Many Pictures Tell a Story - The Fed

This week will be another one focused on charts and graphs that caught my attention. The emphasis will be on the story of the Fed remaining very dovish in spite of what appears to be some pockets of economic strength (e.g. housing, commodities, semiconductors), higher long-term rates, enhanced inflation expectations, and a very strong stock market valuations, particularly for technology companies. The Fed met last week and this is what Chairman Jay Powell said.

Fed Chair Jay Powell said the Federal Reserve will continue buying bonds until “substantial” progress is made in economic growth.

Powell Laments Weak Demand, America Still Waits on Congress

US Daily Coronavirus Confirmed Deaths Feb - Dec 2020

And until herd immunity occurs, the Fed cannot do all of the heavy lifting so it’s vitally important that Congress act to continue to shore up incomes through more fiscal stimulus.

Total Immunity Estimates Herd Immunity Jan 2021-Jan 2022

Remote work and the inability or lack of desire for people to congregate in close quarters and in large numbers has decimated the office economy, particularly in urban areas.

Change in visits to U.S. workplaces since the start of the year April 2020 - December 2020

Businesses serving workers and people congregating together have been hit hard, as well as urban apartments as there is less desire to live in cities and pay high rents and not have the associated advantages.

NYC Small Business Revenue by Borough 1/10/20 - 11/5/20
Daily Asking Apartment Rents per SF Indexed Jan 2020 - Nov 2020

The home economy has clearly benefited relative to the office/social gathering economy.

Sales at Grocery Sales at Restaurants Jan 18 to July 20 Dec 17, 2020

The bifurcated economy of clear winners and losers has led to a still-high percentage of people losing income.

Income Losses Remain Elevated 4/2/ 20 - 12/5/20

Most of the aggregate earnings loss among the bottom third of workers has come from lost jobs Jan - Nov 2020

And I think this is the money shot in terms of what is ultimately influencing Jay Powell and his monetary strategy and why he is imploring Congress to act.

Booster Shot widespread delivery of a coronavirus vaccine by the third quarter could return U.S. gross domestic product to it's pre-pandemic level by the end of 2021

And this trend will probably continue to lead to this.

What interest rate Average G10 central bank policy rate is below zero 2016 - 2020

Which has led to this.

Easy as you go - Financial conditions loosest on record 1990 - 2019

As a result of very loose financial conditions, risk assets have soared, especially for a monetary alternative like Bitcoin which appeals to investors who believe that the dollar will erode in value and inflation will increase as the Fed remains highly accommodative for many years to come.

Bitcoin USD January 2020 - December 2020

One of the big winners is of course housing due to record low mortgage rates and more people working from home. Unlike the last recession, housing is a major source of growth.

Single-family Starts in Current vs Previous Cycle v-Shape Recovery & Move in Single-family Starts

Economic rewards have flown too high growth, low capital intensity technology/platform companies while much of the rest of the economy has produced negative returns.

Mean Reversion Ahead 2018 - 2021

This has translated to a stock market that has decoupled from industrial output.

Industrial Production Non-Energy, Ex-Autos & Parts vs. S&P 500

Valuations are now very stretched on a historical basis, although interest rates are also very low.

Figure 12 S&P 500 through-the cycle valuation

This doesn’t look so good for future stock market returns, although since tech has dramatically outperformed, there could be compelling opportunities in the more beaten-down value category.

Figure 13 S&P 500 ten-year returns and valuation


One comment on “Many Pictures Tell a Story - The Fed
  1. Bill Williams says:

    GARY, great info to plan 2021 business and investing.
    Bill Williams

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