Tag Archives: Economy

Extraordinary Fiscal Spending a Threat to Economy

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Jamie Dimon, Chairman and CEO of JP Morgan Chase, says “government fiscal spending has been “so extraordinary” in the past five years he’s bracing for an economy of high inflation and unemployment.”

Dimon expressed concern that unchecked government spending could lead to stagflation – a dreaded combination of high inflation, high unemployment, and low growth1.

Dimon’s perspective is rooted in the massive fiscal and monetary stimulus that has occurred over the last five years. He questions whether this unprecedented level of intervention will eventually result in stagflation. He also believes that inflation may be stickier than many people assume, given the lingering effects of fiscal and monetary stimulus in the system.

In summary, Dimon’s cautionary stance underscores the need for prudent fiscal policies and a careful balance between economic stimulus and potential consequences.

Source:  https://fortune.com/2024/05/29/jamie-dimon-stagflation-fiscal-monetary-stimulus-government-spending-american-economy/

U.S. Economy Showing Signs of Slowing

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The U.S. economy continues to lose momentum, writes the Wall Street Journal. It finally seems that the cumulative impact of years of inflation is finally catching up with U.S. consumers and eroding their savings cushion—something that companies selling discretionary goods from Starbucks to Kohl’s are saying in their public quarterly financial reports.

In short, signs of an U.S. economic slowdown are becoming hard to ignore.

Labor market are a lagging indicator, meaning they show up later than other signs when an economic shift occurs. The early signals are already here.

U.S. Gross National Debt

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U.S. Gross National Debt exceeds $34 trillion.  

The federal government’s gross national debt has surpassed $34 trillion, a record high that foreshadows the coming political and economic challenges to improve America’s financial balance sheet in the coming years and decades.

The U.S. Gross National Debt is on an unsustainable path of growth, interest costs are exploding, and the Social Security and Medicare trust funds are approaching insolvency.

Source:  Committee for a Responsible Federal Budget

America Needs a National Business Plan

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“We need a business plan that should include being the most efficient. We’re not at war with ourselves, we’re at war with China and Russia. Their governments are subsidizing everything,” says John Hope Bryant, founder of the non-profit Operation HOPE, Inc. “We’re shooting at each other when we should be better together.”

Many think that we should have gridlock in Washington and “…should have a divided government, what we have is a divided people,” states Bryant.

Political free agents

When solving problems is the goal, and not simply picking winners and losers, talking with folks that you may not have a natural affinity to or agreement with almost always makes more sense than not.

Frankly, Bryant just want people to learn to think for themselves, to further realize that they are in the driver’s seat in their respective lives, to expect more from themselves, and to demand more from those who call themselves their leaders and representatives; whether it be in community, national or in the world of politics.

Blacks should all be political free agents from time to time, making both Democrats and Republicans “work” for our vote. We should all remember that FedEx made the U.S. Postal Service a better 2-Day mail service carrier, almost over night.

Now, when Bryant say things like this, people often wonder whether he is a Republican for some reason. Well, the answer is no. But respectfully, he has problems with both my Republican and Democratic friends, so no one should get a pass here. African Americans need results in their community these days, and that is why I am down with what I call the “Get It Done Party.” I just want folks to “get it done.”

I remember when in 2002, Operation HOPE became the only non-profit organization to host two U.S. Presidents in one week; former President Clinton in Harlem (arguably our “first Black President” – smile), who co-taught a Banking on our Future financial literacy course with me, launching our Harlem Partnership together, and thereafter President George W. Bush in South Central Los Angeles, on the 10th anniversary of the revitalization of community following the 1992 Rodney King Riots.

Now, no one in the political establishment said a word about President Clinton and HOPE and me. But when we brought President Bush to South Los Angeles and to First A.M.E. Church, led at that time by my spiritual father Reverend Dr. Cecil “Chip” Murray, our co-host for the event, you would thought the world had come to an end.  I was derided by some at the time for hosting the President, mildly threatened with reprisals, and my “real black man” credentials were no doubt called into question — but we persisted, and we moved forward. And everything worked out just fine. And when I am asked why we hosted the President of the United States, my response is simple and immediate — because he’s the PRESIDENT, that’s why.

