Relevant and even prescient commentary on news, politics and the economy.

Fed Deficit Leaps From Under 5% of GDP last year to 15% Now

In the second quarter, the federal deficit leaped from under 5% of GDP last year to near 15% now. This is new record compared to the prior record of almost 10% of GDP that Obama inherited from Bush

Yes, falling nominal GDP played a role, but a weak economy always plays a role in setting new record deficits.  But in considering what new stimulus Washington comes up with it will serve us well to remember that the new base line already starts at 15% of GDP.

While economists and others are debating the shape of any economic rebound we may  happen to experience, it might serve you well to remember Japan’s lost decade.  It was dominated by the government repeatedly providing stimulus with one hand while simultaneously taking it away with the other hand   All the while this was accompanied by new record government deficits.

Maybe what we learned from Japan is that government can stop the economy from collapsing, but to get the economy growing again could be a very different issue.

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Mail order prescription shipping delays

Because of what Trump is doing to the post office postal
shipments are being delayed.

If you use mail order services to take care of your prescriptions
you should order your refills as soon as you can to keep from
running out of your drugs. I just had to have my doctor write
a new two week prescription at the local drugstore because
shipment delays caused me to run out of one prescription.

My provider is reporting many delays.

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Fed Deficit as a % of GDP now at new record

For once Trump is right to claim that he has set a new record as the federal deficit is now over 10% of GDP.  It is now 10.7% of GDP as compared to the prior record of 10.2% that  Obama inherited from Bush.

The deficit is looking more and more like what happened in Japan.  Despite ever expanding debt, Japan’s economy stagnated.  Expanding federal debt may keep the economy from collapsing, but it can not stimulate growth. The strongest growth in recent decades was under Clinton when the federal government ran a surplus. But the real cause of growth under Clinton was the sharp drop in computer prices and the widespread adoption of personal computers. Clinton followed the wise policy of just stepping aside and letting it happen.

Trump appears to just be following the pattern set by previous Republican administrations with their “starve the beast” strategy. That is to create such a severe deficit problem that when democrats get into office they can not afford to pass new liberal legislation.

The quick and dirty rule of thumb is that when Republican presidents leave office the deficit is larger — as a share of GDP — than when they took office.  It is just the opposite with Democratic presidents,  that leave a smaller deficit than they inherited. But it is funny that you never have the press question Republican presidents about their claim that tax cuts will be self-financing.

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S&P PE NOW BACK ABOVE FAIR VALUE

After the recent market rebound the S&P 500 valuation has risen from below my estimated fair value to just over the top of the fair value band.

It is important to remember that much of the rebound in the S&P PE  is due to weaker earnings.  In the second quarter earnings are falling at double digit rates. But if second quarter real GDP is falling at a 40% to 50% rate earnings estimated are still too high.

Wall Street says do, not fight the Fed.  One measure of Fed policy is money supply growth and as the chart shows MZM ( zero maturity growth) is surging to near record highs.  This implies that the market PE is going to continue to rise and it should pull the overall market with it despite the fact that earnings estimates are probably too high.

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BOND YIELDS AND MONETARY VELOCITY

I have been monitoring  the close relationship between bond yields and monetary velocity ( personal income/zero maturity money) for years without coming to strong conclusion about what to make of it.  In particular, it displays the long term secular rise and fall of bond yields before and after 1980..

 

I do not know of any other economic variable that parallels bond yields so tightly for such a long period.  OK, first question.  Which way does the causal relationship work?  Is it rates driving velocity or velocity driving yields?  Or is it some other variable driving both?  I use to think velocity was a function of real interest rates.  At least that was consistent with the monetarist school of economic thought, especially in explaining the 1930s depression.  But now we are back to negative real interest rates and it does not yet  appear to impact this relationship.  If we are at a long term secular bottom in yields I would expect to see monetary velocity start to rise. But it has not happened yet. But now that we are back to uncharted waters, I would be interested in hearing what others have to say about velocity and bond yield

 

 

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Fauci: No scientific evidence the coronavirus was made in a Chinese lab

National Geographic published this.  This seems to be an unusual topic for that publication and I wonder why Fauci selected  it.

