Connect with us

Government

Tailwinds Shift To Headwinds In 2022

Tailwinds Shift To Headwinds In 2022

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The first part of our 2022 outlook looks through the front windshield and contrasts 2021s tailwinds with 2022s growing headwinds. While no one…

Published

on

Tailwinds Shift To Headwinds In 2022

Authored by Michael Lebowitz via RealInvestmentAdvice.com,

The first part of our 2022 outlook looks through the front windshield and contrasts 2021s tailwinds with 2022s growing headwinds. While no one knows what 2022 holds in store for investors, our concern is that it should not foster the same optimism as 2021. The economic and financial environments are shifting rapidly making the 2022 outlook much more difficult than this past year.

Part 2 of the 2022 outlook, coming out next week, will cover our thoughts on the stock and bond markets.

“The more extended the advance, and the higher valuations become, the more stable and promising the investment can appear to be, when judged through the rearview mirror.” 

- John Hussman

It’s All About Growth

Before looking forward, it’s worth explaining how economists assess economic activity.

Most economic activity is measured in percentage growth terms and not nominal terms. To stress the importance of this nuance, consider the following:

If the government gives consumers $1 trillion to spend, it will boost GDP by at least $1 trillion. In our example, the stimulus will boost GDP to $21 trillion from $20 trillion, equating to 5% growth. Without government stimulus and excluding any new economic activity, GDP will retreat to $20 trillion in the following year. As a result, GDP will decline by 5%. While nothing changed with the economy, the 5% decline will be considered a recession. To avoid zero or declining economic growth, again assuming no other activity, the government will need to provide at least $1.01 trillion of stimulus.

As we show above, stimulus boosts economic activity. However, it detracts from economic growth rates unless it grows each year. This fact will become important in our 2022 outlook as the government will not likely replicate the massive amount of stimulus doled out over the prior two years. Can the economy make up for it?

Covid TailWinds

In hindsight, the rearview mirror showing the period from March 2020 to the present paints an unusual picture. What started so poorly ended up being one of the greatest periods for investors. The S&P 500 total return since the March 2020 lows is +115%.

In March 2020, the sky was falling, and investors aggressively sold stocks. It turns out buying stocks in the face of such a unique calamity was the right thing to do. The justification was not a coming cure or vaccine for Covid or an imminent return to normal, but the government with their fiscal guns blazing.

Since March 2020, the government has run a $5.6 trillion deficit, dwarfing any prior instance. Such massive spending was only possible with the Treasury’s trusty sidekick, the Federal Reserve. 

As we show, the Fed has bought nearly $5 trillion of bonds since the pandemic began. In doing so, it came close to absorbing 100% of the net new debt issuance from the government.

While the government was doling out money to boost economic activity, the Fed spewed liquidity, supported asset prices, and kept interest rates low. Despite Covid shutting down large segments of the economy, economic data quickly recovered to pre-Covid levels.

Record low interest rates, massive consumer and corporate stimulus, and enormous liquidity gusted at investors’ backs producing double- and triple-digit gains. Not only did most asset prices regain March 2020 levels, but many have well surpassed those levels.

In the latter half of 2021, vaccines, increased consumer demand, and a record amount of savings added further oomph to the tailwinds. However, the ominous winds of inflation began picking up at that point.

2022 Headwinds

The perfect fiscal and monetary storms are petering out. As a result, headwinds for 2022 are mounting. Let consider how that weighs on our 2022 outlook.

Fiscal Spending

Over the last 3 months, the federal deficit grew at a $1.6 trillion annualized rate. That is historically high but well below 2020 and 2021 levels. Further, Joe Biden and the Democrats are struggling to pass the Build Back Better (BBB) social infrastructure program. We think it will pass in time, but the fiscal stimulus and spending related to it will not be as immediate or significant as initially planned.

The coming election in November poses more hurdles for spending bills. West Virginia Senator Joe Manchin and other Senators and Representatives from red and purple states face a growing risk of losing their seats. Some may take a page from Manchin’s playbook and voice deep concern for growing budget deficits to appease their voting bases.

