The Wile E. Coyote stock market has now looked down. Nothing but air!
The “good news” data from the U.S. economy is all stimulus related. Without stimulus, Q3 GDP would have fallen double digits.
The economy has yet to face the oncoming eviction crisis in the rental markets and foreclosure tsunami in the commercial real estate market.
No matter how the economic numbers are presented, 22+ million unemployed tells you all you really need to know!
Nothing But Air!
Financial markets are tumbling as investors scramble for liquidity. Strange that this is occurring amidst all the upbeat economic news, not only at home, but abroad:
- China Q3 GDP: +4.9%
- Japan: Q3 IP: +8.8%
- U.S.: Q3 GDP: +33.1%
- Germany: Q3 GDP: +8.2%
- France: Q3 GDP: +18.2%
- Italy: Q3 GDP +16.1%
- Taiwan: Q3 GDP: +3.3%
- AAPL, FB, GOOGL, AMZN: all beat earnings estimates
Was this good news all priced in and then some? Are falling prices the result of nerves about U.S. elections? Or maybe, just maybe, markets have begun to recognize that there is trouble ahead in the economy! There has been recent commentary from the likes of Christine Lagarde, President of the European Central Bank, that the Eurozone economy “is losing momentum;” and from William Dudley, former President of the NY Fed that “the outlook for the [U.S.] economy is deteriorating.” Recent headlines in the financial media include:
- ·“States Are Facing Historic Cash Crisis” (WSJ, 10/29/20, A1)
- “The Fed is Really Close to Running Out of Firepower” (Bloomberg Businessweek, 10/28/20)
- “Mounting Unpaid Rent Risks U.S. Tidal Wave of Evictions” (WSJ, 10/28/20, A1)
- “Delinquent Mall Owners Face Foreclosures” (WSJ, 10/28/20, B6)
It appears that, like Wile E. Coyote, market participants finally looked down – Nothing But Air!
The reality is that only a handful of large tech stocks (AAPL, FB, AMZN, NFLX, GOOG, MSFT) have buoyed the S&P 500 index to a +4% total return YTD (10/29/20). The S&P 500 is a cap weighted index, meaning that companies in the index are given weight based on their total market value (market capitalization). If all the stocks in the S&P 500 are given the same weight (i.e., equal weighted), the YTD return is -5%, and, just counting the bottom 494 stocks (i.e., eliminating those six), the YTD return is lower than -7%.
As an aside, while the business media tells you the “total return” of the S&P 500 on a daily basis (includes price changes and dividend distributions), they never tell you the total return of issues in bondland. They only tell you the current yield. For example, the yield on the 10-year U.S. T-Note is 0.87%. That’s equivalent to just telling you the S&P 500 dividend yield (1.98%). So, just for the record, the YTD yield on the 30-year U.S. T-Bond is close to +20%!
Certainly, some of the market’s angst can be assigned to the very real possibility that there may not be certainty about the election outcomes (president and Congress) for several weeks. But it is the headlines cited above regarding the state of the economy that may be the most troubling of all, and that’s because the effects of the virus and the resulting economic consequences may be more immediately impactful to consumers and the economy than a few weeks of uncertainty over elections.
Given the second wave of COVID infections that appears to be upon Europe and the U.S. (especially in the northern (cooler) states), the markets may be discounting a longer-term bout with the virus. “Maybe it won’t be gone by spring; maybe it will be with us much longer; or maybe we will just have to figure out how to live with it.” These thoughts may just reflect the markets’ thinking.
