Police Across America Brace For Another Violent Summer
Donald Trump may not be president anymore, but that won’t stop Anitfa and BLM from getting their riot willies out this summer in response to any number of social justice triggers.
To that end, the Wall Street Journal reports that police departments across the country are “bulking up patrols and implementing new tactics to prepare for what they say could be a violent summer” as states lift COVID-19 restrictions – as if they had any impact on last year’s summer of leftist violence. Also cited is a spike in firearm purchases during the pandemic as gun crimes spiral out of control in major cities.
Shootings and homicides in big U.S. cities are up this year again after rising last year. In the last three months of 2020, homicides rose 32.2% in cities with a population of at least one million, according to the Federal Bureau of Investigation’s Quarterly Uniform Crime Report.
In New York City, the number of homicides has reached 146 for the year so far, an increase of 27% from 115 during the same period in 2020. In Dallas, police have counted 75 homicides this year, up from 58 during the same period last year. Chicago police have recorded 195 homicides, up from 160 in the year-ago period. -WSJ
And while y/y crime stats spiking 12 months after the country was locked down is may seem like more of a ‘no shit’ than anything else, keep in mind that New York saw its most violent summer last year since 1996. Meanwhile, the country currently finds itself extremely polarized over more than just police reform, as ongoing tensions in the Middle East have spilled over into US streets, and anti-lockdown activists around the world have been fiercely protesting economy-killing pandemic measures – which we imagine our ‘wise and benevolent’ leaders like New York Gov. Andrew Cuomo (D) won’t hesitate to re-implement if COVID-19 even thinks about surging again.
“We’re coming out of the pandemic, life is starting again and more people are going to be out on the street,” said James Shea, Jersey City NJ director of public safety, adding that the city decided to increase the deployment of officers on foot patrol in high-crime areas, as well as expanded the department’s closed-circuit video system.
In Dallas, more officers will be deployed this summer to hot-spots of criminal activity as part of the city’s Violent Crime Reduction Plan, according to Police Chief Eddie Garcia.
In New York, the NYPD will dispatch 200 additional officers and add patrols to 100 blocks in the city with the most gun violence, according to the report, after last year’s chaos. Additional officers have also been deployed to Manhattan business districts in recent weeks, including Times Square, where a recent shooting left three bystanders – including a 4-year-old girl – were injured.
“The warmer months always usually give us more problems when it comes to violence,” said NYPD Chief of Department, Rodney Harrison, who added that gang activity accounts for around half of the shootings in the city – while officers struggled to solve cases during the pandemic due to the NYPD’s strained relationship with residents amid demonstrations against police brutality.
Year-to-date, shootings in New York City are up 86% over 2020, from 242 to 451.
The housing market in America is not one but many markets that generally share a few common threads. In America, the government, coupled with a slew of builder and Realtorassociations control the housing narrative. Housing prices in Canada have been on fire for years now we are seeing this type of buying frenzy spreading to America. This has allowed some buyers to ignore the reality that soaring lumber prices over the past 12 months have caused the price of an average new single-family home to rise by $35,872,according to the National Association of Home Builders.
The two questions that loom large are, who is buying these houses and where are they coming up with the cash to make such offers? Part of this is driven by the government continuing to cloak itself in the guise of being a good and kind friend to first-time buyers and helping them buy homes. This has helped move many a buyer into a home they can’t afford, cannot take care of, or simply don’t need. The long-term ramifications of such policies have destroyed many lives by putting people under tremendous financial pressure and taken its toll on neighborhoods across America.
Buyers And Sellers Should Beware
This buying frenzy has brought a lot of money into housing with the promise of weaseling out a profit. This means the housing sector is in some ways begun to mimic the auto sector with a “Buy here, Pay here” group opening on every corner. It has also created a massive industry where houses are bought to “flip,” This generally means buyers put a few dollars into glossing over flaws and place the house back on the market at a much higher price looking for a gullible buyer that doesn’t understand the poor product beneath the glitter.
One trend that has grown rapidly is the “Cash for Keys” market where houses are sold to people with little money down. These deals are often structured more like a lease with an option to buy with a contract that includes a great deal of small print tilted completely in the seller’s favor. The means they sell you a house that is overpriced, milk everything they can out of the buyer, and wait to take it back so they can start the scheme all over again. Common sense dictates that to maximize profits they must really be hammering any foolish buyer willing to go down this path.
Just yesterday a woman and her son that had lived in an apartment at my complex for eight years moved back in after several months in one of these houses. She described the four months in the house as a “horrible ordeal.” This includes things like, unexpectedly large utility bills as well as receiving estimates for needed repairs that shook her to her core. Maintenance costs can be substantial and something the average person leasing never has to deal with because they are usually included in the rent.