Throughout later 2021 and even into 2022, Covid related stimulus programs ended or will end shortly. The closure of these programs will further reduce the flow of stimulus to consumers. For example, the recently extended student loan deferment program ends in a few months. In this case, many student debtors consume goods and services with money that should be servicing student debt. Once the deferment period ends, spending, in many cases, will decline. The child tax credit will also end shortly, resulting in a shortfall of funds for those receiving the benefit. Likewise, those that did not pay rent are now left with back payments or higher rents to make their landlords whole.

The graph below from Goldman Sachs helps quantify the sharp decline in fiscal spending related to the pandemic.

As we discuss later, the savings rate has fallen back to normal levels, meaning many of those affected will have to reduce consumption.

Monetary Stimulus

The Fed is tapering QE, expecting to end new purchases by March 2021. QE provides vast amounts of liquidity to the financial markets. As the Fed backs away, not only will it reduce liquidity to markets, but reduce the power of the world’s largest holder of U.S. Treasury debt. Someone will take the Fed’s place but must shed other assets to do so.

To help better understand this concept, we suggest reading The Fed Is Juicing Stocks. In particular, the section titled “Draining the Asset Pool.”

The Fed is also hinting at raising interest rates. Higher interest rates will increase interest expenses for debt-laden companies, consumers, and the government. Additionally, those using loans to leverage assets will have to pay more for the leverage. This will undoubtedly cause some investors to reduce or remove leverage as the potential returns diminish. 

The graphs below highlight that margin debt has proliferated and sits at or near record levels. The last two times margin debt grew this rapidly was in 1999 and 2007.

Elections and the Fed

Further pressuring the Fed is politicians. Consider the following from the Financial Times:

The Fed needs to start tapering immediately and then they need to raise interest rates. Both those things can be done by March,” Jake Auchincloss, a Democrat from Massachusetts and member of the House of Representatives financial services committee, which oversees monetary policy, told the Financial Times. “I think chair [Jay] Powell would do well to end the decade of easy money,” he added.

Political pressure from the President and legislators may force the Fed to remove liquidity too quickly or raise rates too fast. Both are likely to be problematic for asset prices and economic recovery.

Savings Rate

The combination of direct government stimulus and the inability to spend money during the lockdowns resulted in unprecedented savings rates. As we show below, the savings rate jumped to levels that were twice as high as any previous level since at least 1959. Note that the two recent peaks result from the two rounds of personal stimulus checks.

The following graph, courtesy of Brett Freeze, shows how government stimulus to consumers (transfer receipts) and credit provided a bonanza of spending power for consumers. Like the bloated savings rate above, that too has normalized.

The savings rate is back to pre-Covid levels. Most consumers, especially those in the middle to lower-income classes, have fully exhausted extra savings and must either reduce spending or increase their use of debt.

Credit card debt and home equity withdraws are both increasing. While such funds can propel additional spending, it will not be nearly the same as the enlarged savings rates. Further, higher interest rates will make debt less appealing. Inevitably credit card and home equity are limited based on wage growth and the ability to service their debt.

Inflation

Prices are on the rise. Higher prices mean consumers spend more to get the same amount of goods. If wages keep up with inflation, the consumer is indifferent.  

Inflation is running at 6.9%, over three times higher than the Fed’s stated 2% objective. At the same time, wages are growing but at a lesser rate than inflation. Average hourly earnings are up 4.8%. While historically robust, real wages, factoring in inflation, are down 2%.

As we note earlier inflation is pressuring the Fed to prioritize their fight against inflation. Might the Fed have to choose between inflation and asset prices? Ohio Democrat Sherrod Brown recently shared thoughts on that- “The Fed should make sure our economy works for workers and their families, not Wall Street.”