Reality Behind the Data
After tanking 31.4% in Q2, the first pass at Q3 GDP shows a growth of 33.1%. Just that cursory look could lead one to think that we are out of the woods, or even that GDP has fully recovered and then some. Unfortunately, that isn’t the math. The denominator has changed. A 33.1% growth from a base that is 31.4% lower results in a GDP still -3.5% below the Q4/19 peak. And the only reason the nominal GDP actually grew by $409 billion in Q3 was because of the federal government’s stimulus packages. In fiscal 2019 (the 12 months ending 9/30/19), the federal budget deficit was $984 billion. For the fiscal year ended 9/30/20, it was 3,132 billion (i.e., 3.132 trillion), or 2,174 billion more. Much of that was the various stimulus packages. So, as you can see, the money drop was much larger than the ultimate economic impact. What happened to the rest? Consumers saved some, they paid off a large amount of debt, corporate cash balances rose, a good deal found its way into the financial markets… Without such stimulus, Q3 real GDP would have contracted an additional 10%-12% according to Wall Street Economist David Rosenberg.
Because of the nature of the political system, another stimulus package has not yet arrived. Maybe one will, post-election, or maybe it will be delayed again if election outcomes are undecided. The original stimulus packages appear to have run their courses. There is an emerging realization that the significant economic issues, outlined by those financial headlines noted above, have no quick or easy solutions, and at least one of the issues (evictions) has never been faced before.
The Oncoming Crises
- As told in the WSJ, state and local governments are facing the biggest cash crisis since the Great Depression. These units employ more than 19 million people. Are layoffs looming? This one appears dependent on the outcome of the elections with a split government not a favorable development.
- Moody’s estimates that 12.8 million renters are delinquent with an average owed of $5,400. That amounts to $70 billion. Many of these renters will be evicted once the eviction moratorium ends unless the federal government steps in. That could put people on the street, many of whom have no jobs. But, even if there is a new eviction moratorium package, any monies advanced to landlords on behalf of the renters will likely have to be paid back over time by the renters, which means future consumption for the renters will be lower. And since the marginal propensity to consume of landlords is lower than that of renters, future economic growth will be lower.
- There are major delinquencies in the commercial real estate sector (malls, strip malls, department stores…). When the foreclosure moratorium ends, the balance sheets of the banks that hold such paper (mainly the regional banks), REITs, and other forms of such debt (CMBS)
will take big hits. This hasn’t happened yet, but, it is inevitable. And it is doubtful that Congress will bail out the holders of such paper. In fact, the Fed’s most recent Beige Book had many such worrying comments.
There seemed to be some better news in the Department of Labor’s weekly employment news release (10/29/20) for the week ended October 24th. The state Initial Unemployment Claims (ICs) fell slightly from 761K to 732K.
When the Pandemic Unemployment Assistance (PUA) program ICs are added, there was hardly any downward movement in ICs (from 1.105 million to 1.091 million). The chart and table above show that while there has been a downtrend (right side of chart), the slope is quite shallow. Eight months into the pandemic crisis, we still have 1.1 million of new weekly claims (layoffs). That’s huge. Pre-virus “normal” is 200K (see left side of chart).
The Continuing Claims (CCs) chart also shows a mild downslope. But, much of the falloff in CCs is due to the exhaustion of benefits, not re-employment. Again, the chart says it all. Look left for the pre-virus levels, and right for the current 22.7 million unemployed (out of 160.1 million labor force participants). That calculates to an unemployment rate of 14%. Given that the 22.7 million number is low due to the exhaustion of benefits, the real unemployment rate is likely somewhere north of 15%!
- The Wile E. Coyote stock market is now looking down, and, sees nothing but air!
- The GDP numbers looks great, but on closer analysis they are still troubling. Furthermore, they are entirely based on fiscal stimulus. While we may get more such stimulus, the reality is that the patient is quite ill.
- A second wave of the virus has appeared in Europe and the U.S. While the number of deaths has not risen commensurately with the number of infections, it is now likely that the virus will impact economic activity for a much longer period than originally thought. The unemployed have been living on federal stimulus. Even with another dose, more than 22 million are unemployed and many will be facing evictions come the new year.
- Defaults have been suppressed, but these, too, are likely to be a big issue in 2021.
- 22+ million people are unemployed with few prospects. That says it all!!!
5 Strongest Growing Provinces and Territories in Canada
Canada’s economy (Gross Domestic Product) increased at an annual rate of 1.9 % in 2018.
