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Welcome to the 12th edition of the Weekly Wrap, where our deficit of gratitude for your reading this is bottomless.
Tax reform got one step closer this week as the Senate voted 51-49 in favor of a 2018 budget. This will allow Republicans to pass a tax bill without 60 votes in the Senate. Of course, this means tax policy will be in place for a maximum of 10 years, but we’ll look past that for now.
This is great news on one particular point. Policymakers are finally realizing that deficits don’t matter. As White House Budget Director Mick Mulvaney noted (via Bloomberg),
“I’ve been very candid about this. We need to have new deficits because of that. We need to have the growth… If we simply look at this as being deficit-neutral, you’re never going to get the type of tax reform and tax reductions that you need to get to sustain 3 percent economic growth.”
The tax package “The tax measure could add as much as $1.5 trillion to budget deficits over a decade,” according to the New York Times. The massive tax cuts are being paid for (or at least somewhat offset) by eliminating or capping some popular items, like state and local taxes and retirement savings tax breaks. These mostly impact the wealthiest of taxpayers, though many middle income earners will still see tax hikes.
But getting back to debts and deficits. The United States can borrow effectively endlessly from the rest of the world. That’s why bond yields are still so low by historical standards, even though the national debt is at an all-time high and still growing. The U.S. government simply having the ability to tax the wealthiest population on earth is enough for U.S. Treasury bonds to be the ultimate safe haven. Thus, deficits and debts don’t matter.
What would be a big deal is threatening the world’s confidence in the U.S. Treasury and the dollar. Exorbitant privilege is the term economists use to describe the dollar as the world’s reserve currency (here’s former Federal Reserve Chair Ben Bernanke on Exorbitant Privilege).
Oil is denominated for in dollars across the globe. Foreign nations borrow in dollars because it adds an air of stability to investors. Borrowing in dollars forces budgetary discipline on those governments. After all, if they have to devalue their home currency, the debts in U.S. dollars become more unsustainable.
The dollar as the world’s reserve currency is an inherent subsidy by the rest of the world to citizens of the United States. If misguided foreign policy, trade policy, or simply upsetting the apple cart just to create chaos were to threaten the dollar’s global status, Americans would feel the pinch big time.
The Growing Chasm Between Barcelona and Madrid: Checking in on the Catalonia Independence Referendum
“If there’s an impasse, or Puigdemont demands a hard Catalonia exit, or there are more riots in the streets between Catalonian nationalists and integrated Spanish supporters, that yield could shoot right back up.”
What Do Trump Stock Market Tweets Mean for the Fed Chair Decision?
“Trump likes to tweet about stock market milestones. But Trump also has a decision to make about who will lead the Federal Reserve. A hawkish pick for the Fed chief could increase the chances of a stock market correction.”
Why a Brexit Deal Remains a Leap of Faith: Theresa May’s Big Week of Negotiations
“Theresa May is finding out that Brexit negotiations are producing no winners. She herself, with a tenuous grip on the Prime Ministership, is feeling the burn the most.”
Spot Exchanges Shorts: Will Catalonia Leave Spain?
Spot Exchanges Shorts: The Apprentice: Federal Reserve Edition
Econ Vlog: Is Global Political Risk Creeping Up on Investors?
Cover photo: Gage Skidmore (Flickr Commons)
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Welcome to the 11th edition of the Weekly Wrap, where we love all economic data points equally, as if they were our own children.
A weak CPI reading. Core CPI for September was released, and came in at 1.7 percent, 0.1 percent lower than expected. Traders are now predicting an 82 percent chance for a December rate hike, down from 86 percent earlier this morning.
At 8:30 am (ET) this morning, we’ll get to see the updated Consumer Price Index (CPI) inflation number for September. The monthly jobs report has traditionally been the granddaddy of economic data. But this monthly inflation metric might be the new king of the heap.
According to the market, the answer is a resounding yes. Traders are pricing in an 86 percent chance of a rate hike in December. That’s up from about 70 percent on October 2 and 42 percent on August 18.
That’s in spite of the apprehensions of some Fed statements. Some members of the committee “noted that, in light of the uncertainty around their outlook for inflation, their decision on whether to take such a policy action would depend importantly on whether the economic data in coming months increased their confidence that inflation was moving up toward the Committee’s objective.”