References:

  1. https://johnhopebryant.com/2006/10/the_politics_of.html

Chinese Economy Circling the Drain

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“What I’m trying to remind everyone is you don’t make anything investing in a totalitarian [Communist Chinese] government over a long period of time. ~ Kyle Bass, founder and chief investment officer of Hayman Capital Management

In recent months, a plethora of downbeat economic data and news have come out of Communist China.

Trouble is growing particularly in China’s real estate sector and financial markets. Massive property developers like Evergrande and Country Garden Holdings have teetered on the brink of default. Beijing has in recent months tried to stabilize the property and banking sectors and shore up support for the country’s stock market and renminbi.

Amid the constant flow of negative economic data emanating from China, government officials announced this summer that they would no longer publish certain economic statistic, such as youth employment, which is has soared in recent years.

“In the long run, you’ve got the Chinese economy circling the drain and you have the real estate market falling apart,” said Kyle Bass, founder and chief investment officer of Hayman Capital Management. “Every single private developer is in some stage of bankruptcy today. And you’ve got about $190 billion worth of offshore bonds, dollar bonds, in some sense of default.”

Further, “I just think you don’t want to invest,” he said. “I think you want to invest in markets where there’s a rule of law, and where you have real leadership, and you actually have ways to earn returns that are positive for your portfolio.”

References:

  1. https://markets.businessinsider.com/news/stocks/china-economy-investors-markets-capital-bass-workers-real-estae-property-2023-9

US Credit Rating Cut by Fitch Ratings

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The US had its credit rating cut one step to AA+ from the top ranking of AAA by Fitch Ratings, echoing a move made more than a decade ago by ratings agency – S&P in 2011.

The credit agency saying that it reflects “expected fiscal deterioration,” a “high and growing” government debt burden, and an “erosion of governance” in face of repeated debt-limit standoffs and other ills have cast doubt on the United States’ ability to meet all its payment obligations.

A lower credit rating could make borrowers less likely to lend money to the federal government on favorable terms, potentially raising costs for U.S. taxpayers.

The Producer Price Index (PPI) Declined 0.5% in December

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Producer prices in December fell the most for any single-month since April 2020, as falling costs for food and energy more than offset rising prices across most other categories, the U.S. Bureau of Labor Statistics reported.

The headline number in today’s Producer Price Index report will be heralded by some as a sign that inflation has been defeated.  And while it certainly does look like peak inflation is behind us, we aren’t popping any champagne bottles just yet, states Brian Wesbury, First Trust Chief Economist. The Producer Price Index (PPI) measures the average change over time in selling prices received by domestic producers for their output.

What the above means in layman terms is that the producers’ input prices continue to rise, but price increases slowed for each of the three major final-demand components—services, goods, and construction. In other words, the rate of that rise in input prices have declined month-to-month. Slowing rate of increasing prices still equate to prices increasing and purchasing power declining.

While energy prices fell 7.9% in December and food prices declined 1.2%, “core” producer prices – which remove the typically volatile food and energy categories rose 0.1 % in December and remain up 5.5% in the past year, well exceeding the Fed’s 2% inflation target.

Looking deeper into core inflation, prices for both goods (ex-food and energy) and services (+0.2% and +0.1%, respectively) rose once again in December.  The service side of the economy will be the key area to watch in 2023.

What matters most for the economy, and the financial markets, is that inflation continues to run well above the Federal Reserve’s target, writes Brian Wesbury. Additionally, he desires that the Federal Reserve tightened enough to slow inflation, but not enough to throw the economy into recession.

Expect a 25 basis point rate hike at the Fed’s meetings in two weeks, along with guidance that the Fed is prepared to continue raising rates further in 2023.  The path ahead to tame inflation will test the Fed’s resolve.

References:

  1. https://www.ftportfolios.com/blogs/EconBlog/2023/1/18/the-producer-price-index-ppi-declined-0.5percent-in-december
  2. https://www.bls.gov/news.release/ppi.nr0.htm

Interest Rates, Cost of Capital and Recession

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Interest rates are often called the price of money. They determine how expensive capital is to access for companies, but also for individuals and even governments. ~ Jonathan Schramm

The Federal Reserve controls what is called the federal funds rate, which is the rate banks pay to borrow from other banks. Other interest rates throughout the system are based on that rate.

