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Pento Warns The Fiscal & Monetary Cliffs Have Arrived

Pento Warns The Fiscal & Monetary Cliffs Have Arrived

Authored by Michael Pento via PentoPort.com,

According to Doug Ramsey of the Leuthold Group, 334 companies trading on the New York Stock Exchange recently hit a 52-week low, more…

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Pento Warns The Fiscal & Monetary Cliffs Have Arrived

Authored by Michael Pento via PentoPort.com,

According to Doug Ramsey of the Leuthold Group, 334 companies trading on the New York Stock Exchange recently hit a 52-week low, more than double the amount that marked new one-year highs. That’s happened only three other times in history — all of them occurring in December 1999.

How did we get back to the precipice of the year 2000, where tech stocks plunged 80% and the S&P 500 lost 50% of its value over the ensuing two years? Well, start off with the fact that the amount of new money created by our central bank in the past 14 years is $8 trillion. That, by the way, is an increase in base money supply only and does not include all of the new money created by our debt-based monetary system. So, from 1913 to 2008, the Fed created $800 billion. And, it took from 2008 until today—just 14 years–for it to have created $8.8 trillion in base money supply. Is there really any wonder why inflation has now become a salient issue, especially for the middle and lower classes, and why the stock market is now set up for a meltdown similar to the NASDAQ collapse of two decades ago?

Some might claim that the bubble in the stock market was much different in 2000 than it is today. They are correct. The overvaluation 22 years ago pales in comparison to today. With its record high P/S ratio of 3.5, as opposed to just 1.8 back in 2000. And the mind-numbing record high 210% TMC/GDP ratio, which is an incredible 68 percentage points ahead of where it ascended to 22 years ago.

Ok, so the stock market is much more expensive today than at any other time in history, but what will the catalyst be to set it tumbling off the cliff? Last week I talked about the monetary cliff coming in the next two months. To review: The Fed will wind down its record-breaking $120 billion per month counterfeiting scheme to zero dollars in that timeframe. This Q.E. involved the process of handing newly created money to banks, consumers, and businesses to boost consumption. But by ending this flow of new money, the Fed will also end its tacit support for the municipal bond market, primary dealers, money market mutual funds, REPO market, International SWAP lines, ETF market, primary and secondary corporate debt markets, commercial paper market, and support for student, auto and credit card loans. All of which were directly supported by Jerome Powell’s with the Fed’s latest Q.E. program.

But it doesn’t end there. Mr. Powell cannot be content with just ending Q.E., not with CPI running at 6.8%! Therefore, very soon after Q.E. is terminated, interest rates are heading higher, and the balance sheet of the Fed must start shrinking. However, an occasional 25-bps rate hike here or there won’t cut it. He has to hike rates by 680-bps just to get to a zero percent real Fed Funds Rate. Now, of course, Powell doesn’t intend to hike monetary policy that much because he is fully aware it would collapse the whole artificial market construct well before he gets anywhere close to that level. But the point here is that the FOMC has lost the luxury of being able to delay and dither as it has in the past because inflation is running at a 40-year high. Hence, the Fed will need to hike rates rather aggressively until inflation, the economy, or asset prices come crashing down. But since all three are so closely linked together, they will likely all cascade simultaneously.

And, now this week, I want to shed some new light on the concurrent fiscal cliff and shoot a hole through Wall Street’s excess savings B.S. As most of you are already aware, I’ve been pretty clear about the negative consumption effects that will result from the ending of $6 trillion in government handouts over the previous two years. This massive and unprecedented largess caused the savings rate in the U.S. to jump from 7.8% in January 2020 to 33.8% by April of the same year. However, that savings rate has now collapsed back down to 6.9%—below its pre-pandemic level. But what about the stash of savings consumers are sitting on that is supposed to carry GDP ever-higher this year?

Well, it appears that the rainy day fund is dwindling quickly. According to the N.Y. Times and Moody’s Analytics, the excess savings among many working- and middle-class households could be exhausted as soon as early 2022. This would not only reduce their financial cushions but also potentially affect the economy since consumer spending has risen to become nearly 70% of GDP.

We have already seen multiple pandemic-era federal aid programs expire last September, including the massive federal supplement to unemployment benefits. Now, with the Expanded Child Income tax credit having expired, which gave up to $300 per child under 6, and up to $250 per child ages 7 to 17 over the period from July to December, the fiscal challenges have become salient for many Americans.

