadoes...etc.), we would normally expect housing starts of 1.5 million per year. But in the past twenty years (March 2001 through February 2021), builders have only started 1.256 million per year. Builders haven't started more than 1.5 million homes in a calendar year since 2006.
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Costs Are Going Up Across the Supply Chain
April 7, 2021The Shanghai Containerized Freight Index, a composite index of 15 export routes out of China, shows shipping prices more than tripling since 2019. Closer to home, the U.S. PPI shows intermediate transportation and warehousing costs for goods rising at an 11% annualized pace over the past three months
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Net Worth has Reached a New Record High in Nominal, Real, and per Capita Terms
March 22, 2021private sector leverage: total household liabilities as a percent of total assets. Leverage today is as low as it has been since 1976, and it has declined by a huge 40% since the peak in early 2009
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Rising Rates Are Not a Foregone Conclusion
March 8, 2021As the money continues to flood into the private sector we continue to see a rise in stock and bond prices. Over time, as stimulus payments and tax refunds are distributed and more money looks to be put to work, investors will extend maturities on their bond portfolios in a “reach for yield.”
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We Expect the U.S. Economy to Boom Starting in Q2
February 23, 2021The U.S. consumer will lead the charge in this growth rebound by relying on a mix of previously accumulated savings, still-flowing fiscal support and a pick-up in job growth.
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M2 money supply expanded by 26% year over year
February 8, 2021Goldman Sachs financial conditions index is the most accommodative since we started tracking the data in 1989.
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Rising Inflation Will Have Very Different Effects Than In The Past
January 22, 2021The “new nominal” is not simply about our expectation for a higher inflation regime in the next five years. It means stronger growth in the near term, and eventually higher inflation - without the typical rise in nominal bond yields.
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Early Read on Existing Home Sales
December 21, 2020The median existing single-family home sales price last month was up by about 15% from last November.
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Positive backdrop for equities: Firmer inflation and a lid on nominal yields
December 9, 2020Many are still looking ahead to 2021 through the lens of a traditional business cycle framework. But we believe this playbook doesn’t apply: in the same way that the “stoppage” was different from a “recession”, the “restart” is different from a “recovery.”
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Kastle Back to Work Barometer: City-by-City Views of America’s Office Use
November 18, 2020The greatest increases in building occupancy came from New York, with a 4.2% rise to 17.3%, and Chicago, with a 3.4% rise to 19.6%. Dallas continues to lead as the most open city on the Barometer at 42.2% open, with Houston closely following at 39.7% open. [Los Angeles metro is currently at 34.1%]
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The higher the price one pays for a security, the lower the expected return
November 4, 2020the real return on cash is negative: holding cash implies losing about 1.5% of your purchasing power every year.
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Current Reading of the Economic Tea Leaves
October 21, 2020very low real interest rates on Treasuries confirm that safety is extremely expensive, Treasuries are a bad deal for investors and a great deal for the federal government
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Americans are Starting New Businesses at the Fastest Rate in More Than a Decade
October 6, 2020new filings among a subset of business owners who tend to employ other workers reached 1.1 million through mid-September, a 12% increase over the same period last year and the most since 2007
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Unprecedented Level of Aid Stands to Boost the Economy After Recovery
September 17, 2020Annual M2 money-supply growth sits at nearly 25%. The household savings rate sits at 18%, a historically high level, even after surging to 33.7% earlier in the pandemic. Credit card debt has steadily declined through the downturn
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We May See Investment-Grade Corporates Become the Signaling Device
September 8, 2020The Fed made it clear that the singular focus on inflation suppression that dominated the Fed’s thinking from 1978 to 2006 has ended. …Simply put, this news today is bad news for long-duration bonds. …It has been our position that the protective impact of duration to a portfolio has likely been exhausted. The policy announcement appears to have confirmed our position.
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Fed Released the Minutes of its July 28-29 Meeting
September 3, 2020Financial markets have been building in the idea that the Fed was going to engage in financial repression. Specifically, the expected policy mix was fixing interest rates across the yield curve, a slow reaction to rising inflation and continued policy accommodation.
