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Why This Isn’t 1920…

Why This Isn’t 1920…

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Why This Isn't 1920... Tyler Durden Tue, 08/25/2020 - 09:45

Authored by Lance Roberts via RealInvestmentAdvice.com,

Why this isn’t 1920 has everything to do with starting valuations and future returns. While, generally, I’m not too fond of comparisons between today’s markets and the past, Ed Yardeni made a comparison too bombastic to disregard in his blog:

“We live in interesting, though not unprecedented, times. The Roaring 1920s could be a precedent for the Roaring 2020s.

The good news is that the bad news during the previous precedent was followed by the Roaring 20s. So far, the 2020s has started with the pandemic, but there are plenty of years left for the prosperous 1920s to become a precedent for the current decade.

The 1920s ended with a stock-market melt-up followed by a meltdown. The 2020s may already be seeing a melt-up, begun on March 23.”

Ed’s point was the economic and industrial revolution that occurred following WWI is a precedent for the next decade. The urbanization of populations moving from farms to cities, the rise of manufacturing and technological innovations from Henry Ford and the Model T, to the “bulldozer,” to refrigeration and not to mention the radio.

1920 Was The Bottom

Yes, the ’20s marked the start of a period of marvel and rapid change.

1920 also marked the end of a 20-years of economic destruction. A series of events rocked the turn of the 20th century, which deeply suppressed financial markets. ((Imagine 20-years with negative total real returns.)

  • Panic of 1907

  • Recession in 1910-1911

  • Recession in 1913-1914

  • World War I ran from 1914-1918

  • Economic Depression in 1920-1921

The market “melt-up” was undoubtedly driven by an economic recovery, a surge in innovation, etc. but was supported by historically low valuations. (Current valuations align with 1929 more than 1920.)

While I certainly agree with the fact the companies today are spending a tremendous amount of money on technology and innovation, this is a significant difference.

The innovations in the early 1900s put increasing numbers of people to work. Those increases in jobs led to higher wages and more robust economic growth. Today, companies are spending money on innovation and technology to increase productivity, reduce employment, and suppress wage pressures.

Look at the chart below. The history of the economy and related events shows the difference between then and now. Notice the strong economic growth rates in the 1920-1940 period as compared to today.

Yardeni’s primary point is that history suggests a massive melt-up is coming for the financial markets. There are challenges to this view based on what history tells us about valuations and forward returns.

Valuations Don’t Matter

In the short-term, a period of one year or less, political, fundamental, and economic data has very little influence over the market. Such is especially the case in a late-stage bull market advance where the momentum chase has exceeded the grasp of the risk undertaken by investors.

In other words, in the very short-term, “price is the only thing that matters.” 

Price measures the current “psychology” of the “herd” and is the clearest representation of the behavioral dynamics of the living organism we call “the market.”

But in the long-term, fundamentals are the only thing that matters. Both charts below compare 10- and 20-year forward total real returns to the margin-adjusted CAPE ratio.

Both charts suggest that forward returns over the next one to two decades will be somewhere between 2-3%.

“P/E’s don’t matter anymore because of Central Bank interventions, accounting gimmicks, share buybacks, etc.”

However, as we will discuss in more detail in a moment, they do matter. The chart below compares trailing valuations to forward 5-year returns on stocks. Again, as noted above, the disparity between current CAPE valuations today at 31x versus 5x earnings in 1920 could not be starker. 

There are two crucial things you should take away from the chart above.

  1. Market returns are best when coming from periods of low valuations; and,

  2. Markets have a strong tendency to revert to their average performance over time.

Bogle And Thaler

The late Jack Bogle, the founder of Vanguard, confirmed the same:

“The valuations of stocks are, by my standards, rather high, butmy standards, however, are high.”

[Note: Bogle’s method differs from Wall Street’s. For his price-to-earnings multiple, Bogle uses the past 12 months of reported earnings by corporations, GAAP earnings, which includes ”all of the bad stuff.”]