Which brings us back to this morning’s CPI report. Would the Fed hold off on a December rate hike with low inflation readings? Probably not – low inflation hasn’t stopped the Fed from increasing rates before. But it is clear that monetary policymakers are keeping a much closer eye on the inflation side of the dual mandate.
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Conor Sen argues in Bloomberg View that we should look past inflation – housing is the real crisis. (Don’t Worry About Inflation. Solve the Housing Shortage.;Conor Sen, Bloomberg View)
Yanis Varoufakis, everyone’s favorite finance minister, argues that we shouldn’t let the Catalonia crisis go to waste. (Spain’s Crisis is Europe’s Opportunity; Yanis Varoufakis, Project Syndicate)
Workers quitting their jobs to seek out better ones. Could this be what’s holding back wage growth? (Record Job Openings Aren’t Enticing Workers to Quit; Eric Morath, Wall Street Journal Real-Time Economics)
Cover photo: Brookings Institution (Flickr Commons)
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Welcome to the 10th edition of the Weekly Wrap, where we believe life can always be summed up with a quote from the 1983 classic Trading Places
https://giphy.com/embed/5xtDarqlsEW6F7F14Fq
Stock investors are holding their heads up high these days. Strong economic fundamentals like GDP growth and manufacturing output have buoyed markets. Tax reform is in full discussion mode, which could cause stocks to further pop. Treasury yields have risen over the past week, signaling a complete risk-on environment.
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Welcome to the 9th edition of the Weekly Wrap, where we had a great week scrolling through 1,262 pages of chart-tastic econ data.
The Fed’s triennial report on the state of American household finances was released this week. This is one of the greatest gifts to people who enjoy spending weekends building charts. Or people who made bar bets about how many renters vs. buyers own equities (Answer at the end).
It will take years to run through and properly comment on all of this data. But here are three charts that immediately caught our attention.
This was a particularly interesting finding, especially considering the narratives in the 2016 election. Median income for those without a high school diploma jumped 14.7 percent since 2013. For comparison, the median income for those with a college degree rose just 2.1 percent over the same period.
But can we dispel the argument that working-class America is not being left behind, at least in terms of income? Most certainly not.
Since 1989, the median wage has grown the most for the college-educated folks, and stagnated – if not fallen – for other groups:
[table id=3 /]
Another interesting trend is in the median income for families that fall into the college-educated category. While real incomes are up 5 percent since 1989, it is down 8 percent since the 2004 peak. The college wage premium is alive and well, though it might not be as big as it once was.
Another finding that runs contrary to the 2016 election zeitgeist, the median income for families is rising fastest in the South and Midwest.
Incomes are still highest for families in the Northeast, but that region saw the slowest growth between 2013 and 2016.
Again, can we dispel the narratives that Trump ran on in 2016 based on this data? Yet again, the answer is no. Incomes (adjusted for inflation) have actually fallen in three of the four regions since 2004. Only in the south is the median family better off than they were 13 years ago.
[table id=4 /]
Finally, we have a data point that validates the Trump narrative. Families of rural America saw income growth that was just one-fifth of the growth in cities.
This is the continuation of a long-term trend as well. The real (inflation-adjusted) median income for a family in a metropolitan area is 10 percent higher than it was in 1989. For rural families, it’s just 2.7 percent.
One caveat, if we’re going to look at this through the intersection of politics and economics: many suburban counties voted overwhelmingly for Trump. These counties are considered within the range of metropolitan statistical areas. Suburban Cincinnati is a good example. Trump won just 42 percent of votes in Hamilton County. But once you cross the county line, that number jumps into the 60s.
Takeaway: There are some fascinating insights to this report, and we will surely be dissecting it until the next dataset comes out in 2020.
Loftium Won’t Cause Another Housing Crash, But It Stirs Bad Memories (September 25): “Of course, this one company will never cause a meltdown of the entire nation’s housing market and economy. But it should still be considered from a micro level. If memory serves correct, things didn’t seem to work out too well for either the borrowers or the lenders in Vegas and Phoenix.”
5 Charts That Explain the State of American Manufacturing (September 27): “Manufacturing is not declining, it’s evolving. Productivity in American manufacturing has been the key story of the past few decades. It simply takes fewer workers to produce more goods than it once did. And the goods that are produced are higher quality and of higher value than before.”