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A Payroll Tax Holiday Will Put the U.S. Back to Work
August 13, 2020This temporary payroll tax holiday could be offset by raising the retirement age for those who choose to participate. For instance, the full retirement age, now 67, could be increased by six months each year until it reaches 78 or retirement, whichever comes first
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U.S. Service Sector Activity Shows Substantial Turnaround
July 21, 2020A significant improvement in what is the lion's share of our economy
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Number of Homeowners in COVID-19-Related Forbearance Plans Falls for First Time
June 8, 2020According to the McDash Flash Forbearance Tracker, as of June 2, 2020, 4.73 million homeowners – or 8.9% of all mortgages – are in COVID-19 mortgage forbearance plans.
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Six High Frequency Indicators for the Eventual Recovery
June 1, 2020According to the Apple data, driving is back to normal, walking is close to normal, but public transit is still off 64% from the pre-crisis level.
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How Can Equities be Doing so Well?
May 12, 2020the spread of the Coronavirus has given larger well-capitalized companies, particularly technology companies and big box stores that were allowed to stay open, an advantage over Main Street competitors
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How will stocks rebound from COVID-19?
April 23, 2020On average, the stock market bottoms around 1.5 months before the peak in jobless claims and 4.5 months before the end of the recession.
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Encouraging Signs Are on the Horizon
April 6, 2020The financial system has already seen an enormous amount of deleveraging. Commodity trading accounts, volatility funds, risk parity funds and other client-oriented funds, as well as hedge funds, levered ETFs, MLPs — you name it — have delevered in the past two weeks. We are now likely at the lower end of leverage in the financial system. The volatility associated with this deleveraging should start to decrease as we go forward.
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Recession + Deflation = Real Panic
April 6, 2020There are three factors which are creating those conditions: the coronavirus, government-ordered shutdowns, and a war between Saudi Arabia and Russia over oil production, and they are all inter-connected.
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Activity Rebounds
February 20, 2020The U.S. manufacturing sector returned to expansion territory in January after five months in contraction, according to the latest reading of the Institute for Supply Management (ISM) Purchasing Managers Index.
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The Fundamental Strength and Resilience of the U.S. Economy
February 5, 2020As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy
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US power generators set for another big year in coal plant closures in 2020
January 23, 2020"[W]e believe that carbon-heavy utilities will accelerate their earnings growth by pursuing a 'virtuous cycle': shutting down expensive coal plants and investing in cheap renewables,"
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Oil is the Key Risk
January 10, 2020The potential for oil prices disrupting global economic growth is probably as high now as it was in the 1970s.
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Growing Wage Pressure from Lower-Paying Jobs
December 30, 2019While higher wages are often a short-term benefit, over time they have the capability to do harm
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Five Economic Reasons to be Thankful
December 4, 2019Household debt burdens have declined sharply since the great recession. The Household debt service ratio was at 13.2% in 2007, and has fallen to a series low of 9.69%. The overall Debt Service Ratio decreased in Q2 2018, and has been mostly moving sideways and is at a series low. The financial obligation ratio (FOR) declined in Q2 and is also near a series low. The DSR for mortgages is also at a series low (since at least 1980). This data suggests aggregate household cash flow has improved
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The Weakest Recovery and Longest Expansion
November 21, 2019At today's real yield of a mere 0.05%, 5-yr TIPS appear to be priced to the expectation that real GDP growth will average about 2% per year going forward.
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Data released for September suggests the economy is still firmly in expansion
November 7, 2019Based on the report, new export orders appear to be the biggest drag on manufacturing activity, which suggests that much of the slowdown is due to a reduction in global trade."
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Assets of Retail Money Market Funds Increased to $1.32 trillion
October 23, 2019Over the past 52 weeks, ICI's money fund asset series has increased 20.1%, with Retail Money Market Funds rising by 22.9% and Institutional Money Market Funds rising by 18.5%
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Conflicting Signals from Fixed Income Markets
October 8, 2019falling PMIs, which are good proxies for the business cycle and have moved in near lockstep with 10-year Treasury yields since the financial crisis, suggest the slowing business cycle (softer domestic backdrop) is the more likely culprit for low U.S. rates
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Houthis have claimed a massive attack on Saudi Arabia’s oil infrastructure
October 8, 2019Essentially, the world oil market is now running without any buffer. For most of the history of the oil market, some producers have held production off the market to stabilize prices. This offline capacity has acted to dampen price spikes when events occur. The world mostly relies on the KSA for maintaining this buffer. For the time being, that buffer is missing which means price volatility will rise.