Also, consider inflation is highly responsible for the recent string of poor consumer sentiment. People usually spend more when they have a positive outlook. As the graph below shows, the University of Michigan’s current and expected consumer sentiment indexes are at or near ten-year lows. The current index sits at 70.6. In April 2020, during the peak of Covid lockdowns, it was 71.8. In September 2008, when Lehman and others were failing, it was 70.3.

Pent up Demand and Mid-Life Crisis

Having been deprived of vacations, eating out, and a host of other activities, people were hungry to return to normal. Vaccines further raised comfort levels and allowed many stores and venues to return to normal.

Consumers splurged as they bought those things they couldn’t buy during lockdowns. Not only did they travel and go out to dinner, but some bought cars and houses and other big-ticket items. It was as if many consumers had a mid-life crisis simultaneously.

Most of that pent-up demand is quickly diminishing. The bills from those spending sprees are mounting, and life is slowly becoming more normal by the day. This additional source of spending is fading quickly.

Summary

Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.” 

-George S. Patton

As you just read in part one of our 2022 outlook, this year’s monetary and economic environment will not be as friendly for asset prices as last year. While that may seem problematic for investors, if we learned anything in 2020 and 2021, it is that stock prices can climb a wall of worry efficiently.

In part two of our 2022 outlook, coming next week, we share our thoughts on how stocks and bonds might perform in the new year.

Tyler Durden Thu, 01/06/2022 - 06:30

Read More

Continue Reading

Government

“The Real President Is Whoever Controls The Teleprompter”: Musk Delivers Scathing Criticism Of Biden

"The Real President Is Whoever Controls The Teleprompter": Musk Delivers Scathing Criticism Of Biden

Authored by Jack Phillips via The Epoch…

Published

on

"The Real President Is Whoever Controls The Teleprompter": Musk Delivers Scathing Criticism Of Biden

Authored by Jack Phillips via The Epoch Times,

Tech billionaire Elon Musk this week warned that the United States must take steps to address inflation or it will end up like socialist Venezuela.

Musk, who is currently in the process of acquiring Twitter, told a virtual conference that he believes the government has printed too much money in recent years.

“I mean, the obvious reason for inflation is that the government printed a zillion amount of more money than it had, obviously,” Musk said, likely referring to COVID-19 relief stimulus packages worth trillions of dollars that were passed in recent years.

U.S. inflation rose by 8.3 percent in April, compared with the previous year. That’s slightly lower than the 8.5 percent spike in March, but it’s still near the 40-year high.

“So it’s like the government can’t … issue checks far in excess of revenue without there being inflation, you know, velocity of money held constant,” the Tesla CEO said.

“If the federal government writes checks, they never bounce. So that is effectively creation of more dollars. And if there are more dollars created, then the increase in the goods and services across the economy, then you have inflation, again, velocity of money held constant.”

If governments could merely “issue massive amounts of money and deficits didn’t matter, then, well, why don’t we just make the deficit 100 times bigger,” Musk asked. “The answer is, you can’t because it will basically turn the dollar into something that is worthless.”

“Various countries have tried this experiment multiple times,” Musk said.

“Have you seen Venezuela? Like the poor, poor people of Venezuela are, you know, have been just run roughshod by their government.”

In 2018, Venezuela, a country with significant reserves of oil and gas, saw its inflation rise more than 65,000 percent amid an economic crash that included plummeting oil prices and government price controls. The regime of Nicolas Maduro then started printing money, thereby devaluing its currency, which caused prices to rapidly increase.

During the conference, Musk also said the Biden administration “doesn’t seem to get a lot done” and questioned who is actually in charge. 

“The real president is whoever controls the teleprompter,” he said.

“The path to power is the path to the teleprompter.”

“The Trump administration, leaving Trump aside, there were a lot of people in the administration who were effective at getting things done,” he remarked.

Musk’s comment about the White House comes as Jeff Bezos, also one of the richest people in the world, has increasingly started to target the administration’s economic policies. Bezos, in a series of Twitter posts, said the rapid increase in federal spending is the reason why inflation is as high as it is.