The Trump Trade Is Back. Kinda. (September 28): If an entire swath of companies are going to rise and fall based on the latest legislative proposals, then investing in small caps is a bet on Congress getting their act together and passing meaningful legislation. But if we take the past nine months as any kind of indicator, that has some long odds.”
We’re all pass-through entities now. Go incorporate yourself immediately. “It is an important asterisk to one of the core elements of the plan: a desire to tax income of “pass-through” businesses such as partnerships at a rate of only 25 percent. Currently, such income is taxed at the owners’ individual income tax rate, which is as high as 39.6 percent (and would fall to 35 percent in the Republican plan). The Republicans want the pass-through businesses to have a tax rate more in line with that of big, C-class corporations (which they are proposing to tax at 20 percent).” (Tax Plan Punts on a Loophole for the Wealthy; Neil Irwin, New York Times The Upshot)
We wrote about Toronto housing recently; UBS confirms it is bubbly. “Toronto and London are among the cities most at risk of a housing bubble as economic optimism and low borrowing costs push up property values in urban areas worldwide, according to UBS Group AG. The Canadian city, which entered the index of 20 locations for the first time this year, has the most overvalued housing market, while London was the third-riskiest in Europe after Stockholm and Munich, the Swiss bank said in a report published on Thursday.” (Toronto, London Among Riskiest Housing Bubble Cities, UBS Says; Jack Sidders, Bloomberg)
It’s not the fees that will kill you, it’s that you’re a terrible investor. “Those who bought in 2009 and held on until today would be pretty happy, but I get the impression that very few people did that. They either bought too late, sold too early, panicked and puked at the worst possible time, or chased a hot new trend. The result is that they inevitably underperformed a 60/40 mix of stocks and bonds 1 , which would have provided about a 10.4 percent return since the start of 2009.” (Fees Are Not the Enemy of Investors; Jared Dillian, Bloomberg View)
The answer: 64.6 percent of homeowners and 29.6 percent of renters.
Cover photo: Federal Reserve (Flickr Commons)
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Welcome to the 8th edition of the Weekly Wrap, where we aren’t registered as a company, and are thus pulling down the rates of entrepreneurship in the U.S.
Ben Casselman wrote in his inaugural piece for the New York Times about the declining rates of business creation in the United States. According to Census Bureau data, only 8.1% of companies in the U.S. are less than a year old. That’s down from about 15% in 1980.
Casselman notes a few reasons: rising power of existing corporations, fewer baby boomers in the labor force, fewer community banks, and more regulation.
There is also another potential factor at play – slower growth in the U.S. economy.
The trend of business creation parallels the trend in real GDP growth since 1980. This would almost certainly hurt business creation. Think of it from the perspective of a bank lender. If you are looking to lend to a new business, you’ll have to take into account different factors to make sure that business owner can pay you back. If broad economic growth is slowing, then the risk of default for borrowers goes up.
That leaves funding for business creation or expansion available to fewer companies. Only established, healthy corporations will receive capital, shutting out many would-be small businesses. That makes the economy less dynamic and less productive over time.
I asked Casselman about this, and he said it was unclear about the direction of causality here. Are there fewer new businesses because of slow economic growth, or is slow economic growth leading to fewer new businesses? He also pointed me in the direction of some research on the topic:
No matter what, this is a huge issue for the American economy, and one that I hope Casselman continues to explore. And there are other questions that I hope to consider, as well:
Amazon and Antitrust: Be careful what you wish for (September 15): “In an ideal world, the platform rivalries between Amazon, Microsoft, Facebook and Google provide a sort of Goldilocks consolidation: not too much, not too little. The tech-lash crowd should just be careful to not outright shatter the proverbial bowls of porridge.”
This Week’s Federal Reserve Meeting: Nightmares of the taper tantrum redux (September 18): “This is uncharted territory. The big four central banks – the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan – all amassed giant balance sheets post-Crisis. The U.S. is the first to dip its toe into unwinding those assets, so nobody is sure what exactly will happen.”
