September 20
Yesterday was Battle of Britain Day. It commemorates perhaps the most important battle of the twentieth century when Nazi Germany was dealt its first defeat, marking a crucial turning point in the Second World War. If Britain, standing alone against the might of a seemingly invincible Germany, had not prevailed in the Battle of Britain, the war would have undoubtedly been lost, with all that would have meant for Europe and the World. Our freedoms today are a direct result of the sacrifices made, the lives lost, and the families destroyed in order to defend Britain and the world against Nazi tyranny.
Utah’s population grew faster than that of any other state between 2010 and 2020. Salt Lake City has the lowest jobless rate among all big cities, at 2.8%, compared with a national rate of 5.2%. That the state has rebounded so well from the downturn caused by the covid-19 pandemic is thanks to the Wasatch Front, an urban corridor that includes Salt Lake and Provo, home to Brigham Young University. The four counties that make up the Wasatch Front account for at least 80% of Utah’s economic activity.
Tyler Cowen of Marginal Revolution says “solve for the equilibrium” on Utah. Under Sociology I provide a possible answer.
Markets and Stocks
I remain positive on equities. The fundamentals-save for a rising inflation risk-remain outstanding. Relative to Treasury yields, equities are not expensive. Economic growth remains above trend. The Atlanta Fed forecasts Q3 GDP growth of just under 4 percent on an annual basis. Growth should accelerate as the Delta variant fades. Earnings growth is outstanding. Further margin expansion is probable. Companies have pricing power. Companies are investing. Consumers have money and wealth to spend. Consumer balance sheets are in the best shape for decades. As the Delta variant fades, consumer confidence should rebound. But as noted above, inflation is the canary in the US economy. And the canary is chirping “Biden you have an inflation problem.”
In spite of positive fundamentals, market action has been sloppy recently.
On Friday, the Dow Jones Industrial Average lost 166.44 points or 0.5% to close at 34,584.88, dragged down by a nearly 2.9% drop in Dow Chemical, a name I like. The S&P 500 shed 0.9% to 4,432.99 and the Nasdaq Composite lost 0.9% to close at 15,043.97.
Mega-cap technology stocks were mostly in the red, with social media giant Facebook dropping 2.2% and Alphabet falling just shy of 2%. Apple lost 1.8%, and Microsoft slipped 1.7%.
History is not on the market’s side with the S&P 500 averaging a 0.4% decline for September, the worst of any month, but I shrug my shoulders about a possible .4 percent seasonal decline. Trying to trade on the basis of monthly historical data is a mug’s game.
In addition, some of the volatility that comes during September is often surrounding so-called quadruple witching, which occurred at the close Friday. This is the expiration of stock index futures, stock index options, stock options, and single-stock futures.
Still, stocks closed on Friday with losses for the week. The Dow slipped less than 0.1% this week, for its third straight week of declines. The Dow has not had a 3-week losing streak since September 2020. The S&P 500 fell nearly 0.6% since Monday for its second straight week of losses. The Nasdaq Composite dropped close to 0.5% this week.
For the month, stocks are also trading in negative territory. The Dow is down about 2.2% in September. The S&P 500 is off by nearly 2% this month but still just 2.5% from its all-time high. The Nasdaq has lost 1.4% this month.
The Federal Reserve meets for two days this week and on Wednesday the Fed is expected to give further clues as to when it may start to slow its $120 billion in monthly bond purchases that have supported the recovery, but also perhaps aided in a jump in inflation.
The U.S. 10-year Treasury hopped 4 basis points to nearly 1.37% on Friday.
On a more positive long term note, two Wall Street gurus are very optimistic about the long term picture for equities
Closely-followed investors Tom Lee and Cathie Wood both see one thing driving the bull market for over a decade: millennials.
“I do believe that both crypto and the equity markets are going to be powered by millennials,” Cathie Wood, founder and CEO of Ark Invest, said at a major Wall Street conference last week.
Wood referenced research from Lee’s Fundstrat that suggests the bull market in stocks may extend to 2026 or even 2038 as millennials build out their investing portfolios. Millennials — which are individuals born between roughly 1981 and 1996 — are the largest single generation ever, even larger than Boomers, said Fundstrat. Plus, the group’s average age is 26.5, as they enter their prime income years.
Lee — known for his prescient call about the market bottom during the Covid recession — said long-term bull markets last between 20 and 42 years and peak returns accelerate to a cumulative gain of 500%.