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Risk Aversion is the Big Story, Not the Yield Curve
September 5, 2019yield curve inversions have preceded every recession since the 1950s. But there is one other variable which has also preceded every recession, and that is a real Fed funds rate that is high and rising (e.g., at least 3-4%). Currently, the real funds rate is barely positive, which means that monetary policy is far from being so tight as to strangle the economy or to starve the market of much-needed liquidity
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Don't Freak Out about the Yield Curve
August 27, 2019The yield curve is indicating economic weakness, but I'm not currently on recession watch. ...In general, I find new home sales and housing starts a better leading indicator for recessions than the yield curve. And Year-to-date (through June), new home sales are up 2.2% compared to the same period in 2018. Not indicating a recession!
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FOMC decided to reduce its short-term interest rate target by 25 bps
August 6, 2019monetary policy was never meant to stimulate or throttle growth. Growth is not created magically when the Fed lowers interest rates. Monetary policy is meant to keep the supply and demand for money in balance, and thus to deliver low and stable inflation, which in turn is conducive to growth
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Split opinions on the Fed about the need for a rate cut
July 24, 2019the current estimate of final sales to private domestic purchasers is a healthier 3% [GDP growth]
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At Least Households Are In Good Shape
July 8, 2019inflation-adjusted value of household net worth, which has also reached an all-time high. It's important to note that this measure of financial well-being has been increasing by about 3.6% per year for many decades. Recent gains are almost exactly in line with historical experience. Nothing unusual or unsustainable about this
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Digital Media Trends - Video Gaming Goes Mainstream
June 18, 2019consumers increasingly curate their own entertainment experiences, gaming is coming to the forefront. The compelling shifts among millennial consumers (which now includes people up to age 35 years old) reached an inflection point, with video gaming subscriptions edging ahead of Pay TV subscriptions—53 percent versus 51 percent
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The Dizzying Effect of Trade Wars
June 4, 2019One trend that is likely to emerge is the creation of trade blocs, where local trade will be dominated by regional hegemons with little trade activity between blocs due to impediments. This would mean a world of higher inflation and lower profitability, but it will likely also be more equal and there will be less “creative destruction.”
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Trade War Hysterics
May 15, 2019Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP. Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy.
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There hasn't been a single year this decade in which global growth fell below 3%
May 6, 2019Robust and steady GDP growth has been reflected in growing global demand for commodities, energy, and real goods and services, which in turn has translated into robust and steadily growing corporate profits
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10 Key Charts Say There's Little To Worry About
April 17, 2019the economy's fundamentals remain healthy ...Thus, it pays to remain optimistic
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Population Without Access to Electricity Falls Below Billon
April 5, 2019In a sign of great progress, over 120 million people worldwide gained access to electricity in 2017.
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How Much Oil Is Displaced by Electric Vehicles? Not Much, So Far
April 5, 2019Gasoline and diesel displacement by electric vehicles will grow by 96,000 barrels a day this year ... That brings the lost cumulative demand since 2011 at 352,000 barrels a day ...By comparison, total global oil demand growth over the same period rose 12 million barrels a day to 100.6 million, according to the International Energy Agency.
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The United States has Become the World’s Largest Crude Producer
March 4, 2019The United States has become the world’s largest crude producer and broke the country’s previous annual record set in 1970
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Americans' Confidence in Their Finances Keeps Growing
February 26, 2019Americans' optimism about their personal finances has climbed to levels not seen in more than 16 years, with 69% now saying they expect to be financially better off "at this time next year."
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Inflationary Pressures Building
February 7, 2019Wages represent the greatest component of income for most Americans, and higher wages can be good for consumption and the economy broadly as individuals have more dollars to spend. However, rising wages can also put pressure on corporate margins if productivity doesn’t keep pace, ultimately leading to inflationary pressures with companies having to raise prices to maintain profitability.