A Weak Currency Alone Won’t Save Your Export Industries (September 20): “But exchange rates are only a small part of the story. Global competitiveness stems from hard investments in capital and soft investments in education and training. Exchange rates can become a red herring: they can be weaponized and used to start a trade war. That’s far more damaging to an economy’s balance of trade than the currency exchange level.”
Janet Yellen doesn’t know what’s up with inflation. Investors shouldn’t pretend to know, either. “The markets want to believe the economy will stay in the sweet spot, growing just enough to avoid deflation concerns while avoiding pushing up inflation. But wanting something to be true don’t make it so.” (Three Dangerous Words for an Investor to Buy Into: Inflation Is Dead; James Mackintosh, Wall Street Journal)
The gold standard may have actually created fewer busts (and booms) than critics realize. But is that enough of an argument for the barbarous relic? “None of this is to say that the gold standard is necessarily better — stability can be overrated and growth is worth having — but the data suggest the standard arguments against gold, and the standard arguments in favour of the flexible and “counter-cyclical” state we have today, need serious revision.” (Going off gold did the opposite of what many people think; Matthew Klein, FT Alphaville)
Social media has been at the center of Silicon Valley techo-libertarianism. But it is a big enough part of our cultural and political zeitgeist to be scrutinized by regulators. “But Facebook’s power and influence seem likely to grow beyond the “self-regulation” phase. That’s why markets are willing to give the company a valuation of $500 billion when its 2017 profits will be in the neighborhood of only $15 billion. (Bloomberg data shows analysts expect Facebook’s revenue to grow to $76 billion in 2020, almost doubling projections for 2017.) The question remains how long self-regulation will be acceptable to the public and Congress.” (Facebook Marks the End of Social Media’s Wild West; Conor Sen, Bloomberg View)
Cover photo: Flickr Commons
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The White House will get its tax cuts. The catch: they won’t do anything to boost the economy.
That’s according to a Bloomberg survey of economists on tax reform.
With all the other distractions, shall we say, surrounding the White House, just getting to tax reform could take time. But over the past few months, there have been proposals from both the White House and from Paul Ryan and Kevin Brady (R-TX), chairman of the House Ways and Means Committee.
Both plans have a few of the same goals – cut taxes, repeal the estate tax, boot the alternative minimum tax, scrap the Obamacare investment income tax, and simplify the tax code. But a massive canyon exists between the substance and style of the two proposals.
Let’s start with the White House plan:
The Ryan/Brady plan intends to make similar deep cuts, but actually looks to close that funding gap:
Alex Raskolnikov, a tax professor at Columbia University, wrote recently that both tax plans could have huge budgetary consequences. He notes, “…[N]o plausible economic forecast would project enough growth to offset the $3-$4 trillion shortfall resulting from the rate cuts in either version of the business tax reform.”
Rasknolnikov does argue that the Ryan/Brady plan is more defensible than the White House plan, however. A few tweaks could put the plan from the lower house on more solid fiscal footing than the one-pager that came out of the executive branch.
Ryan/Brady will turn to a border-adjustment tax to raise additional revenue. In short, this taxes importers and gives tax relief to exporters. WalMart, which imports basically all of those toys and underwear on its shelves, is vehemently against the Ryan/Brady plan. Boeing is vehemently for the plan. The plane manufacturer does most of its business outside of the United States, and would see a huge cut to its tax bill.
Raskolnikov argues for swapping the border-adjustment tax (which could be illegal under WTO rules) to a corporate VAT tax. The two tax strategies aren’t all that different. But the VAT is already used in other countries, which would help the United States avoid WTO litigation (or a trade war). Raskolnikov’s alternative strategy would also include a tax credit for lower-income households, who spend the largest part of their income on imported goods and would be the most hurt by a tax increase on imports.
But as both plans are currently written, the gap between tax revenue and cuts will widen, increasing both the deficit and debt. What happens then? Interest rates could spike as the government has to issue more debt to cover that lost tax revenue.
Remember that argument that government spending crowds out private investment? The same effect happens here, as private businesses would find it more expensive to borrow money to invest in new facilities or equipment.
To be sure, it is still the early innings in the great tax reform ballgame. Ryan/Brady is getting plenty of pushback on the border-adjustment tax, while the VAT is anathema to Republican tax orthodoxy. The White House plan has not been formally expanded upon since its April rollout. And most importantly: Can the White House build enough political capital to actually pass tax legislation.