When an economy is in recession or unemployment is high, the Fed lowers rates. This is meant to encourage investment and spending, pushing more money into the economy.

Inflation is a sign there is too much money in the financial system and economy. One way to reduce the monetary supply is to give people and businesses an incentive to take on less debt. A good way to do that is to raise rates. And this is just what the Federal Reserve is doing.

Interest rates affect stocks in two main ways: the impact companies’ bottom line and impact investor’s behavior.

Many companies “roll over” their debt. This means they never really pay their debt, just pay the interest and renew their old bonds with new ones. In this case, rising rates mean the new bonds will cost the company a lot more in interest expenses going forward.

Some companies are also highly reliant on cheap debt to keep afloat or grow. Others rely on customers spending on credit cards. These companies’ profits might suffer in an environment of rising rates.

This is why a rising rate environment favors skilled stock pickers. A solid balance sheet, low debt, cheap valuation, or high profitability will be very valuable in an environment of rising rates.

Higher interest rates are a disincentive for investors to plow borrowed money into asset markets. That’s one of the main reasons why stocks, cryptocurrencies, and other assets crashed in 2022.

Rising rates for borrowed money tends to cause capital flow out of markets, depressing the values of even quality companies. That hurts investors who bought at the top, especially if they bought at the top with borrowed money. For others it creates a valuable entry point.

Overall, rising interests rates and tightening the money supply are a useful tool to help bring inflation under control. But the recent interest rate increase might not have been enough and there’s probably more to come. If inflation stays high, we would need rates continue to rise to curb inflation.

The positive aspects for US investors:

  • Rising rates support a stronger dollar.
  • A strong dollar makes US imports cheaper.
  • A strong dollar support consumers’ spending by decreasing import costs.
  • Rising rates might help to keep inflation under control.

The negative aspects for US investors:

  • Currency devaluation can hurt overseas investments measured in USD.
    Overindebted companies and consumers might not be able to manage higher rates.
  • Rising rates decrease demand for big-ticket items like homes and vehicles.
  • Rising rates increase the risk of a recession.
  • Rising rates make US exporters less competitive.
  • Rising rates restrict the use of borrowed money by investors, decreasing demand for assets across the board.vehicles.
  • Rising rates increase the risk of a recession.
  • Rising rates make US exporters less competitive.
  • Rising rates restrict the use of borrowed money by investors, decreasing demand for assets across the board.

References:

  1. https://finmasters.com/rising-interest-rates-effects/

Inflation is Bad

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Inflation is an economic term used to describe rising prices and a loss of purchasing power over time.

Written by Geoff Williams for Forbes Advisor

Inflation is an economic term used to describe rising prices of goods and services, and a loss of purchasing power over time. It occurs when consumers spend more on the same amount of goods and services today than they did a year ago, writes Geoff Williams, a contributor for Forbes Advisor. It is typically expressed as the annual change in prices for everyday goods and services such as food, apparel, transportation and toys.

When everybody pays more and gets less for it, it can have some profoundly devastating effects on the economy—and some consumers get hurt more than others.

“In every economic environment, there are winners and losers and inflation is no exception.  However, the longer high inflation persists, the harder it is to find winners,” says Jeanette Garretty, chief economist at Robertson Stephens, a wealth management firm. “Ultimately, high inflation seeps into the nooks and crannies of every balance sheet and income statement.”

There are three primary types of inflation:

  • Demand-pull inflation
  • Cost-push inflation
  • Built-in inflation

Right now, the country is dealing with all three major types of inflation, which is rare, according to Christopher Blake, assistant professor of economics at Oxford College of Emory University.

Demand-Pull Inflation – Demand-pull inflation describes how demand for goods and services can drive up their prices. If something is in short or disrupted supply, you can generally get people to pay more for it.

The U.S. is experiencing demand-pull inflation due to wages rising and Americans having a decent amount of money in their savings accounts, Blake explains, although some consumers are starting to empty those accounts.

“Consumer spending has remained high, despite the rising prices we currently see,” Blake says. “This is commonly referred to as demand-pull inflation, as consumer demand pulls prices higher because firms cannot keep up.”