But what about that pile of savings? Estimates are that it now amounts to around $2.0 trillion (8.5% of GDP). It’s mostly in the hands of the very rich, who are savers and have a much lower marginal propensity to consume than those in the middle and lower classes. According to a study from Oxford Economics, 80% of that savings is in the hands of the top 20% of earners, and 42% went to the top 1%. Again, this is important because it is the middle and lower classes that are responsible for the majority of consumption. So, how is this economically-crucial cohort doing? Well, in addition to getting hurt by inflation and falling real wages, they are running out of their stimulus hoard quickly. According to a recent study done by JP Morgan Chase, households making $68,896 per year or less only have an extra $517 in their checking accounts on average compared with their pre-pandemic level. As unimpressive as that sounds, add in the fact that people don’t eat into their savings with the same zeal that they spend a fresh government handout, and you can see that so-called “mountain of savings” Wall Street loves to tout isn’t much more than a molehill.

When you factor in the massive fiscal and monetary cliffs together with the most overvalued stock market in history, you have the recipe for potential unprecedented stock market chaos, which should be front-end loaded in ‘22. If your retirement savings is with a deep state of Wall Street firm, you hold some mix of stocks and bonds that is set on autopilot. Their fate should be the same as the Hindenburg and Titanic.

*  *  *

Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called, “The Mid-week Reality Check”  and Author of the book “The Coming Bond Market Collapse.”

Tyler Durden Fri, 01/14/2022 - 11:10

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Economics

Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

By Nour Al Ali, Bloomberg Markets Live commentator and analyst

Oil is starting to look like an unlikely haven from the stocks selloff in the run-up to anticipated Fed tightening.

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Oil Could Be The Haven Stocks Traders Need To Shelter From Fed

By Nour Al Ali, Bloomberg Markets Live commentator and analyst

Oil is starting to look like an unlikely haven from the stocks selloff in the run-up to anticipated Fed tightening.

Traders are pricing lower volatility in the commodity than in the Nasdaq and S&P 500. Barometers of market anxiety for both indexes have shot up recently, suggesting trader sentiment is souring. Meanwhile, the CBOE Crude Oil Volatility Index, which measures the market’s expectation of 30-day volatility of crude oil prices applying the VIX methodology to USO options, shows that oil prices are expected to remain relatively muted in comparison.

With a producer cartel to support prices, the outlook for oil is more sanguine, even if the Fed raises rates. The commodity has ample support, with global oil demand expected to reach pre-pandemic levels by the end of this year. The U.S. administration has been pushing oil-producing nations under the OPEC+ cartel to ramp up output, while the group has stuck to a modest production-increase plan and is expected to rubber-stamp another 400k b/d output hike when they meet next week. This means that oil is likely to stay a lot more stable than in recent years.

The relatively low correlation between the asset classes provide diversification benefits. The relationship between the S&P 500 and the global oil benchmark is weak and lacks conviction; it’s even weaker between the Nasdaq 100 and Brent crude contracts. The divergence in price action this week could indicate that stocks have been tumbling in fear of a hawkish Feb, more so than geopolitical risk alone. That would perhaps offer traders an opportunity to seek shelter amid stock volatility in anticipation of the Fed’s next move.

Oil might have tracked the decline in stocks at the beginning of this week, but the commodity is back to its highs now. It’s up close to 15% this year, while the S&P 500 is struggling to reclaim its footing after plunging as much as 10%.

Tyler Durden Wed, 01/26/2022 - 13:45

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Economics

AT&T down 10% despite topping estimates

AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribe

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AT&T (NYSE: T) has revealed that Q4 results indicated continued users for the HBO MAX, wireless and fiber segments. In addition, the company gained more postpaid phone users for the whole year than the last ten years adding one million fiber subscribers. Similarly, the company beat its high-end outlook for international HBO Max and HBO users with almost 74 million subscribers as of December 31, 2021.

CEO John Stankey said:

We ended 2021 the way we started it – by growing our customer relationships, running our operations more effectively and efficiently, and sharpening our focus. Our momentum is strong and we’re confident there is more opportunity to continue to grow our customer base and drive costs from the business.

Q4 2021 revenue dropped 10% YoY

Consolidated revenue in Q4 2021 was $40.96 billion beating consensus estimates $40.68 but dropping 10% YoY, which reflects the impact of divested segments and low Business Wireline revenues. In the third quarter, the company divested US Videos, and in Q4, it divested Vrio. The drop was partially offset by high Warner Media revenues, recovery from pandemic impacts, and high Consumer Wireline and Mobility revenues. Stankey commented:

We’re at the dawn of a new age of connectivity. Our focus now is to be America’s best connectivity provider and also ensure our media assets are positioned to grow and truly become a global media distribution leader. Once we do this, we’ll unlock the true value of these businesses and provide a great opportunity for shareholders.

