Tag: george yacik

Are We Ready For A Second Wave?

Posted on by George Yacik

As we know well by now, the financial markets have recovered nicely from the initial wave of the coronavirus, at least until recently. After plunging by a third from its February 19 all-time high through its March 23 bottom, the S&P 500 has rebounded sharply, although it still remains about 10% below its record high. NASDAQ, however, has won back all of what it lost and now is solidly in the green for the year. Bond yields, meanwhile, have largely settled into a relatively narrow range, all of which signals that investors are fairly positive about the future.

Certainly, the most recent economic news has borne out that optimism. Retail sales jumped a record 17.7% in May after plunging 14.7% in April, the first increase in fourth months. Moreover, May sales in dollars were only 7.7% below where they were in February before the worst effects of the virus hit. In other words, after an extraordinary dip, spending is already close to where it was as more stores and restaurants reopen.

Elsewhere, the Conference Board’s index rose a better than expected 2.8% in May after falling 6.1% in April. Sales of newly-built homes jumped 16.6% while the National Association of Home Builders’ confidence index surged 21 points in June to 58. Sales of existing-home sales, by far the largest category, dropped nearly 10% in May, but that “reflected contract signings in March and April, during the strictest times of the pandemic lockdown,” the National Association of Realtors said, adding that “home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.”

While all of that is undoubtedly good news, is it sustainable? Right now, two main questions are facing the economy and the financial markets: How bad will a dreaded “second wave” of the virus be on both the nation’s health and economy and what happens now that the U.S. government’s stimulus programs have started to run out? Continue reading "Are We Ready For A Second Wave?" →

Is The V-Shaped Recovery Back On?

Posted on by George Yacik

Several months, or was it years ago; when the coronavirus began its spread across the U.S., several bullish economists were predicting a “V-shaped” recovery, meaning the expected economic recession would be deep but short-lived. The subsequent bounce-back would be extremely strong so that the 2020 recession would be a mere blip on the chart. That consensus opinion was quickly replaced by talk of a “U-shaped” or even an “L-shaped” recovery, with the economy reeling for months if not years, as the number of deaths escalated along with the unemployment filings as the U.S. economy remained shut down.

Now it’s starting to appear that maybe the doomsayers were a bit too hasty in their gloomy prognostications. While it’s far too early to predict how things will eventually play out, the V-shaped recovery may actually be a more likely outcome than the more pessimistic scenarios. Certainly, the most recent economic reports, from both the government and the private sector, are already showing a nascent rebound even as many key states – like New York, California, and Illinois – remain largely in lockdown mode and only recently started to open up. At the same time, some previous forecasts are being shown to have been overly bearish.

Probably the biggest surprise to the upside was last Friday’s May employment report, which showed the economy adding 2.5 million jobs, a far cry from the consensus forecast of a loss of 7.7 million, and April’s loss of nearly 21 million jobs. “These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it,” the Labor Department said. Continue reading "Is The V-Shaped Recovery Back On?" →

A New Lease On Life

Posted on by George Yacik

“Buy land, they’re not making it anymore,” Mark Twain once said. That investment advice doesn’t look too smart lately, but then again, Twain wasn’t known for his financial acumen.

Commercial real estate used to be a great investment. You didn’t hit any home runs, but you got a dependable income stream and fair price appreciation that almost never lost money. Real estate and REITs didn’t correlate with stocks or bonds, so you also got a good diversification.

How does that look today?

Last week the Federal Reserve warned in its May 2020 Financial Stability Report that “asset prices remain vulnerable to significant price declines should the pandemic take an unexpected course, the economic fallout prove more adverse, or financial system strains reemerge.” It highlighted commercial real estate as one asset that was particularly vulnerable.

“Prices of commercial properties and farmland were highly elevated relative to their income streams on the eve of the pandemic, suggesting that their prices could fall notably,” the Fed said.
That warning shouldn’t come as a major surprise for those who have been paying attention for the past three months. Most shopping malls are closed. Other than supermarkets, Walmart, Target, and dollar stores, most retailers are closed. JC Penney, Neiman Marcus, and J Crew have already filed for bankruptcy, and likely more will follow them. Restaurants are closed except for takeout. Many of these establishments may never reopen. Millions of people are working from home, but likely a high percentage of them will never go back to the office. Continue reading "A New Lease On Life" →

Disconnect? What Disconnect?

Posted on by George Yacik

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?" →

This Time It's For Real

Posted on by George Yacik

A little over a year ago, I wrote a column about Modern Monetary Theory. Don't look now, but it's no longer a theory, it's reality. Depending on how it eventually turns out, we'll find out if the economic cure to the coronavirus was worse than the disease.

In simple terms, MMT adherents believe that countries that issue and back their currencies, like the U.S., can print as much money as they need and still stay solvent. (Compare the eurozone, where the European Central Bank issues the currency, not the individual member countries). And without creating runaway inflation.

You can try this at home, too, you know, although it doesn't work nearly as well for individuals as it does for governments. Pay off one of your credit card balances with a balance transfer from another bank, then keep repeating the process. This will work for a while until the merry-go-round eventually stops when the banks stop lending you money, and you'll have to either pay everything you owe or wind up in bankruptcy court.

Of course, it's different for the government, which is one of MMT's main arguments, since it can just print more money when it runs out, which means the merry-go-round keeps going, even if investors stop buying Treasury bonds. If that happens, which it never has, the Federal Reserve, a separate but "independent" arm of the government, will pick up the slack.

Neat, huh? Continue reading "This Time It's For Real" →