The argument that the “housing game” is a racket and moves on the promise of “big money” is highlighted by several facts. For those accepting this argument, in some ways, this can be linked to the World Economic Forum’s 2030 agenda that states in 2030 you will own nothing and be happy. In the piece below, Krystal Ball of the Rising explains why the housing market is booming for those in the upper-middle class. She opines what it means for costs of homes in the future. Seven minutes into this YouTube video (https://www.youtube.com/watch?v=EBb9zf_zWvU) starts a rant, ending with, “however this ends up ordinary people are going to get screwed.”
Many of the messages being promoted as common knowledge do not pass serious scrutiny. As I wrote this post I tried to do a bit of additional research to supplement what I know as a contractor and apartment owner. What I found was more like a pack of lies and half-truths spun to fit an agenda. Those of us in the trenches and with our boots on the ground often see things from a different perspective than what is being presented by the media.
An interesting piece by Emma Diehl (https://www.homelight.com/blog/how-many-homes-does-a-realtor-sell-a-yea…) of the Homelight.com blog points out that in the U.S., there are over 2 million active real estate licensees and 1.3 million Realtors®, or real estate licensees who’ve taken an extra step to become certified members of the National Association of Realtors (NAR). This means, some agents may sell a single house per year for their friend, while others such as Ben Caballero, have built empires to facilitate thousands of sales annually using sophisticated tech systems.
In 2013, CareerBliss announced that being a real estate agent is the single most satisfying job a person could have. This led many people into this line of work. The fact is, most realtors are hard-pressed to make a decent living. This is something we are seldom told and supports the idea much of what we are told about the housing sector is hype and pure bunk. This is supported by the numbers put out by Statista which reported there were 683 thousand houses sold in the United States in 2019. This is the largest figure since 2008 but when divided by the number of real estate licensees does not mean multiple sales for each.
While the market has responded to the housing needs of higher-income households, trends suggest a growing inability or desire to supply housing that is affordable for middle and working-class people. It appears developers have little interest in, or they simply can’t afford to add anything but luxury units. It should be noted that at the same time many houses in America sit empty or underutilized and we are hearing about a lack of new listings. I attribute this to sellers holding units off the market because they think prices will rise, they owe more for the house than they can get, or they fear the selling process will be complicated.
Many economists may use housing starts as an indicator of the health of the economy but such numbers are only a small part of a much larger picture. This number reflects many things other than just the number of new houses under construction or started in a given period. The data is generally divided into three categories: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Still more important than just the number of units being built and the type is who is buying these units and why.
Affordability Is A Growing Issue
While people talk about the cost of buying a home more attention should be directed towards the ability of the buyer to maintain the home after they purchase it. Another factor looming large in this sector of the economy centers on affordability. When it comes to affordability, much depends on which part of the country you live but in many coastal and popular areas prices remain high. Even with current rates by the time you add in rising real estate taxes and other costs new homes are expensive.
Not only are new home prices are on the rise but so are real estate taxes and other fees. There is nothing inexpensive about a new home. Sadly, even the construction is often suspect, while code enforcement has increased, many of the items used in new construction no longer outlive the mortgage a buyer takes on. Whether replacing a door after just a few years or windows, it seems everything is expensive and nothing matches the original design. My house is over a hundred years old and still has the same doors and windows. How many homes built thirty years ago support this claim, enough said.
While the number of permits and building starts give some indication on the direction of housing, this is a complicated and this fickle market that is subject to attitudes and economic factors which can change on a dime. Adding to the recent discussion are claims of people buying homes away from big cities in an effort to escape growing violence and the effects of covid-19, this is interlaced with stories about surging gun sales.
New Construction Is Still Below 2008 Levels
The chart to the right shows that new construction is still below 2008 levels. Much of the new construction has been in apartments and not single-family dwellings. In much of the country, housing units are being built using cheap money flowing from the Fed and Wall Street under the idea that if it is built “they will come.”
Home-ownership, a large part of the America dream, has been in decline. It could be argued that demographics are not greatly supportive of higher prices, it is also difficult to ignore the fact that when people “double-up” fewer homes are needed. This adds credence to the argument that if prices rise it most likely will be as a result of inflation. Today, huge discrepancies exist in the cost of housing in the various markets across America and while price variations are not uncommon they should be seen as a red flag and reason for caution.
While many people claim the formation of new households and pent-up demand drives this construction I beg to differ. I contend it is a combination of too much money looking for a safe place to hide. Unnoticed by many Americans is how money from Wall Street has entered this arena and is pushing out the average American. One thing is certain that when inflation raises its ugly head and interest rates increase, housing construction will suffer. The intention of this post is to dispel and explore some of the myths and trends surrounding the future of housing while causing people to think about this subject. Hopefully, it has added some clarity to the discussion.
The $100 Million New Jersey-Based Hometown Deli Has Fired Its Wrestling Coach CEO
Last month, we highlighted when fund manager David Einhorn pointed out a New Jersey deli that was trading with an insane market cap of over $100 million as one of the hallmarks of the bubble the market is in. Einhorn wrote:
“Strange things happen to all kinds of stocks. Last year, on one day in June, the stocks of about a dozen bankrupt companies roughly doubled on enormous volume. Recently, the Wall Street Journal reported a boom in penny stocks.