The economists surveyed by Bloomberg were given a window until November 2018, but there is a long road until they are proven right. As Politico’s Rachel Bade and Bernie Becker recently noted, “Rewriting the tax code will be just as difficult as health care — maybe even more so.”
Time, even in the White House, waits for nobody.
It is looking less and less like the Federal Reserve will hike interest rates anytime soon.
Last week, we discussed the connection between low inflation and low wage growth. The Federal Reserve argued just the same when they released their July meeting minutes this week.
The July minutes show that more members of the Fed’s policy-making committee seem to be coming around to the fact that inflation is likely to remain low. Investors think this is a signal that the Fed Funds Rate, the central bank’s benchmark interest rate, will stay put at 1.25%.
What does this mean? The Fed wants to run the economy hot for longer. Low interest rates should allow businesses to borrow and expand more cheaply. This would spur hiring (it has, for 80-something consecutive months), ultimately leading to wage growth as employers battle it out for workers. Those higher wages must get passed along to consumers in the form of higher prices. Hence, inflation.
But there has been something askew in the Phillips Curve – the economic model that says that a decrease in unemployment should lead to an increase in inflation. If inflation is the ultimate goal for the Fed, the central bankers will keep rates low until inflation kicks in.
We all want higher wages, right? The Fed’s voting committee wants that for you too. You might have to wait a bit longer to see a bump in your paycheck, however.
New York Fed President William Dudley gave a sweeping interview to AP this week.
Somewhat interesting: Dudley seems to take a more hawkish view on inflation than many of his fellow committee members. The NY Fed head would still consider a rate hike at the end of the year. He is in the minority here, however. According to the Chicago Mercantile Exchange’s FedWatch tool, the markets think there is about a 42% chance of a rate hike by December.
More salacious news: Dudley weighed in on the president’s upcoming decision of whether or not to name a new Fed chair.
If you haven’t heard, the White House will have the opportunity to appoint a new Federal Reserve chair in 2018. Janet Yellen has served in the role since 2014. According to PredictIt, Yellen and Gary Cohn, the director of the president’s National Economic Council, are running neck and neck.
I don’t want to evaluate the various candidates for the Federal Reserve, except to say that I think Gary is a reasonable candidate. He knows a lot about financial markets. He knows lots about the financial system. I don’t think you have to have a PhD in Economics, which I have, to be a Chair of the Fed or Governor or a President of one of the Federal Reserve Banks.
I think it’s important to have a committee that has diversity. That has different backgrounds and perspectives. So I think Gary’s a reasonable candidate.
You wouldn’t be alone if this struck you as unusual, but really, what is the benchmark for what normal anymore?
Regardless, the president has a choice to make. He has in the past noted that he is a “low interest rate person.” Yellen is noted as a dove, erring on the side of lower rates. But the president also likes to have his own people in powerful positions. That would seem to tip the scales toward Cohn.
Though the calculus may have changed this week: after the president’s combative news conference following Charlottesville, Cohn was “somewhere between appalled and furious,” according to Axios.
We noted that tax reform is difficult. It is also causing massive uncertainty for businesses. “‘In the details of executing simplification, there are going to be big winners and big losers, and we would not want a client to execute planning that moves them from a position of being neutral or a winner to a position of being a loser,’ Becker said. ‘There just isn’t the specificity we need to do meaningful planning.’” (Biggest Tax Advisory Firms in the Dark About Trump Reform Plans; Emily Stewart, The Street)
Rick Rieder of BlackRock is also down with the tech-driven deflation thesis. “Tech disruption is having an epic impact on U.S. consumption, driving one of the greatest supply-cost revolutions of all time. In short, new disruptive technologies in demand by consumers are a powerful disinflationary force holding down prices. A large part of what we’re witnessing here could be described as the “Amazon effect,” as the e-commerce retailer is disrupting large swathes of the goods economy. But this disinflationary dynamic isn’t limited to e-commerce.” (The truth buried in weak inflation data; Rick Rieder, BlackRock)
Are credit cards are the new subprime home loans. I say no, but that’s another conversation for another time. “The proportion of overall debt that was delinquent, at 4.8 percent, was on par with the previous quarter. However a red flag was raised over the transitions of credit card balances into delinquency, which the New York Fed said ‘ticked up notably.’ Loosening lending standards have allowed borrowers with lower credit scores to access credit cards, Andrew Haughwout, an in-house economist, said in the report. (Americans’ debt level notches a new record high; Jonathan Spicer, Reuters)
Jeff Bezos is tapping into the bond market, because why not? “Amazon has proved itself much more than Tesla, but it, too, is selling investors on hopes and dreams more than reality. Investors who buy 30-year and 40-year Amazon bonds are basically getting equity in the company without the upside should the company continue its path toward world consumer dominance.” (Amazon Peddles Bonds With an Equity Story; Lisa Abramowicz, Bloomberg Gadfly)
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Last week brought us Dow 22,000 and record-high market levels. Yesterday, stocks took a bath and had their worst day in months. What gives?