‘Wall Street will have none of that. They look ahead to the earnings for the next 12 months and we don’t really know what they are so it’s a little gamble.’

[Note: Bogle also noted that Wall Street analysts look at operating earnings, “earnings without all that bad stuff,” to come up with a lower price-to-earnings multiple.]

“If you believe the way we look at it, much more realistically I think, the P/E is relatively high. I believe strongly that [investors] should be realizing valuations are fairly full, and if they are nervous they could easily sell off a portion of their stocks.”

Richard Thaler, the famous University of Chicago professor who won the Nobel Prize in economics, also stated:

We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping. I admit to not understanding it.

I don’t know about you, but I’m nervous, and it seems like when investors are nervous, they’re prone to being spooked. Nothing seems to spook the market.”

Wash, Rinse, & Repeat

As noted, the flood of liquidity, and accommodative actions, from global Central Banks, has lulled investors into a state of complacency rarely seen historically. However, while market analysts continue to come up with a variety of rationalizations to justify high valuations, none of them hold up under real scrutiny. The problem is the Central Bank interventions boost asset prices in the short-term; in the long-term, there is an inherently negative impact on economic growth. As such, it leads to the repetitive cycle of monetary policy.

  1. Using monetary policy to drag forward future consumption leaves a larger void in the future that must be continuously refilled.

  2. Monetary policy does not create self-sustaining economic growth and therefore requires ever-larger amounts of monetary policy to maintain the same level of activity.

  3. The filling of the “gap” between fundamentals and reality leads to consumer contraction and, ultimately, a recession as economic activity recedes.

  4. Job losses rise, wealth effect diminishes, and real wealth is destroyed. 

  5. The middle class shrinks further.

  6. Central banks act to provide more liquidity to offset recessionary drag and restart economic growth by dragging forward future consumption. 

  7. Wash, Rinse, Repeat.

If you don’t believe me, here is the evidence.

The stock market has returned more than 130% since 2007 peak, which is more than 12x the growth in corporate sales and 3.6x more than GDP.

Tobin’s Q

As noted, valuations, by their very nature, are HORRIBLE predictors of 12-month returns should not be used in any strategy that has such a focus. However, in the longer term, valuations are strong predictors of expected returns.

In the following series of charts, I am using forward 10-year returns just for consistency as some of the data sets utilized don’t yet have enough history to show 20-years of forward returns.

The purpose here is simple. Based on a variety of measures, is the valuation/return ratio still valid, OR, is this time different?

Tobin’s Q-ratio measures the market value of a company’s assets divided by its replacement costs. The higher the ratio, the lower the future returns.

Just as a comparison, I have added Shiller’s CAPE-10. Not surprisingly, the two measures not only have an extremely high correlation, but forward return outcomes remain the same.

Importantly, notice that when both measures are low, as in 1920, 1950, 1980, and even 2009, forward returns for investors were strong. Forward returns from high valuations have not been so beneficial. 

Rates, Sales & Buffett

One of the arguments has been that higher valuations are okay because interest rates are so low. Okay, let’s take the smoothed P/E ratio (CAPE-10 above) and compare it to the 10-year average of interest rates going back to 1900.

The analysis that low rates justify higher valuations does not withstand the test of history.

But since earnings are manipulated through a variety of accounting gimmicks, we can look at “sales” or “revenue,” which occurs at the top-line of the income statement. Not surprisingly, the higher the level of price-to-sales, the lower the forward returns have been. You may also want to notice the current price-to-sales is pushing the highest level in history as well.

Even Warren Buffett’s favorite indicator, market cap to GDP, clearly suggests that investments made today will have a rather lackluster return over the next decade.

If we invert the P/E ratio, and look at earnings/price, or more commonly known as the “earnings yield,” the message remains the same.

Conclusion

No matter how many valuation measures you use, the message remains the same. From current valuation levels, the expected rate of return for investors over the next decade will be low.