- The Yukon Territory takes the top spot for Economic Growth with an increase of 8.0 % in 2016.Government expenditures account for almost half the territorial GDP. Infrastructure investment has helped bolster the territory, and exploration of resource assets continues.
- Alberta saw the 2nd largest increase with a 6.1 % increase in 2017. Strong oil prices and foreign demand triggered the growth. Activity in the energy sector increased demand for related machinery and equipment, and the influx of workers increased demand for services.
- British Columbia supplies wood products for the Canadian and US homebuilders. They benefited from the tide of heightened residential construction in the North American market. Investment growth was strong with home building experiencing double digit growth in three of the last four years. British Columbia’s Gross Domestic Product increased at a rate of 2.6 % in 2018.
- Saskatchewan saw an increase of 3.9 %. Strong foreign demand contributed to higher exports of potash and fertilizer. Saskatchewan’s oil-patch, much smaller than Alberta’s, struggled in terms of volume, but the healthy prices ensured an ongoing profitability and higher corporate profits
- Ontario growth was down slightly to 2.8 % in 2005. The increase in commodity prices hampered production in Ontario. The export driven economy felt the pinch of a rising Canadian dollar and the impact of higher fuel costs. Demand for the cars and trucks being produced by Ontario remained strong, but overall the province below the national average of 2.9 %
Canada as a whole experienced an economic growth of 1.9 % in 2018. In 2002 much of Canada’s growth was due to investment and manufacturing in the Eastern half of Canada. In the years following a shift has become notable, the growth in the economy is shifting west. Due to the increase in energy and commodity prices the oil-patch in Alberta, Saskatchewan’s wheat fields and mines and British Columbia’s forests all profited from increased export demand.
Exclusive: China comfortable with yuan rises for now as economy recovers, sources say – The Journal Pioneer
By Kevin Yao
BEIJING (Reuters) – Chinese policymakers are comfortable with the yuan’s rise to two-and-a-half-year highs as a rebound in the world’s second-biggest economy accelerates and the central bank gives the market greater leeway in setting the currency’s value, sources said.
But the central bank might take action if further rises in the closely managed currency, especially if they were rapid, were to hurt the country’s exports, the sources involved in internal policy discussions told Reuters.
Amid broad expectations for further yuan gains and more prolonged weakness in the dollar, the PBOC’s acceptance of the currency’s rise runs counter to recent market speculation that the bank might take steps to stabilise the rising yuan.
“Yuan appreciation is supported by China’s economic fundamentals,” said Yu Yongding, an influential government economist who previously advised the People’s Bank of China.
“We don’t need to intervene as we haven’t seen any shocks from big capital inflows or outflows,” Yu told Reuters. “The exchange rate is mainly driven by the current account.”
The yuan, which closed at 6.5302 to the dollar on Friday, has gained about 6.6% against the U.S. currency this year, although that is largely explained by a nearly 6% decline in the dollar’s value against a basket of currencies.
The yuan is on course to post the biggest annual rise since its 6.8% appreciation in 2017.
Some policy advisers think the yuan may strengthen to 6.4 per dollar next year, a further 2% rise. The authorities could still take steps to brake a rapid rise if Chinese exporters were to feel the pinch or speculative “hot money” were to flood in, the sources said.
The PBOC has recently taken some technical steps that analysts read as a willingness to allow some weakness in the yuan but are not aimed at actively depressing the currency.
The relatively light approach to a stronger yuan may reflect the PBOC’s efforts to give market forces a greater role, part of longer-term reforms to make the yuan a more international currency, insiders said.
The central bank did not respond to Reuters request for comment.
EXPORTERS IN MIND
Policymakers believe this year’s yuan climb is supported by the sharp recovery from the economic damage of COVID-19, which emerged in China a year ago.
Beijing countered the disease with aggressive lockdowns and the downturn with a raft of stimulus measures. China’s economy is expected to grow 2.1% this year, the only major economy to expand – although at its slowest since 1976 – then surge by 8.4% in 2021, a recent Reuters poll showed.