Well first, nobody should be judging stocks by their week-over-week changes.
Second, this was, shall we say, an eventful week. We had Tweetstorms, bluster from both sides of the Pacific, disappointing retail earnings, and – perhaps most important – inflation numbers.
I’ll leave the Korean situation to the experts (though I would recommend David Kang’s article, “The Wolf of Pyongyang: How Kim Jong Un Resembles a CEO”), but instead discuss two of the other relevant items.
Earnings from department stores this week showed that retail continues to have no idea how to defend itself against their younger, leaner digital cousins.
Macy’s has struggled across the board – digital or not. The company’s Q2 results reported a decline in sales of over 5% over the past year, with a 2.5% drop in same-store sales. As such, the company earned a 10% hit in its share price, bringing it down 45% over the past year. Why go to a mall when you have an iPhone?
One solution for the Cincinnati-based (who knew?) retailer? Turn itself into a REIT – or in other words, cash out on its real estate holdings, because that’s the only valuable thing about this company right now.
One bright spot in the sector? Nordstrom.
The Seattle-based chain has avoided the worst of the carnage. Its stock up about 1% over the past year, compared to -11% for the broader retail industry (measured by the SPDR S&P Retail ETF, ticker XRT). That’s a half-truth, though. The stock is down about 30% since its December 52-week high.
Nordstrom has succeeded, despite a rough six months, because it is making the transition to digital better than most of its competitors. As Sarah Halzack at Bloomberg Gadfly notes, online sales have grown 20% year-over-year.
Maybe more importantly, Halzack notes that the company’s private label clothes have been a massive hit for consumers. As we recently found out with Brandless, simplicity is worth a lot of money, especially for that slippery millennial crowd who would never be caught dead wearing a Polo Ralph Lauren shirt.
Yesterday, the Labor Department reported that the Producer Price Index, a benchmark for inflation, fell by the most in 11 months. This is just a one month reading, but it could have a broader impact.
Stable inflation is one of the two pillars of Federal Reserve policy (the other being maximizing employment). The Fed could hold off on further rate hikes until inflation picks back up.
Low inflation has been a thorn in the side of Fed since the Financial Crisis. The central bank wants inflation to pick up so that wages can rise accordingly and interest rates can be raised to a higher (though still low by historical standards) level.
Real wages – that is, wages that grow above the rate of inflation, which increases one’s standard of living – have been flat for decades. But everyone’s life is much better than it was 30 years ago, when median real wages were just about the same as today.
Remember that over-the-shoulder video camera your dad had in the 80s? Well, you can have that – and a telephone, answering machine, camera, alarm clock, and personal valet – in your hands for a few hundred bucks, not the thousands all of this would have cost a decade or two ago.
Technology, not commodity inflation or some monetary phenomenon (👋 Bitcoin folks), has been keeping inflation low for decades. Inflation is an issue in education and health care, but everywhere else, things are better, faster and cheaper.
We may continue to see stagnant real wages, but the impact on our lives from Netflix, Amazon, Uber, Venmo, Yelp, Google Express, and yes, Macy’s and Nordstrom have been a sort of opium of the people.
Technology is inherently deflationary, and it could be the key reason why we are stuck in a low-rate, low-inflation environment. While this brings its own challenges to central bankers, this also means we can earn more value from our paychecks than ever before.
We’ll be watching the Consumer Price Index reading this morning, which will help round out the inflation situation.
