Point Counterpoint
on U.S. Economy; Investment Risks Revealed
By the Curmudgeon
Introduction:
Those looking for above-trend
economic growth and inflation have a lot of company. Thats best exemplified by a Bank of
America Research survey of institutional investors. However, there is a strong dissenting view
from ShadowStats John Williams.
Both agree that inflation is accelerating, as weve chronicled in recent
posts such as Sperandeo/Curmudgeon: Critque of the Feds Transitory Response to
Rising Inflation.
Well examine highlights of
both views in this article.
Bank of America Research Fund
Manager Survey (FMS):
Michael Hartnetts Bank of
America Research monthly Fund Manager Survey (FMS) shows that 69%
expect to see both of these. Thats a
record high as per this chart:
Chart
courtesy of BofA Global Research
Hartnett says 69% of
respondents expect "above-trend" growth and inflation which is a record
high, but its not yet "stagflation."
A net 84% of FMS investors expect a stronger economy (down -6ppt Month
over Month), but still near all-time highs.
FMS economic expectations
still at all-time highs
(Net % of respondents say the
global economy will improve):
Chart courtesy of BofA Global
Research
..
Similarly, a net 83% of FMS
investors expect higher inflation in the next 12 months, (down -10%
Month over Month), but still extremely high.
In contrast, the Conference Boards forecast for U.S. real
GDP growth in 2nd Quarter 2021 is 8.6% (annualized rate), and an
annual expansion of 6.4% (year-over-year) in 2021. Following that robust
recovery, the Board forecasts economic growth of 3.7% (year-over-year) in 2022
and 2.9% (year-over-year) in 2023.
BofA Investment Clock (Fund
Manager Survey edition):
Which of the following do you
think best describes the global economy in the next 12 months?
Chart courtesy of BofA Global
Research
Those bullish views have
pushed fund managers into commodities and late-cyclical stocks. Overweight positions in those areas are close
to 15-year highs.
Investment Risks:
COVID-19 was named a global
pandemic on March 11, 2020. Now in May 2021, a mere 9% cite COVID-19 as the
biggest tail risk. The FMS reveals that
the #1 tail risk for investors is inflation (35%), while #2 is a Fed taper
tantrum (27%) and #3 is the popping of asset bubbles (15%).
Those and other risks are
illustrated in this chart:
Chart courtesy of BofA Global
Research
Hartnet thinks
that accelerating Main Street (real economy) inflation will trigger Wall Street
(financial market) deflations.
With such bullish views on
growth and inflation, the obvious risk for investors is that growth slows, and
inflation proves to be transitory.
Or conversely, that the
economy will actually be much weaker than the heady forecasts which are
so prevalent these days.
Is U.S. Economic Growth
Peaking this Quarter?
The Citigroup Economic
Surprise index, which measures the degree to which economic data is either
beating or missing expectations, dropped recently as some of the key economic
data came in weaker than the consensus expectation. That index is flirting with turning negative for the first time since
mid-2020.
· The
April 2021 Non-Farm Payrolls report came in well shy of expectations,
leading to a big debate about whether the labor market is already getting
tight.
· The
recent CPI report came in significantly higher than expected, thanks to
certain categories related to economic reopening.
· Housing
starts fell much more in April than economists predicted, owing to a litany of
constraints including land, labor and lumber.
· Overall,
expectations for growth remain quite robust. However, its starting to look
like some level of reality is now setting in.
John Williams on the U.S.
Economy:
ShadowStats John Williams takes a strong
contrarian view of the U.S. economy. In
particular, he states on his website that:
The Pandemic-Driven GDP Collapse
appears to have been Understated and the economic rebound
Overstated.
a] April 2021 Housing Starts
Dropped by a Statistically Meaningful 9.5% (-9.5%) in the Month, on Top of a
First-Quarter Contraction.
b] Despite April 2020
Automobile Assemblies in Production Holding Down by 22% (-22%) from February
2020 Pre-Pandemic Peak Activity, Nominal Retail Sales of Automobiles Were Up by
33% in the same period.
c] April 2021 Jobs Increased by 266,000, against
an Expected Gain of 1,000,000, With Unemployment Rising to 6.1% from 6.0%,
Instead of Falling to an Expected 5.8% -- But It Was Worse Than Headlined!
Major Downside Economic Revisions will
be forthcoming in the near future.
Annual Benchmark Revisions to key economic series have been recently
released or are pending, with major negative implications for the GDPs Annual
Benchmarking on July 29th.
a] On May 14th, for example,
the Census Bureau published major downside benchmark revisions to Manufacturers
Shipments, Inventories and Orders (2013-2020) [including nominal New Orders
for Durable Goods (NODG), which were revised lower by- 5.5% in 2020.
b] Also on May 14th, the
Federal Reserve scheduled for May 28th release its long-pending (multi-year
delayed) major downside revisions to its Industrial Production master
series.
c] Next is the May 27th Bureau
of Economic Analysis (BEA) Second-Estimate of First-Quarter 2021 GDP.
d] Where the Fed revised its
annualized First-Quarter 2021 Industrial Production growth May 14th) from 2.5%
to 1.2%. That should take a notch out of
revised First-Quarter GDP growth, as will todays May 18th benchmark reporting
of New Residential Construction.
April 2021 Annual Inflation
Soared to Record or Decades-High Levels as per PPI and Core CPI
rates:
a] April 2021 PPI Year-to-Year
Inflation of 6.17% was the largest advance since 12-month data were first
calculated in November 2010.
b] Monthly and Annual April
2021 CPI Core Inflation (Ex-Food and Energy) Hit 39- and 25-Year Highs of
0.9% and 3.0%, respectively.
John Williams Conclusions:
Sum and substance of the
forthcoming economic headline number revisions, pending and otherwise, is that
the Pandemic-Driven Collapse of the U.S. Economy was much worse than
headlined, and the recovery from same is far shy of where it has been hyped to
be.
GDP has been a lot weaker than
reported. We expect U.S. industrial
production to be revised downwards, which will cause the 1st Quarter
2021 real GDP to be lower than the initial BEA estimate of 6.4% (annual rate).
Also, the July 29th advance
estimate of GDP for the 2nd quarter of 2021 will be much weaker than
bullish forecasts (e.g. the Atlanta Fed GDPNow model estimate for
real GDP growth at a seasonally adjusted annual rate in the 2nd
quarter of 2021 is 10.1% as of May 18th).
In conclusion, the underlying
economic reality remains much closer to the ongoing depression level of
activity reflected in the recent headline Payroll Employment numbers.
Stay safe, be healthy, take care of yourself and
each other, and till next time
The Curmudgeon
ajwdct@gmail.com
Follow
the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has
been involved in financial markets since 1968 (yes, he cut his teeth on the
1968-1974 bear market), became an SEC Registered Investment Advisor in 1995,
and received the Chartered Financial Analyst designation from AIMR (now CFA
Institute) in 1996. He managed hedged equity and alternative
(non-correlated) investment accounts for clients from 1992-2005.
Victor
Sperandeo is a historian, economist and financial innovator who
has re-invented himself and the companies he's owned (since 1971) to profit in
the ever changing and arcane world of markets, economies and government
policies. Victor started his Wall Street
career in 1966 and began trading for a living in 1968. As President and CEO of
Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and
development platform, which is used to create innovative solutions for
different futures markets, risk parameters and other factors.
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