The current bull market has risen for 10 years and if the history plays out, the S&P 500 could reach 19,000 by the end of 2029, a Fundstrat report said. (It closed at 4,432.99 on Friday.)
The basis for the long-term forecast surrounds strong expected demand in the housing and auto markets driven by millennials. Fundstrat expects housing starts could reach more than 2.5 million per year over the next decade.
I don’t know if Lee and Wood will be proved right. But I do know that over time, investing in US equities is the best way to build wealth. Over the past 100 plus years, the average annual return from equities has been around 9 percent.
I continue to like Boeing. Britain’s Financial Times says that the commercial aircraft sector is slowly returning to normal. The future is bright for both Boeing and Airbus as well as derivative plays on the commercial aircraft space.
I like the oil and natural gas space. Barron’s says that: “natural gas prices reached their highest levels in more than seven years thanks to a slow recovery in Gulf of Mexico production after an August hurricane, and strong U.S. exports and tight supplies.”
And a global effort to limit carbon emissions has meant more demand for natural gas and renewable energy.
Surging demand in Europe, Asia, and Latin America for liquefied natural gas (LNG) has led to record high U.S. exports this year, helping push U.S. natural gas futures to their highest since February 2014.
Front-month natural-gas futures settled at $5.46 per million British thermal units on Sept. 15, the highest since February 2014. Prices have more than doubled for the year, trading 115% higher year to date.
The record pace of U.S. LNG exports this year shows just how tight the global natural-gas market is. Countries in Asia and Europe are afraid of running out of energy this winter
2020, U.S. natural gas exports reached a record high, according to the Energy Information Administration. Exports may increase by 20% to 25% this year.
It will be a quiet week for economic data, but it will be an important week for Fed policy. The Fed holds a two day meeting on Tuesday and Wednesday. The market will be focused on talk about tapering and when the first interest rate increases will occur. The market will find out on Wednesday at 2 PM New York time.
On the earnings front, the home builder Lennar reports today. Tomorrow, FedEx and Adobe report. And on Thursday we’ll get numbers from Costco.
I like the residential housing space. I am focusing on Toll Brothers and the new recommendation from Abacus, Allegion
I like FedEx and UPS.
Costco though expensive is a great investment in my opinion.
ECONOMICS
Professor John Cochrane, of Stanford University and its Hoover Institute, writes:
“Today’s inflation is transitory, our central bankers assure us. It will go away on its own. But what if it does not? Central banks will have “the tools” to deal with inflation, they tell us. But just what are those tools? Do central banks have the will to use them, and will governments allow them to do so?
Should inflation continue to surge, central banks’ main tool is to raise interest rates sharply, and keep them high for several years, even if that causes a painful recession, as it did in the early 1980s. How much pain, and how deep of a dip, would it take? The well-respected Taylor rule (named after my Hoover Institution colleague John B. Taylor) recommends that interest rates rise one and a half times as much as inflation. So, if inflation rises from 2% to 5%, interest rates should rise by 4.5 percentage points. Add a baseline of 2% for the inflation target and 1% for the long-run real rate of interest, and the rule recommends a central-bank rate of 7.5%.”
What would happen if the federal government’s cost to borrow increased by 5-6 percentage points?
In 1980, the net debt to GDP ratio was 25 percent. Today it is 110 percent of GDP and rising quickly, with no end in sight. When the Fed raises interest rates one percentage point, it raises the interest costs on debt by one percentage point, and, at 100% debt-to-GDP, 1% of GDP is around $227 billion. A 7.5% interest rate therefore creates interest costs of 7.5% of GDP, or $1.7 trillion. Currently, the annual cost to service the federal debt is about $250 billion. There is a big difference between $250 billion and $1.7 trillion.
The US has a debt problem, a massive debt hole that can’t be filled by “taxing the rich” as Congresswoman Ocasio Cortez so zealously desires. Because “entitlement reform” is a political non-starter, the US can only fill the hole through a combination of stronger economic growth and higher taxes. The US needs a consumption tax. The US should pursue pro-growth policies by reducing taxes on business and investment, as well as by dismantling the regulatory state. The US should look to Reagan and Clinton not to Obama and Biden.
Democrats risk burning down the American economy.
POLITICS
For the next few weeks, Democrats will be experiencing ‘interesting times,’ to use a Chinese curse.