Someone pointed us to Hometown International (HWIN), which owns a single deli in rural New Jersey. The deli had $21,772 in sales in 2019 and only $13,976 in 2020, as it was closed due to COVID from March to September. HWIN reached a market cap of $113 million on February 8. The largest shareholder is also the CEO/CFO/Treasurer and a Director, who also happens to be the wrestling coach of the high school next door to the deli. The pastrami must be amazing. Small investors who get sucked into these situations are likely to be harmed eventually, yet the regulators – who are supposed to be protecting investors – appear to be neither present nor curious.”
The deli was subsequently covered in the news – as was its mysterious CEO Paul Morina, who doubled as both a wrestling coach and school principal (as you do when you’re a $100 million company CEO).
And now, it looks as though – for one reason or another (perhaps due to the spotlight) – the company has decided to move forward from the “talents” of Morina, who has been fired as CEO, according to CNBC.
The company’s majority shareholders voted to remove him and “the company’s only other executive, vice president and secretary Christine Lindenmuth, who works with Morina as an administrator at nearby Paulsboro High School,” CNBC wrote.
Recall, back in late April, we noted that the deli was linked to another shell company whose stock recently exploded, E-Waste. That company, which has multiple connections to Hometown, announced its President had resigned last week.
E-Waste is a self-admitted shell company and had total assets of about $183,000 and liabilities of $412,400 as of its most recent SEC filings. It posted a net loss of $58,000 for the 9 months ended November 30. The company’s own filings state it was created in 2012 “to develop an e-waste recycling business” but “was not successful in its efforts and discontinued that line of business.”
It has been a shell company since then and has been looking to “engage in a business combination with a private entity whose business presents an opportunity for its shareholders.”
But E-Waste’s stock, like Hometown’s, had recently rocketed to a high of $10.25 per share. It put the company’s market cap at over $100 million.
Not unlike Hometown Deli, E-Waste also had little ongoing business. Yet this didn’t stop Hometown Deli from lending E-Waste $150,000 late last year – even while the deli was closed due to the pandemic. E-Waste CEO John Rollo also had an interesting former gig for someone in the waste business: he worked another job as a patient transporter at a northern New Jersey hospital, at a healthcare system CNBC says he’s still employed at.
This Is Not The Inflation You Are Looking For, Move Along
“This is not the inflation you are looking for. Move along.”
In recent weeks a veritable cottage industry of financial experts has cropped up, seeking to defuse ever louder fears that the burst in inflation observed in the past month is “transitory” and won’t impact the Fed’s medium-term thinking or its timeline for tapering/liftoff (not least of all due to the growing political blowback against soaring inflation as captured in “Biden Aides See Political, Not Economic, Peril in Inflation Data” and “Inflation fears grow for White House“). The latest to hammer the “transitory” point is Goldman economist David Mericle who has doubled down on the bank’s sanguine view on inflation, writing in a Sunday note that the data surprises of the past two weeks “have left our Q1 2022 forecast for the start of QE tapering unchanged” adding that “if our taper timeline is right, then liftoff will probably not be on the table for about two years.” This is because the bank’s economists believe that that the inflation risks that matter most for the Fed’s rate hike decisions are not those that have emerged in the past few weeks, but rather those “that will remain relevant at a multiyear horizon.”
So what are those multiyear horizon inflationary risks? Let’s dig in.
First, we start with Goldman concession that inflation is indeed running amok:
The last ten days produced a flurry of startling data surprises that added fuel to inflation fears: a 0.7% increase in average hourly earnings in April and even larger gains in low-wage industries, the largest increase in core CPI in 40 years, and a 0.4pp jump in the University of Michigan’s measure of long-term household inflation expectations to the highest level in a decade
That said, when looking at last week’s show-stopping CPI print, which Goldman admits was “a huge upside surprise” it is one of little lasting significance according to the Goldman and here’s why. As shown in the next chart which decomposes the largest increase in the core since 1981 by category, the main contributors fall into two groups:
travel and related services categories where prices are experiencing quick reopening rebounds from deeply depressed levels, and
goods categories like used cars where a pandemic-induced demand surge has run headfirst into temporary shortages, production bottlenecks, and supply chain disruptions. In contrast, other large core service categories remained soft in April.
While these forces might also generate high inflation prints in coming months – as the full normalization of prices in pandemic-depressed categories like airfares as reopening progresses would add another 30bps to core CPI and 15bps to core PCE, while supply chain disruptions including the semiconductor shortage also remain severe, as shown in the next chart and their impact on goods prices has probably not yet run its course…
… Goldman again trots the familiar party line that “these disruptions and shortages look unlikely to boost inflation on net beyond this year”.
Many arose because producers initially made the natural assumption last year that demand would fall in a recession, as it usually does. Instead, fiscal support boosted household incomes and the unavailability of services led to a surge in demand for goods, resulting in the supply-demand imbalances that have pushed up prices. But this problem should be resolved from both directions over the rest of the year: producers are ramping up to meet demand and consumers are increasingly free to shift their consumption basket back toward services. And encouragingly, the most prominent example of the current supply chain disruptions—the shortage of microchips for autos—is set to fade later in Q2.
