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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…

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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

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Government

Buyouts can bring relief from medical debt, but they’re far from a cure

Local governments are increasingly buying – and forgiving – their residents’ medical debt.

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Medical debt can have devastating consequences. PhotoAlto/Odilon Dimier via Getty Images

One in 10 Americans carry medical debt, while 2 in 5 are underinsured and at risk of not being able to pay their medical bills.

This burden crushes millions of families under mounting bills and contributes to the widening gap between rich and poor.

Some relief has come with a wave of debt buyouts by county and city governments, charities and even fast-food restaurants that pay pennies on the dollar to clear enormous balances. But as a health policy and economics researcher who studies out-of-pocket medical expenses, I think these buyouts are only a partial solution.

A quick fix that works

Over the past 10 years, the nonprofit RIP Medical Debt has emerged as the leader in making buyouts happen, using crowdfunding campaigns, celebrity engagement, and partnerships in the private and public sectors. It connects charitable buyers with hospitals and debt collection companies to arrange the sale and erasure of large bundles of debt.

The buyouts focus on low-income households and those with extreme debt burdens. You can’t sign up to have debt wiped away; you just get notified if you’re one of the lucky ones included in a bundle that’s bought off. In 2020, the U.S. Department of Health and Human Services reviewed this strategy and determined it didn’t violate anti-kickback statutes, which reassured hospitals and collectors that they wouldn’t get in legal trouble partnering with RIP Medical Debt.

Buying a bundle of debt saddling low-income families can be a bargain. Hospitals and collection agencies are typically willing to sell the debt for steep discounts, even pennies on the dollar. That’s a great return on investment for philanthropists looking to make a big social impact.

And it’s not just charities pitching in. Local governments across the country, from Cook County, Illinois, to New Orleans, have been directing sizable public funds toward this cause. New York City recently announced plans to buy off the medical debt for half a million residents, at a cost of US$18 million. That would be the largest public buyout on record, although Los Angeles County may trump New York if it carries out its proposal to spend $24 million to help 810,000 residents erase their debt.

HBO’s John Oliver has collaborated with RIP Medical Debt.

Nationally, RIP Medical Debt has helped clear more than $10 billion in debt over the past decade. That’s a huge number, but a small fraction of the estimated $220 billion in medical debt out there. Ultimately, prevention would be better than cure.

Preventing medical debt is trickier

Medical debt has been a persistent problem over the past decade even after the reforms of the 2010 Affordable Care Act increased insurance coverage and made a dent in debt, especially in states that expanded Medicaid. A recent national survey by the Commonwealth Fund found that 43% of Americans lacked adequate insurance in 2022, which puts them at risk of taking on medical debt.

Unfortunately, it’s incredibly difficult to close coverage gaps in the patchwork American insurance system, which ties eligibility to employment, income, age, family size and location – all things that can change over time. But even in the absence of a total overhaul, there are several policy proposals that could keep the medical debt problem from getting worse.

Medicaid expansion has been shown to reduce uninsurance, underinsurance and medical debt. Unfortunately, insurance gaps are likely to get worse in the coming year, as states unwind their pandemic-era Medicaid rules, leaving millions without coverage. Bolstering Medicaid access in the 10 states that haven’t yet expanded the program could go a long way.

Once patients have a medical bill in hand that they can’t afford, it can be tricky to navigate financial aid and payment options. Some states, like Maryland and California, are ahead of the curve with policies that make it easier for patients to access aid and that rein in the use of liens, lawsuits and other aggressive collections tactics. More states could follow suit.

Another major factor driving underinsurance is rising out-of-pocket costs – like high deductibles – for those with private insurance. This is especially a concern for low-wage workers who live paycheck to paycheck. More than half of large employers believe their employees have concerns about their ability to afford medical care.

Lowering deductibles and out-of-pocket maximums could protect patients from accumulating debt, since it would lower the total amount they could incur in a given time period. But if the current system otherwise stayed the same, then premiums would have to rise to offset the reduction in out-of-pocket payments. Higher premiums would transfer costs across everyone in the insurance pool and make enrolling in insurance unreachable for some – which doesn’t solve the underinsurance problem.

Reducing out-of-pocket liability without inflating premiums would only be possible if the overall cost of health care drops. Fortunately, there’s room to reduce waste. Americans spend more on health care than people in other wealthy countries do, and arguably get less for their money. More than a quarter of health spending is on administrative costs, and the high prices Americans pay don’t necessarily translate into high-value care. That’s why some states like Massachusetts and California are experimenting with cost growth limits.

Momentum toward policy change

The growing number of city and county governments buying off medical debt signals that local leaders view medical debt as a problem worth solving. Congress has passed substantial price transparency laws and prohibited surprise medical billing in recent years. The Consumer Financial Protection Bureau is exploring rule changes for medical debt collections and reporting, and national credit bureaus have voluntarily removed some medical debt from credit reports to limit its impact on people’s approval for loans, leases and jobs.

These recent actions show that leaders at all levels of government want to end medical debt. I think that’s a good sign. After all, recognizing a problem is the first step toward meaningful change.

Erin Duffy receives funding from Arnold Ventures.