Democrats have a more than full legislative agenda.
House Majority Leader Steny Hoyer (D-Md.) on Friday said the House will vote on the Senate-passed bipartisan infrastructure bill on Sept. 27, even though House Democrats are far from reaching consensus on the $3.5 trillion social welfare bill
In a letter to lawmakers previewing this month's legislative session, Hoyer said the House will vote on the bipartisan infrastructure bill the last week of September "pursuant to the rule passed in August."
Under that agreement between Speaker Nancy Pelosi (D-Calif.) and a small group of moderates, the House is scheduled to vote Sept. 27 on the bipartisan infrastructure bill even though progressives have long warned they won't support it if the larger, Democrat-only social spending package isn't completed yet.
Once the House returns today from its summer recess, Pelosi will be tasked with rounding up the votes for the package with a slim majority, meaning she can only afford up to three defections. But multiple tricky policy disputes remain unresolved, including lifting the cap on the state and local tax deduction and empowering Medicare to negotiate lower prescription drug prices.
Aside from Democrats' two-part infrastructure plan, the House has a packed agenda for the next two weeks it is scheduled to be in session.
Congress has to pass a bill to keep the federal government funded past Sept. 30, when the current fiscal year ends.
Lawmakers also need to pass legislation to raise the debt limit. Senate Minority Leader Mcconnell has told Senate Majority Leader Schumer, “because you prefer one party rule, you are on your own regarding the debt limit.” (That is a paraphrase.)
In a letter to lawmakers on Friday, Hoyer said the House will vote on the debt limit and on a continuing resolution to fund the government. He did not say whether the two issues would be joined as one bill. The Treasury Department is now using what are known as "extraordinary measures" to prevent the US from defaulting on its debt. It has said it will no longer be able to take such steps at some point in October, creating a deadline for Congress.
It will be ‘interesting times’ indeed.
SOCIOLOGY
Over the course of the next 18 months, Covid will fade from the global headlines. The United States through a combination of vaccinations and prior infections will reach a form of herd immunity sometime in the next couple of months. It is simply a matter of numbers.
In 2022, 15 billion doses of vaccines will be made available to the world's population. In 2022, the world through a combination of vaccinations and prior infections will reach a form of herd immunity. But as Covid fades, the opioid epidemic will continue to burn through America.
Last year about 100,000 Americans died from opioid overdoses. Several hundred thousand also died from the consequences of some form of addiction, principally cirrhosis of the liver. This year, mortality from drugs and drink will be the same, several hundred thousand Americans will die. Next year the numbers will again be the same. The numbers will be the same in 2023, 2024, and 2025. Addiction is a silent killer. We write about it, the media talks about it, but until it hits our family or friends, no one really cares.
A major reason that the United States faces an addiction crisis is loneliness and alienation. On those topics, I recommend “Bowling Alone,” by Robert Putman. He explains that one type of social capital is bonding social capital, which is formed when people bond over shared feelings and experiences. Bonding increases when families are strong, and communities are strong. See the work of Professor Raj Chetty, and the opinions of David Brooks.
Unfortunately, the trend in America is not about bonding, it is about fracturing. Out of wedlock births are the new normal. Among the non-college-educated, broken homes are the routine. And with the arrival of a flat fast global economy, broken communities are common place. How do we fix the problems of loneliness and alienation? Money won’t solve the problem.
For 51 months, I lived with men from cultures poverty, White, Black and Hispanic. Money won’t fix the ability to get up in the morning, to go to work and to be a responsible father. As I have written many times before, women will procreate with irresponsible men, but they won't bond with irresponsible men. The issue is social. It is not money. Efficacy is not achieved through welfare.
I wrote about Utah in the opening paragraph because that state offers a path forward. For the decade 2010 to 2020, Utah enjoyed the nation’s fastest population growth rate. It also enjoyed the nation’s lowest unemployment rate. Utah has a young population who live in a geographically desirable area. But the foundations of the culture of Utah are strong families, strong communities, and the Mormon religion. Religion can bind the nation. I am all ears for other ideas about how to solve the problems of loneliness and alienation.
I would also note that Utah achieves economic and social success in spite of spending less per capita on public education than any other state. Money won’t fix the problem. On the matter of loneliness alienation and addiction, I also recommend the TED Talk by Johann Hari. I disagree with Hari’s views on chemical addiction, but he is spot on that the root causes of addiction are loneliness and alienation.