There is a large community of individuals who suggest differently, as they make a case as to why this “bull market” can continue for years longer. Unfortunately, any measure of valuation does not support that claim.

Such does not mean that markets will produce single-digit rates of return each year for the next decade. The reality is there will be some great years to be invested over that period. There will likely also be a couple of tough years in between.

That is the nature of investing. It is just part of the full-market cycle.

While I certainly hope Mr. Yardeni is correct in his thesis, valuations suggest differently.

The economic cycle, demographics, debt, and deficit, also suggest his optimistic view is unlikely. 

Mr. Yardeni is correct on the point he made with his quote from Mark Twain:

“History doesn’t repeat itself, but it often rhymes.”

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Government

August Monthly

Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies:  the US dollar, Swiss franc, and Japanese yen, strengthened..

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Fear that the spread of the Delta mutation of the covid would disrupt the global economy spurred the unwinding of risk-on positions. Interest rates fell, and the traditional funding currencies:  the US dollar, Swiss franc, and Japanese yen, strengthened most in July. While major US indices set new record highs, as did Europe's Dow Jones Stoxx 600, the MSCI Emerging Markets Equity Index fell 7%.

The preliminary July PMI reports were below expectations in the US, UK, and France.  Japan's composite PMI has been contracting since February 2020.  There has been some re-introduction of social restrictions in parts of Europe.  The UK's "Freedom Day" (July 19), when mask requirements and social restrictions were supposed to be dropped, turned into a caricature as the Prime Minister and Health Minister were in self-quarantine due to exposure, and the number of cases reached the highest level in 5-6 months. 

Given the large number of people in the world that remain unvaccinated, the challenge is that the virus will continue to mutate.  Moreover, even in high-income countries, where vaccines are readily available, and stockpiles exist,  a  substantial minority refuse to be inoculated. This is encouraging the use of more forceful incentives that deny the non-vaccinated access to some social activity in parts of the US and Europe.  In the US, the vaccines have been approved for emergency use only, and broader approval by the FDA could help ease some of the vaccine hesitancy.  Yet, rushing the process would be self-defeating.  An announcement still seems to be at least a couple of months away.  

In some countries, the surge in the virus even where not leading to hospitalizations and fatalities, maybe tempering activity and postponing more "normalization" like returning to offices.   The increase in the contagion has also prompted several companies to postpone plans to have employees return to offices. In other countries, like Australia, the virus and social restrictions are having a more dramatic economic impact.  Its preliminary July PMI crashed to 45.2 from 56.7, the lowest since last May.  Although many countries in East Asia seemed to do well with the initial wave, they have been hard hit by the new mutations.  For some, the recovery already had appeared to be in advanced stages.  

Floods in China, India, Germany, and Belgium add to the economic angst.    A freeze in Brazil sent coffee prices percolating higher.  Wildfires in Canada stopped the downside correction in lumber prices.  While rebuilding is stimulative, in the first instance, the natural disasters could be inflationary as transportation and distribution networks are impacted. 

The market reacted by pushing down nominal and real interest rates.  In late July, the US 10-year inflation-protected note yield (real rate) fell to a record low near minus 1.13%  Ten-year benchmark yields in the US, Europe, Australia, and China were at 4-5 month lows.  Expectations for rate hikes by high-income countries eased, and Beijing surprised investors by cutting reserve requirements by 50 bp (freed up ~$150 bln of liquidity).   

Still, other central banks, like Russia who hiked rates by 100 bp in late July, are pushing forward.  In Latin America, Brazil, Mexico, and Chile are likely candidates for rate hikes in August.  The market anticipates additional rates hikes from the Czech Republic and Hungary.  On the other hand, Turkey's central bank meets under much political pressure to cut rates.  Inflation is not cooperating, and it reached 17.5% in June,  a new two-year high.  Yet, the Turkish lira downside momentum eased, and this alone, in the face of a stronger dollar, meant it was the best performing emerging market currency last month, up about 3.0%.  Its 12% loss year-to-date still makes it the second-worst performing emerging market currency so far this year, behind the Argentine peso's nearly 13% decline.  