Still, policy insiders do not expect the PBOC to tighten monetary policy any time soon, as domestic demand remains weak, a new wave of coronavirus infections could cloud global recovery prospects and tensions with the United States may not ease in the near term.
Also supporting the yuan are solid exports, fund inflows and a widening gap between Chinese and U.S. interest rates.
“We should not worry too much about yuan rises,” said a policy insider.
“The yuan is still within a normal range and there is no big deal if it rises a bit further,” this source said. “There could be some impact on exports going forward, but the impact is not big now.”
Further gains, are indeed, expected.
Bullish positions in the yuan were at their highest in almost three years, according to the latest fortnightly Reuters poll of analysts and fund managers.
The dollar is likely to keep weakening for at least six months as investors continue to shift to risky assets and seek higher returns, a Reuters poll of currency strategists showed on Friday.
A source close to the commerce ministry, a staunch defender of Chinese exporters, said those companies might be hurt if the yuan strengthens beyond 6.5 to the dollar, but other insiders believe greater official tolerance over yuan gains.
A major concern would be the speed of further gains.
“We cannot let it rise too fast,” one insider said. “The main concern is exports. It could also affect market expectations and lead to more hot-money inflows.”
(Reporting by Kevin Yao; Editing by William Mallard)
Niagara's new economic development director looks forward to regrowing economy in 2021 – WellandTribune.ca
Niagara’s new economic development director George Spezza is optimistic about the year to come, despite the devastation many businesses have suffered under COVID-19 pandemic restrictions.
“If we can weather the storm and look forward to an economic recovery based on some of the successes of the vaccines that are coming forward, I think 2021 could be an opportunity to really gain that momentum and start growing the economy again,” said Spezza, who started his new job on Monday.
“I’m always really impressed with people’s ability to fight against some of these crises and survive. We want to do everything we can from an economic and regional perspective to support that growth and recovery efforts. I believe it will take some time, but the future is bright moving forward.”
Spezza suspects the economic recovery will begin slowly in the first few months of 2021, and quickly increase as restrictions are lifted.
When that happens, he said the industries that have been impacted the most such as tourism, and hospitality “should see an influx of people coming back to that sector, and they’ll start seeing some of that growth.”
“Companies will have to be ready and prepared for that influx of tourism and hospitality.”
In the meantime, he said, Niagara’s economic development office will continue to assist businesses, keeping them up to date on information about programs and assistance accessing upper-tier government funding.
“The provincial and federal governments are coming forward with significant dollars and our role really is to ensure that our business community has access to that, and we can provide some assistance in accessing those programs,” Spezza said.
Navigating through the ever-changing information about programs that are available can be difficult for business owners, who are already working long hours running the day-to-day operations of their companies.
Spezza had been paying attention to Niagara while working as director of business growth services for Toronto’s economic development and culture office, prior to joining the Region’s economic development office. The Mississauga resident said he could see Niagara’s potential.
“It’s really a region with a lot of upside and a bright future,” he said, adding he often visited Niagara to explore the area.
“It was growing and doing well, and I think there’s a great opportunity for success there.”
Spezza’s interest in helping the region realize its potential led him to apply for the job running the economic development office and brought some new ideas to the job on ways to accomplish that goal.
“Niagara has a global brand already, and there are some great opportunities on how we can continue to build on that brand.”
Through collaboration and teamwork, Spezza said he hopes to leverage Niagara’s well-known brand to drive expansion into other markets and drive increased investment.
“Certainly we have a hospitality industry that is very well recognized around the world, but how can we best capture the visitors and tourism in the area to talk about all the other amazing opportunities to invest in the region?” he said.
Spezza described Valerie Kuhns — the Niagara Region Economic Development department’s strategic economic initiatives manager who had been filling the vacancy for most of the past two years — as a “consummate professional,” adding he is looking forward to working with her and other office staff.
“I think we’re going to make a very good team working together, Val and I and the rest of the office,” he said.
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