Fauci: No scientific evidence the coronavirus was made in a Chinese lab

The rest is copied exactly from National Geographic

Fauci, the director of the U.S. National Institute of Allergy and Infectious Diseases, shot down the discussion that has been raging among politicians and pundits, calling it “a circular argument” in a conversation Monday with National Geographic.

“If you look at the evolution of the virus in bats and what’s out there now, [the scientific evidence] is very, very strongly leaning toward this could not have been artificially or deliberately manipulated … Everything about the stepwise evolution over time strongly indicates that [this virus] evolved in nature and then jumped species,” Fauci says. Based on the scientific evidence, he also doesn’t entertain an alternate theory—that someone found the coronavirus in the wild, brought it to a lab, and then it accidentally escaped.

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Daily Cases: Coronavirus:New York vs. Rest of US

It looks like many states are preparing to end stay at home quarantine.

If you look at the numerous charts around on the number of new  coronavirus-19 cases reported each day it looks encouraging.  They show a peaking and a very slow decline or at best a  plateau.

However, this plateau is the product of two very different curves for New York city and the rest of the country.  It is New York city falling and the rest of the country rising significantly.

Don’t Be Fooled by America’s Flattening Curve

Don’t Be Fooled by America’s Flattening Curve, NYT, Nathaniel Lash, May 6, 2020

This looks very much like the various state governments could be lifting the quarantine just as they experience a surge in new cases.

For example, in Texas the 7 day moving average of the daily reported  Coronavirus  cases has just exceeded 1,000 for the first time.

 

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Starve the Beast

It should be worth noting that the federal deficit under Trump is already at 5% of GDP even before the Coronavirus stimulus begins.

Figure 1

Interestingly, if you look at the long term record the only policy or strategy that fits the data is the Republican policy of starve the beast. That policy is to enlarge the  federal deficit so much when they control the purse strings that democrats will be unable to enact policies increasing spending that benefits the lower and middle classes.  That is why you repeatedly see a pattern of republicans presidents leaving office with a much larger deficit than they inherited while democratic presidents reduce the deficit..  With US savings rates so low this forces the US to borrow abroad to finance the savings-investment gap. We lucked out that in the 1980s OPEC and Japan had  savings surpluses that they used to finance the US deficits.  Under Bush it was the Chinese that had a savings surplus to invest in the US.  But OPEC and Japan no longer have surpluses to finance the US deficit and the Chinese have started to draw down their savings as they shift to consumption led growth.  Because the Japanese and Chinese had large surpluses to invest the  long feared crowding out worked through the dollar and large trade deficit rather than higher interest rates and weakness in the credit sensitive economic sectors. The hollowing out of US manufacturing was a direct consequence of the republican tax cuts.

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OIL PRICES

Oil prices are collapsing as West Texas intermediate is now trading at just over $11/bbl

Oil prices move to the point where the marginal supply is profitable or unprofitable. In today’s world the marginal oil supply is US fracked oil. But the economics of fracked oil differs from traditional oil in that the current cost of production is very high as compared to most traditional sources where current costs are relative insignificant and the bulk of the cost is sunk or fixed costs.  Even if the prices make production unprofitable, it still minimizes losses to continue producing as long as you are covering your variable costs. That use to describe most US oil production.  But now the variable cost of fracked oil is very high and the oil companies will not continue to drill fracked oil at these low prices.

It appears that Russia and Saudi Arabia are acting together to drive the price of oil below the level where fracked oil would be profitable.  Historically, low oil prices were very much a favorable development for the US economy.  But that is no longer true and at current prices the US will suffer deep drops in oil production and a major widening of the US trade deficit.

It is going to be interesting to see how Trump reacts to two of his best buddies severely harming the US oil business and economy.

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