The Federal Reserve does not meet in August, but the Jackson Hole symposium (August 26-28) may offer a window into official thinking about the pace and composition of its bond purchases.  Under that scenario, a more formal statement would be provided at the end of the September FOMC meeting (September 21-22). Chair Powell has pledged to give ample notice about its plans to taper.  This means that the initial timing of the beginning of the tapering may be vague by necessity.  Many expect the Fed to begin reducing its bond purchases either later this year or early next year.  

The debt ceiling debate may add another wrinkle.  The debt ceiling waiver expired at the end of July.  There are several different ways that Treasury can buy time.  There are many moving parts, and it is hard to know exactly when Secretary Yellen would run out of maneuvers, but she probably has around two months.  In the past, the uncertainty was reflected in some T-bill sales.  Recall it was the debate over the debt ceiling (the government has already made the commitments or spent the funds and now has to pay for them) that prompted S&P to remove its AAA rating for the US in 2011. 

Meanwhile, Beijing is waging an internal battle to retain control in the technology and payments space.  It has also stepped up its antitrust actions and moved to make it more difficult for internet companies to have IPOs abroad. At the same time, the US threatens to de-list foreign (Chinese) companies if they refuse to allow US regulators to review their financial audits.  This is more than quitting before getting fired, though at the end of July the US announced that concerns over risk disclosures have prompt it to freeze applications for Chinese IPOs and the sale of other securities.  Its efforts to turn the private schools into non-for-profits are driven by Beijing's domestic considerations, but foreign investors--hedge funds, a couple US state pension funds, and provincial pensions in Canada appear to have been collateral damage.  Even the Monetary Authority of Singapore had exposure.

The jump in Chinese yields and the drop in equities that pushed the CSI 300 (an index of large companies listed on the Shanghai and Shenzhen exchanges) 21% below the February peak prompted some remedial measures by officials.  They succeeded in steadying the bonds and stock markets, and the yuan recovered from three-month lows as July wound down. However, both the disruption and the salve, the selling of industrial metals, coal, and oil from its strategic reserves, demonstrate the activist state that gives foreign investors reservations about increasing allocations to China.  To draw foreign capital, officials may be tempted to engineer or facility a strong recovery in shares and the yuan.  

Beijing is also meeting resistance from abroad.  Its aggressiveness in the region, including the aerial harassment of Taiwan and rejection of the Arbitration Tribunal at the Hague regarding the United Nations Convention on the Law of the Sea (that pushed back against Chinese claims in the South and East China Seas). Over the past few weeks, the situation has escalated. The UK announced it will station two naval vessels in the area.  Japan has promised to defend Taiwan should it be attacked by China.  The US has not been that unequivocal.   The EU has been emboldened.  Latvia became the first EU member to open a representative office of "Taiwan" instead of Taipei.  

Many wargame scenarios are premised on China attacking Taiwan, but this does not seem to be the most likely scenario. Top US military officials have testified before Congress that Beijing wants to have the ability to invade and hold Taiwan within six years based on comments from President Xi to the People's Liberation Army.  Yet, if China senses that the status of Taiwan is truly changing, it could move against the Pratas Island, which is off the east coast of China and the south tip of Taiwan.  It is closer to Hong Kong than Taiwan.  It is an uninhabited atoll with a garrison.  Taking this island would send a signal about its determination, with the costs and risks of invading Taiwan. It is true to the ancient Chinese idiom about killing a chicken scares the monkeys.  

Bannockburn's World Currency Index, a GDP-weighted basket of the top dozen economies, rose fractionally after falling 1% in June.  The two largest components after the dollar are the euro and yuan.  The former slipped by was virtually flat near $1.1860 and the latter softened by less than 0.1 %.  The yen, with about a 7.3% weighting in the basket, was the strongest, gaining about 1.25% against the US dollar.  Sterling was almost eked a 0.5% gain.  The Indian rupee slipped 0.1%, while Brazil's real was the weakest currency in the index, falling by about 4.6% in July.   

