What To Expect From A Biden (And Bernie) Fed

Now that Judy Shelton has passed the first big hurdle to be confirmed as a member of the Fed – passing muster with the Senate Banking Committee by a 13-12 party-line vote – let’s assume that the full Senate will confirm her. While it’s not a slam dunk, Republicans do control the chamber by a 53-47 majority, so even if Mitt Romney votes against her, as he says he will, she’s probably in.

Despite what her many detractors believe – that she has the power all by herself to return the U.S. to the gold standard and direct the Fed to do whatever President Trump wants – that probably won’t happen unless Fed chair Jerome Powell resigns or Trump figures out a way to remove him without triggering a massive global financial panic safely. Even then, it’s a fantasy. So Shelton is probably going to be confirmed, and nobody is going to die as a result.

So let’s turn instead to what a Fed under a President Biden might look like. Luckily, the former vice president has publicly revealed what he has in mind, in a short and concise 110-page press release entitled, “Combating the Climate Crisis and Pursuing Environmental Justice,” the product of a “unity task force” set up by Biden, and former presidential candidate Bernie Sanders, whom I guess wrote most of it. I’ll save you the trouble of pouring through it unless you’re feeling masochistic.

Granted, there’s only a little (fortunately) in the tome that deals with the Fed. Indeed, through the magic of word search, I found that there are only eight references to “Federal Reserve” in the document, but what’s there is enlightening about their thinking. No, there’s nothing in there about Fed monetary policy, I suppose to respect the Fed’s independence. Continue reading "What To Expect From A Biden (And Bernie) Fed"

Why It's Different This Time

The other day I completed a survey for my brokerage company, and one of the questions they asked was, "Is the current crisis worse than the 2008 financial crisis?" A couple of months ago, when our state and region were mostly in lockdown, I would have answered with a resounding and unhesitating, "Yes!"

Now I'm not so sure. Admittedly, I don't live in one of those states where the virus is now spiking, and things here are close to back to normal, so maybe my vantage point is too subjective. Nevertheless, I would have to say this crisis is far from as bad as the previous one, which may explain why the stock market has behaved the way it has, namely prices are off only a little from where they began the crisis, with only that short, sharp drop in February and March.

One reason, of course, is that the economy, as a whole, has rebounded strongly over the past couple of months as most of the country has reopened, at least to some degree, even as millions of people continue to work remotely. But the main reason is that that the lessons we learned from 2008 have been brought to bear in this crisis, namely that the government and the Federal Reserve have thrown much more money and resources at the problem than they did 12 years ago, which has mitigated the damage to a great degree.

As we've seen in the second-quarter earnings reports released so far by the big banks, the measures taken after 2008 to make sure they've built up enough capital to withstand another global crisis have paid off. Other than Wells Fargo (WFC) – which is still in the Fed penalty box, forbidden to grow assets – which reported a big loss, the other big banks reported flat Goldman Sachs (GS) or reduced JPMorgan Chase (JPM), Citigroup (C), and Bank of America (BAC) earnings compared to a year ago. It could have been a lot worse. Who would have thought they'd be able to pull that off three or four months ago? Let's give the Dodd-Frank Act and Fed capital requirements the props they deserve. Continue reading "Why It's Different This Time"

Are We Ready For A Second Wave?

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?

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

“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"