Last week, we discussed the impact of a weakening dollar on stocks. Multinational companies like Boeing and Apple should benefit as the dollar weakens, because American goods and services should become more competitive in the global marketplace.
But how much of this happens in real life, as opposed to models from your college economics course textbook? According to Wells Fargo economist Jay Bryson, not much. Bryson notes,
“Could a weaker dollar help to boost growth in American exports? Since the beginning of the year, the U.S. dollar has depreciated about 7 percent on a broad trade-weighted basis and our currency strategy team looks for further weakness in the greenback on a trend basis. However, the statistical analysis that we and other analysts have conducted over the years shows that the sensitivity of American export growth to changes in the value of the dollar is much lower than it is to changes in global economic growth. So, a dollar that is weaker than our current forecast would impart some upside potential to U.S. export growth, but it likely would not be a “silver bullet” either in terms of strong export growth.“
Companies know that the value of a currency can fluctuate – sometimes by quite a bit in a short period of time (see: United States in 2017, Great Britain in 2016). While a weaker dollar or pound might help American or British companies in the short term, companies need to be innovative. They must make products or provide services that people across the globe want to buy to survive in the long-run.
When Macy’s emails out those 30% off coupons, they see a short-term boost in revenue. But if they want people to keep coming back without those coupons, you must have a compelling value proposition to consumers (which, apparently, Macy’s does not).
Just as Macy’s cannot rely on short-term discounts to sustain a long-term business model, multinational companies cannot rely on currency fluctuations to stay competitive in the global market.
The Janet Yellen of Britain, Mark Carney, noted this week that the Bank of England expects wage growth in the U.K. to slow. Thanks Brexit. “The bank’s latest forecasts factor in “uncertainty about the eventual shape of the U.K.’s economic relationship with the EU,” which “weighs on the decisions of businesses and households and pulls down both demand and supply,” Carney said. Companies are keeping a lid on pay increases until they know what kind of access they’ll have to Europe’s market in a few years, Carney said. The BOE cut its forecast for wage growth for 2018 and 2019.” (Carney Sees U.K. Economy at Brexit’s Mercy as Forecasts Cut; David Goodman and Jill Ward, Bloomberg)
A brief history of Microsoft Excel, written 30 years ago. “The problem with ledger sheets was that if one monthly expense went up or down, everything – everything – had to be recalculated. It was a tedious task, and few people who earned their MBAs at Harvard expected to work with spreadsheets very much.” (A Spreadsheet Way of Knowledge; Steven Levy, Wired).
Surely hedge funds are now looking into buying up private streets to separate wealthy residents from their cash. “Tina Lam and Michael Cheng snatched up Presidio Terrace — the block-long, private oval street lined by 35 megamillion-dollar mansions — for $90,000 and change in a city-run auction stemming from an unpaid tax bill. They outlasted several other bidders. Now they’re looking to cash in — maybe by charging the residents of those mansions to park on their own private street.” (Rich SF residents get a shock: Someone bought their street; Matier & Ross, San Francisco Chronicle)
With the Hyperloop, is the next hot Brooklyn neighborhood is actually Buffalo? “The curious stability of the half-hour average commute means that when bullet trains — or autonomous vehicles, or whatever innovation comes next — link two places by that much time, they won’t just open up plausible new weekend getaways and airline alternatives. They will also potentially restructure daily life: where people live, what jobs they hold, how cities expand over time.” (Why Even the Hyperloop Probably Wouldn’t Change Your Commute Time; Emily Badger, The Upshot/New York Times)
Cover photo: Matias Waldemar, Flickr Commons
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On Wednesday, the Dow Jones Industrial Average closed above 22,000 for the first time. @realDonaldTrump responded accordingly:
Stock Market could hit all-time high (again) 22,000 today. Was 18,000 only 6 months ago on Election Day. Mainstream media seldom mentions!
— Donald J. Trump (@realDonaldTrump) August 1, 2017
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The S&P 500 is also near all-time highs, but the Dow presents an interesting case study.
“The Dow Jones Industrial Average breached 22000 Wednesday after rising more than 2000 points so far this year. Boeing counted for 563 points of that gain. About 60% of its sales come from overseas.
No. 2, contributing 283 points, is Apple, which gets two-thirds of its sales abroad.