The BWCI rose by 6.5% in the last nine months of 2020 after falling by 3.2% in Q1 20 as the pandemic struck and structural dollar shorts and safe-haven flows favored the dollar.  It fell by 1.5% in Q1 21 as if correcting the previous advance.  It rose by 1.1% in Q1.  More so than bilateral exchange rates, the BWCI gives the impression that broadly speaking the dollar's losses from last year are being consolidated more than reversed. 

Dollar:  The greenback's two-month uptrend stalled in the second half of July, sending the momentum traders and late longs to the sidelines. The dollar's pullback had already begun before the FOMC meeting at which the Fed lent support to priors about a tapering announcement in the coming months.  The next opportunity is in late August. The weaker dollar tone that we expect to carry into August could create the conditions that make a short-covering bounce ahead of the Jackson Hole symposium more likely.  Some assistance,  like the moratorium on evictions, ended on July 31, and others, like the federal emergency unemployment compensation (where states continue to participate), are finishing in early September. Meanwhile, the Biden administration appears to see some of its infrastructure initiative approved in a bipartisan way and the other part through a reconciliation mechanism that it can do if there is unanimous support from the Senate Democrats.  Inflation remains elevated, and Treasury Secretary Yellen and Federal Reserve Chair Powell warned it may remain so for several more months but still expect the pressure to subside.  The price components of the PMI have eased in the last two reports. There appears to have been some normalization in used car inventories that also reduce the pressure emanating from the one item alone that has accounted for about a third of the monthly increase of late.  

Euro:   The leg lower that began in late May from around $1.2265 extended more than we had expected and did not find support until it approached $1.1750 in the second half of July.  A trough appears to have been forged, and the euro finished near the month's highs.  Technical indicators favor a further recovery in August.  Overcoming the band of resistance in the $1.1950-$1.2000 shift the focus back to the highs.  The low for longer stance by the ECB may be bullish for European stocks and bonds.  The Dow Jones Stoxx 600 reached new record highs in late July.   Bond prices are near their highest levels since February-March.  The IMF raised its 2021 growth forecast for the euro area to 4.6%from the 4.3% projection in April and 4.3% next year from 3.8%.  The economy seemed to be accelerating in Q3, but the contagion and new social restrictions may slow the momentum.  Inflation is elevated about the ECB's new symmetrical 2% inflation target, but it pre-emptively indicated it would resist the temptation of prematurely tightening financial conditions.  The debate at the ECB does not seem about near-term policy as much as the commitment and thresholds for future action.  

 

(July 30,  indicative closing prices, previous in parentheses)

 

Spot: $1.1870 ($1.1860)

Median Bloomberg One-month Forecast $1.1885 ($1.1950) 

One-month forward  $1.1880 ($1.1865)    One-month implied vol  5.3%  (5.6%)    

 

 

Japanese Yen: The correlation of the exchange rate with the 10-year US yield is at its highest level in a little more than a year (~0.65, 60-day rolling correlation at the level of differences).  The correlation of equities (S&P 500) and the exchange rate is in the unusual situation of being inverse since early this year.  In early July, it was the most inverse (~-0.34) in nine years but recovered to finish the month almost flat. The yen rose by about 1.4% in July, offsetting the June decline of the same magnitude. Its 5.7% loss year-to-date is the most among the major currencies and the second weakest in the region after the Thai Baht's nearly 9% loss. The JPY110.60-JPY110.70 represents a near-term cap. The JPY109.00 area should offer support, and a break would target JPY108.25-JPY108.50.   The extension of social restrictions in the face of rising covid cases is delaying the anticipated second-half recovery.  The preliminary composite PMI fell to a six-month low in July of 47.7.  