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Key Economic Indicators are Mostly Positive
January 16, 2019industrial production in the US reached an all-time high last month, and it has made impressive strides since late 2016
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Bull Markets Die from Excessive Optimism – They Don’t Worry Themselves to Death
January 7, 2019"While the recent decline is of bear market magnitude, I think it is more akin to the three biggest corrections we’ve lived through since the market bottomed in 2009."
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Recession Indicators Update
December 17, 2018At present, 11 of the 12 ClearBridge Recession Risk Dashboard indicators we track remain [in Expansion]
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Yield Curve is NOT Forecasting a Recession
December 17, 2018While it's hard to argue with facts, an almost-flat curve is not the same as a flat or inverted curve. The latter occur only when the market looks into the future and sees good evidence that the Fed will no longer tighten policy and will very likely ease policy at some point. We're not there yet
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The Trade Deficit in Goods and Services
November 7, 2018Overall, in the past year exports are up 7.2%, while imports are up 9.8%, signaling very healthy gains in the overall volume of international trade and easily outstripping the pace of nominal GDP growth.
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Housing Market Update: Slowing but Not Collapsing
August 20, 2018[When looking at the] index of housing affordability, you find that it is still the case that the average family has an income that is more than sufficient to qualify for mortgage big enough to buy a median-priced home using conventional financing. Prices are up and mortgage rates are up, but so are incomes, and the economy is in pretty good shape.
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Yield Spread: 2-year and 10-year Treasury Note spread has narrowed
July 20, 2018The economy is accelerating, and the Fed is chasing both rising real growth and rising inflation. Even if the Fed lifts rates to 3.5% by the end of 2019 (which would require six more rate hikes at the current pace), the Fed will still not be tight relative to nominal GDP growth. So, the odds of a recession in the next few years remain very low even if we get a technical inversion.
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Economic Fundamentals Remain Robust: Despite the Tariffs
July 13, 2018Capital spending trends appear quite healthy and should be an important driver for equities in the second half of the year.
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Business Fixed Investment - 1st Quarter GDP
June 22, 2018business fixed investment – equipment, structures, and intellectual property – was revised to a 9.2% annualized growth rate from a prior estimate of 6.1%.
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Likelihood of a Recession in the next 12 months Remains Low
June 15, 2018Truck shipment growth has been increasing on a year-over-year (YOY) basis, with YOY improvement of 5% or more in each of the last seven months. This pickup in freight activity is consistent with an expanding economy.
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Household Net Worth Hits $100 Trillion
May 30, 2018As in recent years, gains have come mostly from financial assets (up $27.6 trillion since late 2007) plus real estate (up $2.8 trillion since the pre-Recession peak of 2006), offset by only a $1 trillion increase in debt.
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White House staff turnover, dollar as world reserve currency, and the JCPOA
March 19, 2018In this edition of Reading the World, we will examine White House staff turnover, U.S. dollar as the world reserve currency, and the Joint Comprehensive Plan of Action (JCPOA) regarding Iran.
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Will the New Tax Law impact Home Sales, Inventory, and Price Growth
January 4, 2018We expect the high end of the [residential real estate] market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations, but there will be offsets for these buyers due to the lower rates - and these buyers will likely benefit from the corporate tax cuts. Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT).
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Net Neutrality Repeal Won’t Lead to Internet Apocalypse
December 18, 2017A contrary assessment to the Net Neutrality repeal.
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Will S&P 500 Report Record-Level EPS in 2018?
December 18, 2017For 2018, the bottom-up EPS estimate (which reflects an aggregation of the median EPS estimates for all of the companies in the index) for the S&P 500 is $146.17.
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Don’t Fear Higher Interest Rates
December 8, 2017Rising rates won’t kill the recovery or bull market any time in the near future.
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Relationship between Market Cap to GDP Ratios and Subsequent 10-year Returns
December 8, 2017U.S. stocks are not cheap. Total U.S. stock market capitalization as a percentage of gross domestic product (market cap to GDP) currently stands at 142 percent.
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Snapshot: A Boatload of Good News for Global Trade
November 8, 2017Global trade volume is growing faster than industrial production, while shipping volumes are strengthening.
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