It remains to be seen if the chip shortage somehow resolves itself in the next month, but until we wait here is another chart from Goldman, this time showing the impact of reopening effects and temporary shortages on the year-on-year rate of core inflation, which Goldman believes is likely to peak in April and May, and should gradually fade later this year and will turn negative next year as prices in categories such as used cars normalize from their current elevated levels.
Here Goldman is quick to counter that its observations do not mean that there are no inflation fears. After all, just hours earlier we discussed another Goldman note according to which the bank saw “substantial home price appreciation for at least a couple more years”, in which the bank projected that we projected “that shelter inflation will exceed 4% in 2023, a higher rate than at any point in the prior economic cycle”, even surpassing the housing bubble of 2006-2007.
How does one reconcile the two? As Goldman’s econ team explains, it’s not that there are no inflation fears “but rather that investors should focus on the right risks, those that could have more lasting significance.“
Going down the list, Goldman starts off with the broadest upside inflation risk which is the possibility that fiscal support, pent-up savings, and easy financial conditions could persistently push demand well above potential GDP, leading to a serious inflationary overheating: “our forecast instead implies that GDP will rise about 1% above our estimate of potential, which we would view as consistent with inflation rising moderately but not dramatically above 2%.”
Here, Goldman notes that “so far the consumer spending data appear roughly consistent with our expectations” and the next chart shows that Goldman’s consumer spending tracker jumped after both rounds of stimulus checks, but that spending is now running about 3% above the pre-pandemic level, meaning it is only about 1% above the pre-pandemic trend (Friday’s disappointing retail sales only confirmed this hypothesis). In other words, while further reopening is likely to raise spending, the boost from the stimulus checks is likely to continue to fade.
Next, Goldman lists three specific upside risks that could have more meaningful and lasting consequences for inflation and monetary policy than the current post-pandemic price spikes.
Risk #1: A sharper rise in wage growth
The first risk is that wage growth could rise to a much faster pace than reached last cycle if current signs of worker shortages and labor market tightness prove more persistent than many expect. The starting point for wage growth is unusually high for an economy emerging from a recession. The next chart shows that Goldman’s composition-adjusted wage growth tracker barely slowed from its pre-pandemic pace and remains at about 3% year-on-year.
Adding fuel tot he fire, a number of recent labor market indicators hint at an acceleration. Average hourly earnings rose 0.7% in April, wage growth is up sharply over the last year in low-wage industries and industries with particularly tight labor markets, and lower-wage workers report much higher pay expectations for potential jobs.
Moreover, a range of other indicators discussed here, such as a very high job openings rate, a high quits rate, worker surveys reporting that it is easy to find a job, and employer surveys reporting that it is hard to find workers, all point to a very tight labor market where workers have the upper hand.
Incidentally, even Goldman has no problems identifying the reason for this record labor market imbalance: as the bank admits, “the underlying reason seems to be that effective labor supply is much more constrained than the 6.1% unemployment rate suggests, owing to unusually generous unemployment insurance benefits and lingering virus-related impediments to working” but “we expect both of these temporary factors to fade by the fall, which should relax these supply constraints and cool the current wage pressures.”
Risk #2: A multi-year boom in home prices boosts rent inflation
The second risk is one we discussed earlier, namely that a multiyear boom in US home prices could drive shelter inflation much higher. The chart below shows that shelter inflation has fallen during the pandemic, and Goldman’s shelter inflation tracker suggests that rent growth should remain modest for the time being.
But the shelter category is highly cyclical and is very likely to accelerate as the economy improves and the effects of temporary pandemic drags like eviction moratoriums fade. On top of this, Goldman expects that a national housing shortage will fuel substantial house price appreciation for at least a couple more years. Bottom line: “the tightest national housing market since the 1970s nevertheless poses some additional upside risk.”
The third risk noted by Goldman is that the current price spikes caused by temporary pandemic effects could have a more lasting impact if they raise long-term inflation expectations substantially (i.e. transitory proves to be non-transitory). Last week brought hints in this direction, including a 0.4% jump in the University of Michigan’s measure of long-term household inflation expectations, a modest increase in long-term inflation expectations in the Survey of Professional Forecasters, and further increases in market-implied inflation compensation.
Goldman’s own monthly version of the Fed’s index of Common Inflation Expectations (CIE) has risen further to 2.08% in a preliminary May reading. The Fed’s index is smoothed, and if the underlying measures held steady at their current levels, the bank estimates that the CIE would eventually rise to 2.1%.