 

Spot: JPY109.85 (JPY111.10)      

Median Bloomberg One-month Forecast JPY109.85 (JPY110.70)     

One-month forward JPY109.80 (JPY111.05)    One-month implied vol  5.4% (5.4%)  

 

 

British Pound:  Sterling reversed lower after recording a three-year high on June 1 near $1.4250 and did not look back.  It dipped briefly below $1.38 for the first time since mid-April on the back of the hawkish Fed on June 16 to finish July at new highs for the month and above the downtrend line off the early June highs.   A convincing move back above $1.40 would confirm a low is in place and a resumption of the bull move, for which we target $1.4350-$1.4375 in Q4.  The postponement of the economy-wide re-opening until the middle of July, and a central bank looking past the uptick in CPI above the 2% medium-term target, weighed on sentiment.  The central bank will update its economic forecasts in August, and both growth and inflation projections likely will be raised. The furlough program ends in September, and it may take a few months for a clear picture of the labor market to emerge.  Nevertheless, the market has begun pricing in a rate hike for H1 22.  

  

Spot: $1.3905 ($1.3830)   

Median Bloomberg One-month Forecast $1.3930 ($1.3930) 

One-month forward $1.3910 ($1.3835)   One-month implied vol 6.6% (6.5%)

  

 

Canadian Dollar:  The Canadian dollar reached its best level in six years in early June (~$0.8333 or CAD1.20) but has trended lower amid profit-taking and the broad gains in the US dollar.  The usual drivers of the exchange rate:  risk appetites, commodities, and rate differentials were not helpful guides recently.  Canada has become among the most vaccinated countries, and the central bank was sufficiently confident in the economic outlook to continue to slow its bond purchases at the July meeting despite losing full-time positions each month in Q2. Speculators in the futures market have slashed the net long position from nearly 50k contracts (each CAD100k) to less than 13k contracts in late July.  The downside correction in the Canadian dollar appears to have largely run its course, and we anticipate a better August after the heavier performance in July.  Our initial target is around CAD1.2250-CAD1.2300.  

 

Spot: CAD1.2475 (CAD 1.2400) 

Median Bloomberg One-month Forecast  CAD1.2435 (CAD1.2325)

One-month forward CAD1.2480 (CAD1.2405)    One-month implied vol  6.8%  (6.5%) 

 

 

Australian Dollar:  Since peaking in late February slightly above $0.8000, the Australian dollar has trended lower and by in late July briefly dipped below $0.7300, posting a nearly 9% loss over the past five months. The 50-day moving average ~$0.7570) fell below the 200-day moving average (~$0.7600) for the first time since June 2020, illustrating the downtrend after the strong recovery from the low near $0.5500 when the pandemic first stuck.  The combination of a low vaccination rate and the highly contagious Delta variant forced new extended lockdowns for Sydney and social restrictions that have sapped the economy's strength.  It will likely slow the central bank's exit from the extraordinary emergency measures.  Indeed, the Reserve Bank of Australia is likely to boost its weekly bond-buying from A$5 bln to at least A$6 bln.  A convincing break of $0.7300 could open the door for a return toward $0.7000, but we suspect the five-month downtrend is over and anticipate a recovery toward $0.7550 over the next several weeks.  

 

Spot:  $0.7345 ($0.7495)       

Median Bloomberg One-Month Forecast $0.7425 ($0.7610)     

One-month forward  $0.7350 ($0.7500)     One-month implied vol 8.9  (8.5%)   

 

 