AT&T reported Q4 net income (loss) attributable to $5 billion or $0.69 per diluted shared share. On an adjusted basis, including merger-amortization fees, a share of DirecTV intangible amortization, gain on benefit plans, and related items, the company had an EPS of $0.78 topping consensus estimate of $0.76 per share.

AT&T had total revenue of $168.9 billion in 2021

AT&T’s consolidated revenues were $168.9 billion in 2021, compared to $171.8 billion a year ago, reflecting the split of the U.S Video division in Q3 2021, as well as the effects of other divested operations. However, higher revenues in WarnerMedia and Communications somewhat offset these declines.

For the full-year, net income (loss) attributable to commons shares was $19.9 billion or $2.76 p were per diluted share. On an adjusted basis, FY 2021 earnings per share were $3.4.

La notizia AT&T down 10% despite topping estimates era stato segnalata su Invezz.

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Economics

New home sales surge, while house price measures decelerate; expect deceleration or even downturns in each

  – by New Deal democratSince I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly…

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 - by New Deal democrat

Since I didn’t post yesterday, let me catch up today with a note on both new home sales and prices.


New home sales (blue in the graph below) for December rose sharply to 811,000 on an annualized basis. This is the higher monthly number since March, and while it is well above the trend since the Great Recession, it is still well below its levels from late 2020:


The red line is inventory. When it comes to new homes, inventory lags not only sales but also prices, so it is not surprising that inventory has increased sharply to a 10 year+ high.

While new home sales are the most leading of all housing metrics, they are very noisy and heavily revised. So in the below graph I compare them with single family permits (red), which have also increased in the last few months, but also are not at 2020 levels:


Because mortgage rates have increased significantly in the past several months, I do not expect this surge in new home buying to last much longer.

Sales lead prices, and for most of 2021 sales were down. So it should not be a surprise that on a YoY basis, price increases are at last abating, shown both monthly (blue) and quarterly (black) in the graph below:


In December, prices were only up 3.4% from one year prior. Since the data is noisy on a monthly basis, the quarterly number, still high at just under 15%, but well below the sharp gains earlier in the year, is more telling.

The deceleration in YoY price gains, which nevertheless are still very high, was also the story yesterday in both the Case Shiller and FHFA house price indexes (light and dark blue in the graph below, /2 for scale). Also shown are the YoY% gains in rent of primary residence and owner’s equivalent rent (how the CPI measures housing inflation)(light and dark red):


My purpose in the above graph is to show that both house price indexes track one another closely, as do both “official” measures of housing inflation. Additionally, as I’ve previously pointed out, house price increases tend to bleed over into the official inflation measures with about a 12 to 18 month lag. Thus on a YoY basis price increases bottomed in 2019, but did not bottom in the official measures of rent until the beginning of 2021. Since the YoY% increase in house prices peaked in mid year 2021, we can expect the “official” CPI housing measure to continue to increase on a YoY basis through roughly late 2022.

This doesn’t necessarily mean that the *total* inflation measure will continue to increase throughout this year. Below I again show the YoY% change in owners’ equivalent rent as above, but also the total inflation index (gold). Most importantly, note that sometimes they track in tandem, but also that generally during the entire house price boom, bubble, and bust from 1995 to 2015 they tended to move in opposite directions:


Why did this happen? Sometimes, as during 1995-2015, home ownership and apartment renting are alternative goods. When more people decide to leave apartments and move into houses, house prices increase while rents flatten. This is generally what happened during the boom and bubble. Then during the bust people were forced to abandon houses and move back into apartments. This is shown in the below graph of homeownership:


Note the huge upward surge until the housing bubble popped, followed by the equally sharp deflation.

Finally, let’s factor in interest rates set by the Fed, shown in black below:


As CPI increases, the Fed typically increases interest rates. By the time the fully effect in owners’ equivalent rent is felt, Fed rate hikes have typically cooled the economy, meaning that the remaining majority of the overall consumer inflation index declines.

Bringing our discussion back to the present, we see that total inflation has been rising sharply since just after the pandemic hit. Owners’ equivalent rent started to rise about 9 months ago. Part of the delay was the big increase in the homeownership rate during that time, driving rents and house prices in opposite directions. The consensus is that the Fed will raise rates several times this year, perhaps starting as early as this spring. If they indeed do so, they will probably continue to embark on hiking rates until the economy slows or even reverses, enough so that price increases - other than rents - decelerate considerably. But while rent measures will continue to accelerate this year, house price increases themselves are likely to continue to decelerate, or even stall in the months ahead.

 

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