Wednesday, June 16, 2021

Fed stands pat, but raises inflation expectations

From Schwab

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting today, opting to leave its stance and interest rates unchanged, as was widely anticipated, and there was also no change to its asset purchases. However, the Committee sharply raised its expectations for inflation this year and pulled forward the timeframe of when it could begin to raise interest rates, surprising the markets.

In its statement, the Committee said, "Progress on vaccinations has reduced the spread of COVID-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened." On inflation, it noted that prices have risen, but it still deems it as "transitory," while it also continued to reiterate its intentions to aim for an average of two percent over time, and that longer‑term inflation expectations remain well anchored at two percent. However, in the updated economic projections provided with its statement, it upped its projection for PCE inflation to 3.4%, a full percentage point from its March estimate, and the core PCE, which excludes food and energy, to 3.0% from the previous meeting's 2.2% forecast. As well, the Committee increased its estimate for real GDP to 7.0%, a one-half percentage point above March's reading. As such, the Fed's "dots plot" showed that members saw a liftoff of rates could come as soon as 2023, whereas it saw no increases until at least 2024 at its last meeting.

In his scheduled press conference following the statement, Chairman Jerome Powell said that the effects of bottlenecks on inflation have been larger than anticipated, and that inflation could turn out to be higher and more persistent than previously thought. As such, Powell said that the Committee is prepared to adjust policy if pricing pressures move too high, but any needed change to its policy would remain accommodative. Get more in-depth analysis on the Fed's decision from Schwab's Liz Ann Sonders in here commentary later this afternoon on our Market Insights page.

Housing starts for May rose 3.6% month-over-month (m/m) to an annual pace of 1,572,000 units, below the Bloomberg consensus forecast of 1,630,000 units, and compared to April's downwardly-revised pace of 1,517,000 units. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 3.0% m/m at an annual rate of 1,681,000, south of expectations calling for 1,730,000 units, and compared to the negatively-revised 1,733,000 unit pace in April.

The Import Price Index increased 1.1% m/m for May, compared to expectations calling for a match of April's upwardly-revised 0.8% increase. Versus last year, prices were up by 11.3%, compared to forecasts of a 10.9% increase and April's upwardly-adjusted 10.8% gain.

The MBA Mortgage Application Index rose by 4.2% last week, following the prior week's 3.1% decrease. The increase came as the Refinance Index gained 5.5% and the Purchase Index was 1.6% higher. The average 30-year mortgage rate declined 4 basis points (bps) to 3.11%.

Job Openings Hit New Records in April


Saturday, June 12, 2021

Market Snapshot from Schwab Investing

Liz Ann Sonders shares her perspective on the U.S. stock market and economy in this monthly Market Snapshot video.

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Wednesday, June 9, 2021

JOLTS, a Sleepy Economic Indicator, Jolts Awake

By Kelly Evans,

The Exchange, CNBC

Well, JOLTS certainly lived up to its name yesterday. This is typically one of the sleepiest economic indicators, despite its acronym (for the Job Openings and Labor Turnover Survey). It comes out way after the fact--yesterday's release was data for the ancient month of April--and it's not usually a headline-grabber.

Until now. My eyes certainly bulged when I saw the number. Nine-point-two million job openings?! I've never seen it that high before. It jumped by a million openings in just a month. This is truly bizarre. Not in the sense that I don't believe it--but in that the data are confirming something really, really different is going on out there.

Why so many job openings? It's peculiar to reflect upon. In the 2001-2007 expansion, there were never more than about five million in any given month. By 2010, after the great recession, openings had collapsed to fewer than three million and it took more than five years for them to return to their pre-crisis highs.

Since 2015, openings have been on a steady climb higher. From five million to six million to seven million to eight million by 2019--meaning the recent spike isn't just a post-pandemic phenomenon. It's an acceleration of the previous trend. So as I think it over, the pandemic seems to have sharply sped up the societal change that was gradually happening--the Great American Reset.

What change? Well, we all know the quality of internet video and video conferencing had been gradually increasing over the years. But suddenly, the pandemic showed that it could replace previous systems for how we live, and school, and work. No one wants to waste away all day in a corporate office. That's doubly true when both parents are working, and they have children--i.e., the millennials now. The share of both parents working with children hit 64% in 2019, up from 60% in 2015. The last time it was that high, coincidentally, was in 1999 and 2000--just before the dotcom crash.

So you're seeing this massive reshuffling now, as people who can have flexibility restructure--and improve--their lifestyles around it. For some, that means cashing in their homes, moving to lower-cost areas, and retiring early, as Glenn Kelman observed. For younger couples, that might mean one spouse can now permanently work from home--or even drop out of the labor force altogether, if it's paired with moving somewhere cheaper.

And it might not even be a bad thing for the economy in the long run. In fact, it's probably necessary, especially if better family balance helps stem the falling fertility rate. We've already basically returned the economy to its pre-pandemic size even with millions of workers on the sidelines. So while the Fed has been focused on getting labor force participation back up, lower participation in the years ahead based on family preference would be a totally different, much healthier thing.

That said, if companies still can't find workers once immigration fully normalizes and other Covid measures expire, it will slow down the economy. That's how you get "stagflation," which we're nowhere near right now with growth still booming. But bottom line, workers for a whole variety of reasons are saying to their old employers pay up, or I'll find something different to do. The quits rate also hit a new high in April and is 40% above its pre-pandemic average. YOLO, baby!