“Remember the Administration tried their best to add another $3.5 TRILLION to federal spending,” Bezos wrote on Monday, drawing rebuke from several White House officials. “They failed, but if they had succeeded, inflation would be even higher than it is today, and inflation today is at a 40-year high.”

Tyler Durden Tue, 05/17/2022 - 15:05

Read More

Continue Reading

Spread & Containment

Type-I interferon stops immune system ‘going rogue’ during viral infections

Hamilton, ON (May 17, 2022) – McMaster University researchers have found not only how some viral infections cause severe tissue damage, but also how…

Published

on

Hamilton, ON (May 17, 2022) – McMaster University researchers have found not only how some viral infections cause severe tissue damage, but also how to reduce that damage.

Credit: Georgia Kirkos/McMaster University

Hamilton, ON (May 17, 2022) – McMaster University researchers have found not only how some viral infections cause severe tissue damage, but also how to reduce that damage.

 

They have discovered how Type I interferon (IFN) stops the immune system ‘going rogue’ and attacking the body’s own tissues when fighting viral infections, including COVID-19.

 

Their paper was published in the journal PLOS Pathogens today.

  

Senior author Ali Ashkar said IFN is a well-known anti-viral signalling molecule released by the body’s cells that can trigger a powerful immune response against harmful viruses.

 

“What we have found is that it is also critical to stop white blood cells from releasing protease enzymes, which can damage organ tissue. It has this unique dual function to kick start an immune response against a viral infection on the one hand, as well as restrain that same response to prevent significant bystander tissue damage on the other,” he said.

 

The research team investigated IFN’s ability to regulate a potentially dangerous immune response by testing it on both flu and the HSV-2 virus, a highly prevalent sexually transmitted pathogen, using mice. Data from COVID-19 patients in Germany, including post-mortem lung samples, was also used in the study.

 

“For many viral infections, it is not actually the virus that causes most of the tissue damage, it is our heightened immune activation towards the virus,” said Ashkar, a professor of medicine at McMaster.

  

First co-author of the study and PhD student Emily Feng said: “Our body’s immune response is trying to fight off the virus infection, but there’s a risk of damaging innocent healthy tissue in the process. IFNs regulates the immune response to only target tissues that are infected.

 

“By discovering the mechanisms the immune system uses that can inadvertently cause tissue damage, we can intervene during infection to prevent this damage and not necessarily have to wait until vaccines are developed to develop life-saving treatments,” she added.

 

“This applies not just to COVID-19, but also other highly infectious viruses such as flu and Ebola, which can cause tremendous and often life-threatening damage to the body’s organs,” said first study co-author Amanda Lee, a family medicine resident. 

 

Ashkar said the release of harmful proteases is the result of a ‘cytokine storm’, which is life-threatening inflammation sometimes triggered by viral infections. It has been a common cause of death in patients with COVID-19, but treatment has been developed to prevent and suppress the cytokine storm.

 

Ashkar said that steroids like dexamethasone are already used to rein in an extreme immune response to viral infections. The authors used doxycycline in their study, an antibiotic used for bacterial infections and as an anti-inflammatory agent, inhibits the function of proteases causing the bystander tissue damage.

 

Lee added: “This has the potential in the future to be used to alleviate virus-induced life-threatening inflammation and warrants further research.” 

 

The study was funded by the Canadian Institutes of Health Research.

 

-30-

 

Editors:

Pictures of Ali Ashkar and Emily Feng may be found at https://bit.ly/3wmSw0D

  

 

 


Read More

Continue Reading

Spread & Containment

mRNA vaccines like Pfizer and Moderna fare better against COVID-19 variants of concern

A comparison of four COVID-19 vaccinations shows that messenger RNA (mRNA) vaccines — Pfizer-BioNTech and Moderna — perform better against the World…

Published

on

A comparison of four COVID-19 vaccinations shows that messenger RNA (mRNA) vaccines — Pfizer-BioNTech and Moderna — perform better against the World Health Organization’s variants of concern (VOCs) than viral vector vaccines — AstraZeneca and J&J/Janssen. Although they all effectively prevent severe disease by VOCs, the research, publishing May 17th in the open access journal PLOS Medicine, suggests that people receiving a viral vector vaccine are more vulnerable to infection by new variants.