No. 3 is McDonald’s , contributing 239 points; foreign sales count for about two-thirds of its total.”
So if these three companies alone make up about 55% of the total gain in the Dow this year, and if two-thirds represent global sales, we can attribute about 36% of the total Dow gain to foreign consumers buying planes, Big Macs, and iPhones.
Read more about all of this here: Thank the Foreigners for Dow 22000 (Justin Lahart; WSJ)
The key reason? The U.S. dollar. More specifically, the accelerating weakness of the dollar.
Since the beginning of the year, Bloomberg’s dollar index has slipped by 9%. Why is this good for companies? If Boeing sold a plane to a German airline for €1 million, the American company would be sitting on a pile of euros. As the euro strengthens against the dollar (or equivalently, as the dollar weakens against the euro), those euros becomes worth more and more dollars. That’s great for American investors (Note: this is a huge simplification, because companies with international sales often hedge currency moves. But on net, a weak dollar boosts U.S. earnings).
Getting that extra boost from the weak dollar probably explains that big divergence between the Dow and the S&P, which features more domestically-focused companies.
Read more about this here: Market’s Surge Meets Dollar’s Swoon (Landon Thomas; New York Times)
However, this little tailwind might not last long, because…
The U.S. economy added 209,000 jobs in July, which is above trend for the past few months.
And a bit of good news/bad news on labor force participation rate: the overall LFPR was basically flat at 62.8%, but it was noted that the prime-age employment rate hit a post-crisis high.
Prime-age employment rate hits 78.7%, highest since September 2008. pic.twitter.com/hJ0i4G6adu
— Ben Casselman (@bencasselman) August 4, 2017
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That’s good for younger job-seekers, because this could mean that all those jobs your parents are finally retiring from are being filled by you. Bully for the young folks.
Hourly wage growth of 2.5% was fine. Not great, but not falling.
In all, today’s jobs report isn’t likely to make the Federal Reserve veer off course. The central bank has stated that it will follow through with a series of rate hikes and the sale of assets from its balance sheet. Together, these would likely have the impact of strengthening the dollar.
But this wage growth number is one that Janet Yellen watches closely. If the lack of wage growth puts the voting members on pins and needles (👋, Neel Kashkari), rates could stay lower for longer.
I was in Toronto last weekend, and I was astounded by two things. First, the number of new new condos across the entire city. Glassy high-rises are peppered into old, industrial brick neighborhoods, creating a very interesting contrast (see feature image). And the city seems to be incredibly livable (And look at that, Mercer ranked Toronto #16 in its quality of living index).
Toronto’s housing market has also been the hottest market in the world over the past few years, but homes in North America’s 4th largest city might be getting cheaper. That’s according to a survey from Reuters.
If you want one takeaway stat on just how frothy Toronto’s market could be…
10x
That’s how fast the number of realtors in Toronto has grown compared to overall Canadian job growth since 2008.
So when you do decide to buy that 45th floor downtown condo, you’ll have no problem tracking down an agent.
Alan Greenspan isn’t worried about your stock portfolio, but “when [long-term interest rates] move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.” (Greenspan Sees No Stock Excess, Warns of Bond Market Bubble; Oliver Renick and Liz McCormick, Bloomberg)
Tyler Cowen’s thoughts on the new Tesla are the most Tyler Cowen thing you’ll read this week. “Defensive innovation is when you create a new product or capability to protect yourself against an impending disaster, such as the worst scenarios for climate change. It’s important, of course, to practice defensive innovation, but don’t confuse it with progress. The defense only stops your living standards from falling.” (The New Tesla Is Great, But It Isn’t Progress; Tyler Cowen, Bloomberg View)
The situation in Venezuela is more than just a political catastrophe, it is quickly becoming a humanitarian disaster. Harvard’s Ricardo Hausmann takes stock of the situation, noting “Measured in the cheapest available calorie, the minimum wage declined from 52,854 calories per day to just 7,005 during the same period, a decline of 86.7% and insufficient to feed a family of five, assuming that all the income is spent to buy the cheapest calorie. With their minimum wage, Venezuelans could buy less than a fifth of the food that traditionally poorer Colombians could buy with theirs.” (Venezuela’s Unprecedented Collapse; Ricardo Hausmann, Project Syndicate)
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