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Student Loan Forgiveness Is Robbing Peter To Pay Paul

Student Loan Forgiveness Is Robbing Peter To Pay Paul

Via SchiffGold.com,

With President Biden’s Saving on a Valuable Education (SAVE)…

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Student Loan Forgiveness Is Robbing Peter To Pay Paul

Via SchiffGold.com,

With President Biden’s Saving on a Valuable Education (SAVE) plan set to extend more student loan relief to borrowers this summer, the federal government is pretending it can wave a magic wand to make debts disappear. But the truth of student debt “relief” is that they’re simply shifting the burden to everyone else, robbing Peter to pay Paul and funneling more steam into an inflation pressure cooker that’s already set to burst.

Starting July 1st, new rules go into effect that change the discretionary income requirements for their payment plans from 10% to only 5% for undergraduates, leading to lower payments for millions. Some borrowers will even have their owed balances revert to zero.

What the plan doesn’t describe, predictably, is how that burden will be shifted to the rest of the country by stealing value out of their pockets via new taxes or increased inflation, which still simmering well above levels seen in early 2020 before the Fed printed trillions in Covid “stimulus” money. They’re rewarding students who took out loans they can’t afford and punishing those who paid their way or repaid their loans, attending school while living within their means. And they’re stealing from the entire country to finance it.

Biden actually claims that a continuing Covid “emergency” is what gives him the authority to offer student loan forgiveness to begin with. As with any “temporary” measure that gives state power a pretense to grow, or gives them an excuse to collect more revenue (I’m looking at you, federal income tax), COVID-19 continues to be the gift that keeps on giving for power and revenue-hungry politicians even as the CDC reclassifies the virus as a threat similar to the seasonal flu.

The SAVE plan takes the burden of billions of dollars in owed payments away from students and adds it to a national debt that’s already ballooning to the tune of a mind-boggling trillion dollars every 3 months. If all student loan debt were forgiven, according to the Brookings Institution, it would surpass the cumulative totals for the past 20 years for multiple existing tax credits and welfare programs:

“Forgiving all student debt would be a transfer larger than the amounts the nation has spent over the past 20 years on unemployment insurance, larger than the amount it has spent on the Earned Income Tax Credit, and larger than the amount it has spent on food stamps.”

Ironically enough, adding hundreds of billions to the national debt from Biden’s program is likely to cause the most pain to the very demographics the Biden administration claims to be helping with its plan: poor people, anyone who skipped college entirely or paid their loans back, and other already overly-indebted young adults, whose purchasing power is being rapidly eroded by out-of-control government spending and central bank monetary shenanigans. It effectively transfers even more wealth from the poor to the wealthy, a trend that Covid-era measures have taken to new extremes.

As Ron Paul pointed out in a recent op-ed for the Eurasia Review:

“…these loans will be paid off in part by taxpayers who did not go to college, paid their own way through school, or have already paid off their student loans. Since those with college degrees tend to earn more over time than those without them, this program redistributes wealth from lower to higher income Americans.”

Even some progressives are taking aim at the plan, not because it shifts the debt burden to other Americans, but because it will require cutting welfare or sacrificing other expensive social programs promised by Biden such as universal pre-K. For these critics, the issue isn’t so much that spending and debt are totally out of control, but that they’re being funneled into the wrong issues.

Progressive “solutions” always seem to take the form of slogans like “tax the wealthy,” a feel-good bromide that for lawmakers always seems to translate into increased taxes for the middle and lower-upper class. Meanwhile, the .01% continue to avoid taxes through offshore accounts, money laundering trickery dressed up as philanthropy, and general de facto ownership of the system through channels like political donations and aggressive lobbying.

If new waves of college applicants expect loan forgiveness plans to continue, it also encourages schools to continue raising tuition and motivates prospective students to continue with even more irresponsible borrowing.

This puts pressure on the Fed to keep interest rates lower to help accommodate waves of new student loan applicants from sparkly-eyed young borrowers who figure they’ll never really have to pay the money back.

With the Fed already expected to cut rates this year despite inflation not being properly under control, the loan forgiveness scheme is just one of many factors conspiring to cause inflation to start running hotter again, spiraling out of control, as the entire country is forced to pay the hidden tax of price increases for all their basic needs.

Tyler Durden Wed, 03/13/2024 - 06:30

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Analyst reviews Apple stock price target amid challenges

Here’s what could happen to Apple shares next.

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They said it was bound to happen.

It was Jan. 11, 2024 when software giant Microsoft  (MSFT)  briefly passed Apple  (AAPL)  as the most valuable company in the world.

Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion. 

It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion. 

"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.

The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.

Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue. 

Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.

Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.

“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.

A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.

Future Publishing/Getty Images

Big plans for China

Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.

Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.

Related: Tech News Now: OpenAI says Musk contract 'never existed', Xiaomi's EV, and more

The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.

Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.

Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.

"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads. 

"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.

Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify  (SPOT)  and other music streaming rivals via restrictions on the App Store.

The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.

Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com

The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.

BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market. 

Analyst says Apple selloff 'overdone'

Concurrently, prices for previous models are typically reduced by about $100 with each new release. 

This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.

More Tech Stocks:

Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.

This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China. 

BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.

The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.

On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”

The firm said that investors' growing preference for AI-focused stocks like Nvidia  (NVDA)  has led to a reallocation of funds away from Apple. 

In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.

And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.

“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.

Related: Veteran fund manager picks favorite stocks for 2024

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