Another point to note is that at least half of the rebound over the last year appears to reflect mundane co-movement with gasoline and other energy prices, which correlate strongly even with longer-term expectations. The remainder of the increase likely reflects other factors, such as the latest price spikes and the Fed’s new average inflation targeting framework. So far, Goldman concludes, that “the increases are healthy, indeed, as Chair Powell said at his last press conference, the Fed’s new framework will only succeed in centering inflation on the 2% target if it succeeds in boosting inflation expectations.” But if the CIE moved well above its historical range as news of sharp prices increases makes headlines this year, Goldman warns of upside risk to its own inflation forecast.
Finally, what does all this mean for Goldman’s inflation outlook and what the Fed will do next?
As Goldman’s economists conclude, all three of these sources of upward pressure on inflation are expected to materialize to some degree in the years ahead. Indeed, each of them is an essential contributor to our forecast that core PCE inflation will reach 2.1% by end-2022, 2.15% by end-2023, and 2.2% by end-2024, higher numbers than reached last cycle and enough to generate liftoff in early 2024.
But, as a surprisingly cautious Goldman concedes in its final paragraph, “each of the three factors discussed above also carries some additional upside risk that we take seriously and watch closely in our Monthly Inflation Monitor. While another month of rapidly rising airfares or used car prices would probably not change our medium-run inflation views much, substantial surprises on these three key risks likely.“
In closing, it’s worth reminding readers that earlier today Morgan Stanley’s economists also warned that there is just one substantial threat to the “red hot global recovery”, and that would of course be inflation, i.e., “the biggest threat to this cycle is an overshoot in US core PCE inflation beyond the Fed’s implicit 2.5%Y threshold – a serious concern, in my view, which could emerge from mid-2022 onwards” but like Goldman, MS economists don’t see much risk of runaway (or hyperinflation) just yet and is why Morgan Stanley’s chief US economist Ellen Zentner still expects the Fed to signal its intention to taper asset purchases at the September FOMC meeting, to announce it in March 2022 and to start tapering from April 2022.
Druckenmiller: “There’s Been No Greater Engine Of Inequality Than The Fed”
After his status-quo-shattering appearance on CNBC this week, during which he warned that “Fed policy is endangering the dollar’s reserve status,” billionaire fund manager Stan Druckenmiller spoke to The USC Marshall Center for Investment Studies’ Student Investment Fund Annual Meeting via Zoom, and shocked the on-lookers with his frank assessment of our current perceptions and realities.
After The Bank of Canada sheepishly admitted this week that “some of the monetary policy tools it is using to address the COVID-19 pandemic, such as quantitative easing (QE), could widen wealth inequality,” Druckenmiller drops the proverbial hammer on all the hedged-speak (“could”), and blasts that
“I don’t think there has been a greater engine of inequality than the Federal Reserve Bank of the United States… so hearing the Chairman [Powell] talking about visiting homeless shelters is very rich indeed…”
The outspoken fund manager went on to note that “everyone wealthy that I know is making fortunes” because “this guy [Powell] is printing money like there’s no tomorrow” adding that the kids is Harlem are not benefitting from money-printing but wealthy people are, exclaiming that
“…for the life of me I can’t understand why the left is so excited about money-printing when all the data shows that the people who benefit from money-printing are rich people.”
“The odds-on bet is that we’re going to have inflation,” he continues:
“and inflation is going to hurt poor people, again, a lot more than rich people.”
How does this all end?
“The asset bubble which [Powell] is blowing up into unbelievable proportions busts before the inflation ever really manifests itself, that’s what happened in the housing bubble in 08/09. We never really got to the inflation because the asset bubble burst… not dis-similar to what happened in 1929.”
And Druck reminds us all, “there is no one, no group, that will be hurt more by a bust than the poor… they will be first in line to get screwed.”
While publicly glorified by the media as “heroes” and “saviors” of the economy, Sven Henrich pointed out earlier that the true impact of Fed policy is much more sinister.
Inflation, as Druckenmiller rightly points out hurts the poor the most as living expenses take up most if not all of their monthly budgets.
This revelation to some (not all) came after his earlier-in-the week, WSJ Op-Ed that “keeping emergency settings after the emergency has passed carries bigger risks for the Fed than missing its inflation target by a few decimal points. It’s time for a change.”
Pointing out, rather awkwardly that The Fed’s independence is supposed to act as a counterbalance to these political whims.
“America’s deep divisions also make the central bank’s independence crucial. Fighting inequality and climate change are very far from the Fed’s central mission.”
The long-term risks from asset bubbles and fiscal dominance dwarf the short-term risk of putting the brakes on a booming economy in 2022.
“If they want to do all this and risk our reserve currency status, risk an asset bubble blowing up, so be it. But I think we ought to at least have a conversation about it,” Druckenmiller said.
“If we’re going to monetize our debt and we’re going to enable more and more of this spending, that’s why I’m worried now for the first time that within 15 years we lose reserve currency status and of course all the unbelievable benefits that have accrued with it,” he added.
Central banks have been the root of a lack of confidence in dollar stability.
“5-6 years ago I said Crypto was the solution in search of a problem. That’s why I didn’t play crypto the first wave because we already have the dollar, why do we need crypto for?