Cost-Push Inflation – Cost-push inflation often kicks in when demand-pull inflation is going strong. When raw materials costs increase for businesses, the businesses in turn must raise their prices, regardless of demand.

“Increases to the prices that producers face put businesses in a tough spot,” Blake says. “They can either accept higher costs and keep their prices the same, or they can respond by trying to keep their profit margins the same.”

When the price of chicken keeps going up, for example, eventually your favorite restaurant will need to charge more for a chicken sandwich.

Built-in Inflation – As demand-pull inflation and cost-push inflation occur, employees may start asking employers for a raise. If employers don’t keep their wages competitive, they could end up with a labor shortage.

If a business raises workers’ wages or salaries and tries to maintain profit margins by raising prices, that’s built-in inflation.

Now, if you learn about your favorite coffeehouse raising prices due to the climbing cost of coffee beans, you’re a victim of cost-push inflation.

And if you’re going to buy that coffee even though the price is uncomfortably high, you’re engaging in demand-pull inflation.

3 Ways Inflation Hurts Consumers and the Economy

1. Less Purchasing Power

The most obvious impact of inflation is that it hurts your purchasing power. If you can’t buy as many goods and services as you did before inflation, your quality of living will eventually diminish.

Less purchasing power really hurts families that were already experiencing financial hardship. “Think more money spent on groceries and gasoline, and less spent on travel and entertainment,” says Angelo DeCandia, a professor of business at Touro University.

“Inflation hits the lowest-income families harder because items such as gasoline and food make up a much larger portion of their budgets, leaving less for discretionary spending,” says Dan North, senior economist at trade credit insurer Allianz Trade. “So, for example, where they used to have money to go out to dinner, even fast food, or [go to the] the movies once a month, now they won’t at all.”

A 2021 study from the University of Pennsylvania found that lower-income households had to spend about 7% more on goods and services last year compared to 2019 or 2020, while higher-income households had to spend 6% more. Remember, the annual rate of inflation for 2021 was 4.7%.

2. Less Savings

If rising prices for essentials is eating into your budget more than normal, you probably aren’t putting as much money into a savings account. A June 2022 Forbes Advisor-Ipsos survey found that 42% of respondents were saving less money than usual.

“Inflation makes all of our income and savings less valuable,” says Todd Steen, professor of economics at Hope College in Holland, Michigan.

If you’re not able to save as much as you used to, you may be less prepared for financial emergencies, forcing you to rely on costly credit cards or loans to pay unexpected bills.

And even if you have money in savings already, that decreased purchasing power means your emergency fund might not stretch enough to cover a financial crisis during an inflationary period.

If you have $1,000 socked away for a rainy day, you’re certainly better off than not having it. But here’s an example of how inflation can eat at the value of your savings.

Car repair prices went up 9% from June 2021 to June 2022 according to the CPI. If you had a $900 car repair in June 2021, in June 2022, that same car repair would have been $981. Suddenly your $1,000 saved up is a little less valuable.

“Inflation is a difficult problem to get rid of in an economy, because when prices increase, workers want to have higher wages and salaries to keep up,” he says. “This can lead to future price increases, and the cycle continues.”

3. Loss of Goods and Services

Some industries do pretty well during inflationary times, particularly ones in which you can’t hold off your spending indefinitely, like supermarkets, gas stations and funerals—but some businesses are completely devastated.

That’s because when inflation runs rampant, consumers spend their money on products and services that they absolutely need, and hold back on what they don’t.

You’re going to get your car repaired if you need it. You’ll keep spending money on food.

But you might not take your kids to a trampoline park. You might instead opt for a free city playground with the youngsters, instead. Decisions like that are understandable when prices are high but collectively, they can damage segments of the economy.

“That could mean your favorite pizza place closes, or your nail salon drops a service because it’s become too costly,” says Callie Cox, an investment analyst at eToro.

The renown economist Milton Friedman quipped that inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced
only by a more rapid increase in the quantity of money supply than in output of goods and services. Consequently, empirical evidence suggest that, if growth in the money supply is greater than the actual growth in GDP, inflation results.