Credit: Carlos Reusser Monsalvez, Flickr (CC0, https://creativecommons.org/publicdomain/zero/1.0/)

A comparison of four COVID-19 vaccinations shows that messenger RNA (mRNA) vaccines — Pfizer-BioNTech and Moderna — perform better against the World Health Organization’s variants of concern (VOCs) than viral vector vaccines — AstraZeneca and J&J/Janssen. Although they all effectively prevent severe disease by VOCs, the research, publishing May 17th in the open access journal PLOS Medicine, suggests that people receiving a viral vector vaccine are more vulnerable to infection by new variants.

By March 2022, COVID-19 had caused over 450 million confirmed infections and six million reported deaths. The first vaccines approved in the US and Europe that protect against serious infection are Pfizer-BioNTech and Moderna, which deliver genetic code, known as mRNA, to the bodies’ cells, whereas Oxford/AstraZeneca and J&J/Janssen are viral vector vaccines that use a modified version of a different virus — a vector — to deliver instructions to our cells. Three vaccines are delivered as two separate injections a few weeks apart, and J&J/Janssen as a single dose.

Marit J. van Gils at the University of Amsterdam, Netherlands, and colleagues, took blood samples from 165 healthcare workers, three and four weeks after first and second vaccination respectively, and for J&J/Janssen at four to five and eight weeks after vaccination. Samples were collected before, and four weeks after a Pfizer-BioNTech booster.

Four weeks after the initial two doses, antibody responses to the original SARS-CoV-2 viral strain were highest in recipients of Moderna, followed closely by Pfizer-BioNTech, and were substantially lower in those who received viral vector vaccines. Tested against the VOCs – Alpha, Beta, Gamma, Delta and Omicron – neutralizing antibodies were higher in the mRNA vaccine recipients compared to those who had viral vector vaccines. The ability to neutralize VOCs was reduced in all vaccine groups, with the greatest reduction against Omicron. The Pfizer-BioNTech booster increased antibody responses in all groups with substantial improvement against VOCs, including Omicron.

The researchers caution that their AstraZeneca group was significantly older, because of safety concerns for the vaccine in younger age groups. As immune responses tend to weaken with age, this could affect the results. This group was also smaller because the Dutch government halted use for a period.

van Gils concludes, “Four COVID-19 vaccines induce substantially different antibody responses.”

#####

In your coverage, please use this URL to provide access to the freely available paper in PLOS Medicine:

http://journals.plos.org/plosmedicine/article?id=10.1371/journal.pmed.1003991

Citation: van Gils MJ, Lavell A, van der Straten K, Appelman B, Bontjer I, Poniman M, et al. (2022) Antibody responses against SARS-CoV-2 variants induced by four different SARS-CoV-2 vaccines in health care workers in the Netherlands: A prospective cohort study. PLoS Med 19(5): e1003991. https://doi.org/10.1371/journal.pmed.1003991

 

Author Countries: The Netherlands, United States

 

Funding: This work was supported by the Netherlands Organization for Scientific Research (NWO) ZonMw (Vici grant no. 91818627 to R.W.S., S3 study, grant agreement no. 10430022010023 to M.K.B.; RECoVERED, grant agreement no. 10150062010002 to M.D.d.J.), by the Bill & Melinda Gates Foundation (grant no. INV002022 and INV008818 to R.W.S. and INV-024617 to M.J.v.G.), by Amsterdam UMC through the AMC Fellowship (to M.J.v.G.) and the Corona Research Fund (to M.K.B.), and by the European Union’s Horizon 2020 program (RECoVER, grant no. 101003589 to M.D.d.J). The funders had no role in study design, data collection and analysis, decision to publish, or preparation of the manuscript.


Read More

Continue Reading

Trending