The problem has been clearly identified. It is Jerome Powell and the rest of the world’s central bankers.There is a lack of trust.“
“The low-interest environment increases inequality by increasing the wealth of people who are well off.”
As ProPublica reports, economists are beginning to view the interplay of the Fed’s actions and inequality in a new light. Central bankers used to think that “we didn’t have to worry about inequality when we did monetary policy,” Olivier Blanchard, former director of research for the International Monetary Fund, said during a December virtual forum sponsored by the Peterson Institute for International Economics. Blanchard said he has since come to believe that monetary policy does impact economic inequality because a change in interest rates has “major, major distribution effects between borrowers and lenders, between asset holders and not.”
“Inequality is a cumulative process,” said Karen Petrou, author of “The Engine of Inequality: The Fed and the Future of Wealth in America” and managing partner of the Washington-based consulting firm Federal Financial Analytics.
“The richer you are, the richer you get, and the poorer you are, the poorer you get, unless something puts that engine in reverse,” she said.
“That engine is driven not by fate or by untouchable phenomena such as demographics but most importantly by policy decisions.”
Bernanke, currently a fellow at the Brookings Institution, admitted in a 2017 Brookings paper that:
“all else equal, higher stock prices mean greater inequality of wealth.”
Janet Yellen, now Treasury secretary, asked in a 2014 speech whether income inequality is “compatible with values rooted in our nation’s history,” but she largely defended ultra-low rates during a Q&A at a 2013 conference of business journalists.
Older savers were “suffering from low returns on their CDs,” she said, but “they have children and they have grandchildren” who will benefit from the stronger economy.
Except, as Druckenmiller began this diatribe, as the Fed pumps more money into the financial system by buying Treasury securities and indirectly supporting federal stimulus programs, the run-up in stock markets is likely to continue – and leave people even further behind than they already were.
Glaring and expanding wealth inequality is destructive to society.While there will always be inequality and successful capitalism should rightfully reward those that work hard and come up with great business concepts the artificial exponential enrichment of the few by a “government created agency” (Jay Powell) is not in the purview of the Fed’s mandate.
One of the oldest celebrations of the LGBTQ community in the world has been New York City’s annual Pride celebration. The parade began 51 years ago and has long been a symbol of the strength, defiance, and pride of this community. The whole idea was to show the full spectrum of LGBTQ influence, participation, and expression in our society. This year, however, activists have decided to discriminate against one group: police officers.
In a parade that was found to reject discrimination in every form, the organizers have told the Gay Officers Action League and other such groups that they will not be allowed to march. Their presence is viewed as a threat to others in the parade and a denial of a “safe space” for LGBTQ members. It is hard to imagine a more antithetical position for the parade in excluding officers who are part of the community and who want to publicly stand with other LGBTQ members.
The organizers have announced that police and corrections officers will be barred from participating in the parade until at least 2025. They declared “The sense of safety that law enforcement is meant to provide can instead be threatening, and at times dangerous, to those in our community who are most often targeted with excessive force and/or without reason.”
The Gay Officers Action League, an organization of L.G.B.T.Q. police, denounced the decision on Friday night. In addition, the NYPD is being asked to remain at least a block away from all events to ensure a safe environment for participants.
Activists have long opposed police participation and cite the anti-police riot outside the Stonewall Inn in Manhattan. However, the police participants have marched to show that the NYPD does not just support the LGBTQ community but includes officers from the community. It is the very rejection of the image of the Stonewall Inn riot and a testament to the progress made not just by the LGBTQ community but the NYPD.
Nevertheless, Beverly Tillery, the executive director of the New York City Anti-Violence Project insists that “[t]he issue is, how do we make Pride safe for the people who feel the most marginalized and have often been left out of the conversations about how Pride is run?”
It is a terrible setback and insult for officers and their predecessors, who had to sue for the right to march in uniform and did so for the first time in 1996. They have fought to diversify the ranks of the NYPD and show that there are officers not just supportive but part of the LGBTQ community. That would seem an incredibly powerful and reassuring message to send to community members. The growing numbers each year showed the progress that has been achieved since 1978 when New York City mayor Ed Koch banned discrimination in police hiring on the basis of sexual orientation (over the objection of the Patrolmen’s Benevolent Association).
On November 2, 1969, Craig Rodwell, Fred Sargeant, Ellen Broidy and Linda Rhodes called for an annual march for all “Homophile organizations.” The march was envisioned as a statement against exclusionary limits of every kind for members of the community:
We propose that a demonstration be held annually on the last Saturday in June in New York City to commemorate the 1969 spontaneous demonstrations on Christopher Street and this demonstration be called CHRISTOPHER STREET LIBERATION DAY. No dress or age regulations shall be made for this demonstration.
We also propose that we contact Homophile organizations throughout the country and suggest that they hold parallel demonstrations on that day. We propose a nationwide show of support.
GOAL is one such organization and shows how much has changed since this call for a unifying celebration of everyone within this community. It was created in 1982 and each year around 200 of its members and their families participated in the march.