Mexican Peso:  The dollar chopped higher against the peso in July and reached a high near MXN20.25 on July 21. It trended lower and, in late July, fell below the seven-week trendline support near MXN19.90.  After finishing June less than 0.1% weaker, the greenback lost about 0.4% against the peso in July, which was the fifth consecutive month without a gain.  The other notable LATAM currencies were the weakest three emerging market currencies (Chilean peso ~-4.1%, Colombian peso ~-4%, and the Brazilian real ~-3.8%).  If the upper end of the dollar's range has held,  a break of MXN19.80 may warn a test on the lower end of the range (~MXN19.50-MXN19.60).  The 5.75% year-over-year CPI for the first half of July and the highest core inflation for early July in more than 20-years keep expectations for another rate hike intact when Banxico meets on August 12.  The market has another hike priced in for the September 30 meeting as well.  The dispute with the US over measuring domestic content for auto production under USMCA could undermine Mexico's role in the continental division of labor, but instead, producers in Mexico may choose to pay the WTO auto tariff standard of 2.5%.  The IMF's latest economic forecasts revised the projection for Mexican growth this year to 6.3% from the April projection of 5%.  

 

Spot: MXN19.87 (MXN19.95)  

Median Bloomberg One-Month Forecast  MXN19.94 (MXN19.97)  

One-month forward  MXN19.95 (MXN20.02)     One-month implied vol 10.5% (10.7%)

  

 

Chinese Yuan: The dollar spent most of July within the trading range that had emerged in late June found roughly between CNY6.45 and CNY6.4950. The range was maintained even after the PBOC unexpectedly cut reserve requirements by 50 bp (announced July 9). However, Beijing's more aggressive enforcement of antitrust, discouragement IPOs abroad, making private education non-for-profit without foreign investment triggered sales of Chinese shares. It helped lift the dollar in late July to around CNY6.5150, its highest level in three months and just shy of the 200-day moving average.  The pursuit of domestic policy objectives appears to be putting at risk strategic goals.  A drying up of capital inflows from spooked foreign investors may have slow efforts to liberalize capital outflows that could eventually lead to making the yuan convertible.  At the same time, China's actions give a timely example of what holds the yuan back from a significant role in the world economy and why a technology solution (e.g., digital yuan) will not suffice.  As the dollar briefly traded above the upper end of its recent range in July, the risk is that it slips through the lower-end range, which could spur a move toward CNY6.40.  

 

Spot: CNY6.4615 (CNY6.4570)

Median Bloomberg One-month Forecast  CNY6.4555 (CNY6.4360) 

One-month forward CNY6.4780 (CNY6.4815)    One-month implied vol  4.0% (4.7%)

 

Disclaimer 



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Economics

Black women face a persistent pay gap, including in essential occupations during the pandemic

This year, Black Women’s Equal Pay Day arrives 10 days earlier than in 2020 (August 13). If this seems inconsistent with current realities, it is.

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This year, Black Women’s Equal Pay Day arrives 10 days earlier than in 2020 (August 13). If this seems inconsistent with current realities, it is. That’s because the August 3, 2021 date is based on the comparison of median annual earnings for full-time, year-round workers reported in the 2020 Annual Social and Economic Supplement of the Current Population Survey (CPS). Since the reference year in that survey is the previous year—2019—the earlier date is more a statement about pay equity during the pre-COVID period of historically low unemployment than the impact of the pandemic. 

Based on hourly wages available for 2020, the pandemic’s effect on pay inequality in 2020 is challenging to interpret since job losses were concentrated among low-wage occupations, which has the effect of skewing the distribution toward a higher average that is less representative of the workforce as a whole. These lower-paying jobs were concentrated in leisure and hospitality and education and health services—industries that employ a disproportionate share of women.

In fact, the pandemic’s effect on pay equity during 2020 is less about a relative difference in dollars per hour and more a matter of a disproportionate share of women—and Black women in particular—becoming unemployed and thus wageless. Nearly 1 in 5 Black women (18.3%) lost their jobs between February 2020 and April 2020, compared with 13.2% of white men (see figure below). As of June 2021, Black women’s employment was still 5.1 percentage points below February 2020 levels, while white men were down 3.7 percentage points.