References:

  1. https://www.forbes.com/advisor/personal-finance/why-is-inflation-bad/
  2. https://www.nytimes.com/article/inflation-definition.html
  3. https://www.forbes.com/advisor/personal-finance/types-of-inflation/
  4. https://www.caixabankresearch.com/en/economics-markets/inflation/inflation-merely-monetary-phenomenon

Focus, Discipline and Patience are Wealth Building Super Powers!

Are American Consumers in a Recession?

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Over the past few months, supply-chain headwinds, inflationary pressures, inverted U.S. Treasury bond yield curve, and rising interest rates has added friction to the U.S. economy and to business operations across industries.

Consequently, investors have become extremely pessimistic about the economic outlook and stock market sentiment, which both are expected to witness a downturn in 2023 amid the impending prospects of a recession.

Per JPMorgan Chase, rising interest rates, record decades high inflation, geopolitical pressure and other factors could lead to a recession that will likely wash away the benefits of savings and the massive government aid received during the pandemic. Moreover, the job market is expected to downshift significantly and unemployment is projected to increase next year as the economy weakens.

A growing number of companies are opting to leave jobs vacant when employees leave or announcing hiring freezes. Widespread layoffs so far have been limited to the handful of industries hammered by rising interest rates, such as technology, housing and finance, say Mark Zandi, chief economist of Moody’s Analytics, and Jim McCoy, senior vice president of talent solutions for ManpowerGroup, a staffing firm.

The Federal Reserve, by increasing its benchmark interest rate to counter inflation, has raised the possibility of a downturn next year. Some experts believe that the Federal Reserve’s bid to contain inflation by increasing interest rate and tightening the money supply will likely achieve its target but put pressure on the consumer’s wallet and potentially trigger a recession in 2023.

Fifty-seven percent of the National Association for Business Economics (NABE) economists see more than a 50% chance of recession next year, according to the results of a new survey published by NABE. The survey pointed to the Federal Reserve’s continued raising the federal funds rate and tightening of monetary policy in an effort to tame inflation as the biggest challenge facing the economy.

Additionally, Gregory Daco, chief economist of EY-Parthenon, expects a recession to hit by the first half of 2023 as hiring slows and layoffs spread across industries, leading to net job losses for the year. He expects the economy to grow just 0.3% for the full year and unemployment to peak at 5.5%.

Many Americans believe that the U.S. economy and the global economy are already in a recession. However, with consistently strong job growth, historically low unemployment and solid growth in consumer spending, that doesn’t sound like a recession most people would remember.

But, a recession is in the eyes of the beholders. Essentially, “It depends on who you ask,” says Capital Group economist Jared Franz. “With food, energy and shelter prices all rising faster than wages, the average American consumer would probably say yes. In my view, we are either on the edge of a recession or we are already tipping into it.”

To put things in perspective, over the past 70 years the average U.S. recession has lasted about 10 months and resulted in a GDP decline of 2.5%. In Franz’s estimation, the next one may be worse than average, if current trends persist, but still less severe than the Great Recession from December 2007 to June 2009.

Key economic indicators point to a potential recession

Sources: Capital Group, Bureau of Economic Analysis, National Bureau of Economic Research, U.S. Department of Commerce.

The official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER) considers many factors beyond GDP, including employment levels, household income and industrial production. Since NBER usually doesn’t reveal its findings until six to nine months after a recession has started, we may not get an official announcement of an economic recession until next year.

“It’s fair to say that most consumers probably don’t care what NBER thinks,” says Capital Group economist Jared Franz. “They see inflation above 9%, sharply higher energy prices and declining home sales. They feel the impact of those data points. The labor market is one of the only data points that isn’t signaling a recession right now.”

References:

  1. https://www.cnbc.com/2022/12/06/recession-walmart-jpmorgan-gm-ceos-talk-about-possible-slowdown.html
  2. https://www.msn.com/en-us/money/markets/is-a-2023-recession-coming-job-growth-likely-to-slow-sharply-companies-brace-for-impact/ar-AA159tMa
  3. https://www.foxbusiness.com/economy/labor-market-may-skirt-us-recession-nabe
  4. https://www.capitalgroup.com/advisor/insights/articles/is-us-already-in-recession.html