They have now been told that they are not welcomed as a perceived threat to their own community. I cannot think of a message more counter to traditions or values of the annual parade. A movement based on inclusion has now embraced exclusion as a defining value.
Bill Gates Urged To Provide Epstein Evidence To Ghislaine Maxwell Investigators
Bill Gates is being urged to come forward with evidence about his former pedo-pal Jeffrey Epstein, after their years-long relationship continued after Epstein was a known pedophile – and has been cited by anonymous sources as a key factor in Melinda Gates’ decision to divorce him, which she began pursuing in 2019 after Gates’ relationship with Epstein came under the spotlight.
Attorney Spencer Kuvin, who represents nine Epstein accusers, told The Sun that Gates should step up and volunteer any information on Epstein and his associates that might help in the ongoing investigation into Ghislaine Maxwell, Epstein’s ‘Madam.’
“Why are you taking business meetings with a person like that? I question anyone’s moral character who chooses to take business meetings with someone who’s exhibited that kind of behavior and admitted to that type of behavior.” said Kuvin, adding “With Bill Gates, his wealth and investigatory powers, I find it incredibly hard to believe that he would not have known the full extent of the allegations that have been brought against Epstein here for that.”
“Remember there’s an ongoing investigation regarding Ghislaine Maxwell,” Kuvin continued. “So if Mr. Gates, has information that could assist in that investigation, I would say he should step forward.”
Gates, much like Prince Andrew, has denied any wrongdoing, and has sought to distance himself from the dead ‘financier’ despite evidence that the two were much closer than he claims.
“I met him [Epstein]. I didn’t have any business relationship or friendship with him,” Gates previously claimed.
Yet, according to the New York Times, Gates and Epstein met at least six times, including visits to Epstein’s New York mansion on ‘multiple occasions,’ staying at least once into the night.
Later that spring, on May 3, 2011, Mr. Gates again visited Mr. Epstein at his New York mansion, according to emails about the meeting and a photograph reviewed by The Times.
The photo, taken in Mr. Epsteins marble-clad entrance hall, shows a beaming Mr. Epstein in blue-and-gold slippers and a fleece decorated with an American flag flanked by luminaries. On his right: James E. Staley, at the time a senior JPMorgan executive, and former Treasury Secretary Lawrence Summers. On his left: Mr. Nikolic and Mr. Gates, smiling and wearing gray slacks and a navy sweater. –New York Times
Curiously, Gates adviser Boris Nikolic (pictured below) was named as a fallback executor in an will Epstein amended days before his August 10 death in a Manhattan jail cell.
“We know historically that numerous other people that and took meetings with Epstein after his conviction, we’re just slowly peeling away the layers of this onion of the numerous individuals, high profile individuals that continued with their social and business relationships with that scene after his convictions,” said Kuvin. “There are academic institutions and business individuals that were continuing associations with Epstein after his conviction in admissions about what he’d done to young girls.“
While Gates has come under renewed fire for his relationship with Epstein, he’s also been accused of creepy workplace behavior.
Well, that didn’t work out as planned. Last week, we said:
“Notably, the ‘money flow buy signal’ seemed to cross; however, we need some follow-through action on Monday to confirm. As shown, the uptick in money flows did allow us to add some exposure to portfolios in holdings we had taken profits in with the previous ‘sell’ signal.”
Well, that follow-through failed to occur.Not only did the “buy signal” not trigger, but the market also broke down through the previous consolidation range. As I said, it did not work out as planned. The last exposure we took on is now pressuring the portfolio momentarily, but we should benefit from the turn if we are correct.
With markets deeply oversold on a short-term basis, with signals at levels that generally precede short-term rallies, the rally on Thursday and Friday was not unexpected. Notably, the S&P 500 did hold support at the 50-dma and rallied back into the previous trading range. Furthermore, institutional investors have cut their exposures by 50% in just two weeks, primarily big tech, which provides fuel for a rally.
We will hold exposures at current levels for now. However, instead of looking for a more extended rally into mid-summer, we suspect this rally will be pretty short-lived.
As stated last week, overall, the market trend remains bullish, so there is no need to be overly defensive. We still expect to see a deeper correction as stimulus fades from the system in the next month. At that point, we will become more defensive in positioning as the peak of economic growth and earnings becomes more apparent.
An Inflation Primer
On Thursday’s “3-Minutes” video, I review the recent inflation numbers to put them into perspective. While there is some panic over the headline numbers, there are valid reasons to expect inflationary pressures to be transient.
As stated above, we expect inflation to subside later this year, along with economic growth.
As such, we continue to focus on our risk management accordingly for now. If we are correct in our assessment about the roll-off effect of stimulus and liquidity, we could well see bonds outperform stocks in 2022. We are watching very closely as we currently hold minimal duration in our fixed-income portfolios. If we begin to see the very negative sentiment on bonds reverse, as inflationary pressures subside, we could well see an excellent buying opportunity.
The problem for the markets is the Fed is going to be late.