The fact that we are talking about this every year reflects the stubborn, structural nature of pay inequities which is manifold. Occupational segregation limits Black women’s access to higher-paying occupations. But, even when employed in the same occupation, pay discrimination results in lower earnings for women relative to men, including among essential workers as we show below. The lack of a national paid leave policy means that women are more likely to take unpaid time out of the workforce and have breaks in their work and earnings history. The combination of these factors means that, on average, women start their careers with a pay gap that they are never able to close.

The infographics below take a closer look at average hourly earnings of Black women and non-Hispanic white men employed in major occupations at the center of national efforts to address the public health and economic effects of COVID-19, based on our previous analysis of CPS microdata from 2014-2019. These occupations include front-line workers in health care and essential businesses like grocery stores, those who have borne the brunt of job losses in the restaurant industry, and teachers and child care workers. As these figures show, equal pay for Black women workers is long overdue.

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Government

If Hospitalizations Lead Fatalities: Prospects for Florida

With large shares of populations vaccinated, case counts are no longer a good predictor of fatalities arising from Covid-19. Hospitalization might prove better (and ICU hospitalizations even better). The statistics do not augur well, particularly for…

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With large shares of populations vaccinated, case counts are no longer a good predictor of fatalities arising from Covid-19. Hospitalization might prove better (and ICU hospitalizations even better). The statistics do not augur well, particularly for Florida.

Source: GS CovidTracker, August 2, 2021.

Obviously, Florida remains a big problem when you consider its 21 million population, and that it accounts for 5.1% of US GDP (as of 2019Q4). For comparison, California, as the economically largest state, accounted 14.8%.

Here is IHME’s latest fatalities forecasts, from July 30.

Source: IHME, July 30th forecast.

The IHME forecast presented above was not include in the July 26th CDC ensemble forecast. At the time of the CDC ensemble forecast compilation, IHME’s forecast was above the ensemble forecast, but not at the very top.

Source: CDC, July 26 ensemble forecast.

Since it’s hard to see, here’s a detail.

Source: CDC, July 26 ensemble forecast.

The IHME forecast available as of 7/26 was for about 1000 fatalities per week, compared to the ensemble forecast of a bit below 600. The IHME forecast was at the top of the 95% band. A new ensemble forecast should be released on 8/4.

It’s clear why Mr. De Santis wants to avoid the specter of Covid-19. The late summer and winter waves clearly slowed Florida’s recovery. Rising deaths might spur — if not additional public health measures such as mask mandates that the governor has banned — then increasing aversion by those who perceive risks associated with going about business as usual.

Figure 1: Florida Reported deaths due to Covid-19 (black, left log scale), nonfarm payroll employment, in 000’s, s.a. (teal, right log scale).  NBER defined recession dates shaded gray. July observation for deaths is IHME forecast.  Source: IHME, BLS, NBER, and author’s calculations.

I expect risk aversion to induce a reduction in consumption of high contact services. If mask mandates and other public health measures were imposed, that might lead to a greater short term reduction in economic output (although in the long run, total hours might be higher, as in the Eichenbaum pandemic/output model).

Any lessons to be gleaned from the past episodes? The employment losses thus far can be decomposed into two groups — the high contact services associated with leisure and hospitality services, and everything else covered in nonfarm payroll employment.

Figure 2: Florida employment relative to 2020M02 in leisure and hospitality services (blue bars), and in rest-of-nonfarm payroll employment (tan bars), in 000’s, s.a.  Source: BLS, and author’s calculations.

You can see that leisure and hospitality employment recovery stalls out in July-August 2020, and January 2021. If the rise in deaths occurs as forecasted in Figure 1, then

All this takes place in the context of already slowing growth, as far as we can tell (these indicators run only through June).

Figure 3: Florida Coincident index (black), real GDP (purple), and nonfarm payroll employment (teal), all in logs, 2019Q4=0. NBER defined recession dates shaded gray. Quarterly data for coincident index, employment converted from monthly to quarterly by averaging. Source: Philadelphia Fed, BEA, BLS, NBER, and author’s calculations.

 

 

 

 

 

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