After the Great Recession, there were nearly seven unemployed workers for every single job opening in America. Five years after the downturn ended, there were still four unemployed workers for every opening. Today, per Goldman, there are more job openings than unemployed workers--less than a year after the pandemic recession. This is a very different environment.

And sure enough, like a cocooned caterpillar, there was actually much growth and change happening to the U.S. workforce while we were all forced inside to ponder our lives and experiment with new technology during the pandemic. We are reemerging as a much different, less constrained society.

New Leak of Taxpayer Info Is (More) Evidence of IRS Corruption

by Dan Mitchell

International Liberty

I sometimes try to go easy on the IRS. After all, our wretched tax system is largely the fault of politicians, who have spent the past 108 years creating a punitive and corrupt set of tax laws.

There is plenty of IRS behavior to criticize. Most notably, the tax agency allowed itself to be weaponized by the Obama White House, using its power to persecute and harass organizations associated with the "Tea Party."

That grotesque abuse of power largely was designed to weaken opposition to Obama's statist agenda and make it easier for him to win re-election.

Now there's a new IRS scandal. In hopes of advancing President Biden's class-warfare agenda, the bureaucrats have leaked confidential taxpayer information to ProPublica, a left-wing website.
ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. ...ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate. ...those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.
Since I'm a policy wonk, I'll first point out that ProPublica created a make-believe number. We (thankfully) don't tax wealth in the United States.

So Elon Musk's income is completely unrelated to what happened to the value of his Tesla shares. The same is true for Jeff Bezos' income and the value of his Amazon stock.*

And the same thing is true for the rest of us. If our IRA or 401(k) rises in value, that doesn't mean our taxable income has increased. If our home becomes more valuable, that also doesn't count as taxable income.

The Wall Street Journal opined on this topic today and made a similar point.
There is no evidence of illegality in the ProPublica story. ...ProPublica knows this, so its story tries to invent a scandal by calculating what it calls the “true tax rate” these fellows are paying. This is a phony construct that exists nowhere in the law and compares how much the “wealth” of these individuals increased from 2014 to 2018 compared to how much income tax they paid. ...what Americans pay is a tax on income, not wealth.
Some journalists don't understand this distinction between income and wealth.

Or perhaps they do understand, but pretend otherwise because they see their role as being handmaidens of the Biden Administration.

Consider these excerpts from a column by Binyamin Appelbaum of the New York Times.
Jeff Bezos...added an estimated $99 billion in wealth between 2014 and 2018 but reported only $4.22 billion in taxable income during that period. Warren Buffett, who amassed $24.3 billion in new wealth over those years, reported $125 million in taxable income. ...some of the wealthiest people in the United States essentially live under a different system of income taxation from the rest of us.
Mr. Appelbaum is wrong. The rich have a lot more assets than the rest of us, but they operate under the same rules.

If I have an asset that increases in value, that doesn't count as taxable income. The same is true if Bill Gates has an asset that increases in value.

Now that we've addressed the policy mistakes, let's turn our attention to the scandal of IRS misbehavior.

The WSJ's editorial addresses the agency's grotesque actions.
Less than half a year into the Biden Presidency, the Internal Revenue Service is already at the center of an abuse-of-power scandal. ...ProPublica, a website whose journalism promotes progressive causes, published information from what it said are 15 years of the tax returns of Jeff Bezos, Warren Buffett and other rich Americans. ...The story arrives amid the Biden Administration’s effort to pass the largest tax increase as a share of the economy since 1968. ...The timing here is no coincidence, comrade. ...someone leaked confidential IRS information about individuals to serve a political agenda. This is the same tax agency that pursued a vendetta against conservative nonprofit groups during the Obama Administration. Remember Lois Lerner? This is also the same IRS that Democrats now want to infuse with $80 billion more... As part of this effort, Mr. Biden wants the IRS to collect “gross inflows and outflows on all business and personal accounts from financial institutions.” Why? So the information can be leaked to ProPublica? ...Congress should also not trust the IRS with any more power and money than it already has.
And Charles Cooke of National Review also weighs in on the implications of a weaponized and partisan IRS.
We cannot trust the IRS. “Oh, who cares?” you might ask. “The victims are billionaires!” And indeed, they are. But I care. For a start, they’re American citizens, and they’re entitled to the same rights — and protected by the same laws — as everyone else. ...Besides, even if one wants to be entirely amoral about it, one should consider that if their information can be spilled onto the Internet, anyone’s can. ...A government that is this reckless or sinister with the information of men who are lawyered to the eyeballs is unlikely to worry too much about being reckless or sinister with your information. ...The IRS wields an extraordinary amount of power, and there will always be somebody somewhere who thinks that it should be used to advance their favorite political cause. Our refusal to indulge their calls is one of the many things that prevents us from descending into the caprice and chaos of your average banana republic. ...Does that bother you? It should.
What's especially disgusting is that the Biden Administration wants to reward IRS corruption with giant budget increases, bolstered by utterly fraudulent numbers.

Needless to say, that would be a terrible idea (sadly, Republicans in the past have been sympathetic to expanding the size of the tax bureaucracy).

*Financial assets such as stocks generally increase in value because of an expectation of bigger streams of income in the future (such as dividends). Those income streams are taxed (often multiple times) when (and if) they actually materialize.

Don't Panic! The World is a Better Place than You Thought

A very well-done and interesting video. For more on this topic, visit Gapminder Foundation

Fed stands pat, but raises inflation expectations

From Schwab Market Insight The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting today, opting to leave its...