Rates Doing The “Fed’s Work”
In last week’s message, we said:
“Over the next couple of months, there will be an evident surge in inflation, which the Fed wanted. However, that surge in inflation may come in a lot “hotter” than they anticipated. If that occurs, bond yields will jump higher, effectively “tightening” monetary policy very quickly.”
Such is what we saw on Thursday as bond yields jumped to nearly 1.7%. While rates did fall back mildly on Friday, the rise in rates from the August lows increases the cost of capital. (Chart shows the percentage increase in rates versus the annual inflation rate,)
Given the long and highly correlated history of GDP, Inflation, and Interest Rates, it is no surprise to see rates pacing inflation currently. As noted in “No, Bonds Aren’t Over-Valued.”
“As shown, the correlation between rates and the economic composite suggests that current expectations of sustained economic expansion and rising inflation are overly optimistic. At current rates, economic growth will likely very quickly return to sub-2% growth by 2022.”
Note: The “economic composite” is a compilation of inflation (CPI), economic growth (GDP), and wages.
At the peak of nominal economic growth over the last decade, interest rates rose to 3% as GDP temporarily hit 6%. However, rates correctly predicted that economic growth would return to its long-term downtrend, and inflation would decline. Bonds were right as the economy fell into recession in 2020.
Once again, economists predict 6% or better economic growth, yet interest rates are roughly 50% lower than previously. The bond market is screaming that:
Economic growth will average between 1.75% and 2% over the next few years; and,
Deflation still trumps inflation.
Moreover, the Fed is manipulating inflation expectations.
The Fed Is Driving Inflation Expectations
In recent months, market participants continue to rely heavily on implied inflation expectations. The reliance led to much media-driven commentary relating to allocation decisions in the “inflationary environment.” From that analysis, investors piled into materials, energy, and financial companies, which did indeed provide short-term outperformance. The more deflationary sectors of technology, staples, and utilities, not surprisingly, underperformed.
The problem is that the “market-based” expectations aren’t market-based at all. The first graph below shows the massive amounts of inflation-protected Treasury bonds and notes. Such large purchases create distortions in the very market investors are relying on for inflationary information. Instead, the Fed is skewing the implied inflation calculations.
The following chart from our analyst, Nick Lane, shows the history of these purchases and the impact on inflationary expectations.
Just as the Fed’s monetary interventions distorted signals in the asset market, those interventions are now distorting signals in the TIPs market.
In other words, investors depend on signals from the market to allocate capital and adjust allocations. However, when those signals get manipulated, false readings can lead to significant future dislocations when reality collides with fantasy.
Such is why the Fed will make a mistake.
The Fed Is Going To Make A Mistake
As discussed, the “base effects”(comparison versus last year’s data) make price inflation appear much higher than it is. The graph below puts the CPI indexes in context with their trends of the previous five years.
Currently, the broad CPI index is only .011% above its trend. The Core CPI, which excludes food and energy, is 1.06% above its trend. If the inflationary impulse is transitory and dies out over the next few months, inflation data will end close to where it was pre-pandemic.
The Fed is now potentially in a difficult position with inflationary “expectations” rising, caused by their actions, which increases the risk of a “policy mistake.”
Given the Fed waited so long into the economic cycle to hike rates they weren’t able to gain much of a spread before the economy contracted. Historically, there have been ZERO times the Federal Reserve hiked rates that did not negatively affect outcomes.
The problem for the Fed is that the bond market is not worried about surging inflation. Despite economic growth expectations of as much as 6%, interest rates are trading below 2%. Given the close correlation shown above, it is a message you should not dismiss quickly.
The “real economy” is heavily debt-financed, and as such, cannot withstand substantially higher rates. Consequently, the Fed is caught between hiking rates to quell transient inflationary pressures, thereby deflating the most significant asset bubble in financial history, or doing nothing and hoping no one pushes the “big red button.”
Unfortunately, history is full of instances where someone panicked.
Portfolio Update
“The road to hell gets paved with good intentions.” – Unknown
As noted above, our attempt to “front-run” our “money flow signal” did not work out as planned as the signal did not turn. While we did not take on a tremendous amount of exposure, the increased exposure to the decline mid-week was certainly not part of our plans.
As is always the case, technical analysis works best when you wait for the signals to occur. While a harsh lesson to relearn, the damage was minimal. With market risk reduced, our entry levels should perform over the next couple of weeks.
“Given the economic climate and extreme market risks and rewards, we continue to take an agnostic view of markets. We do not get wed to opinions of economic activity or inflation, or how they may steer markets.
Paying top dollar for assets requires independent thinking and careful attention to market activity. From the brightest traders on Wall Street to the halls of the Federal Reserve and in the studios of the self-anointed media economic experts, there is zero appreciation for the potential of massive forecasting errors.”
Historically, investors get rewarded for going against the crowd. Such is especially the case when the masses are in agreement on what the future holds.
“When all experts agree, something else is bound to happen.” – Bob Farrell.
Goldman Warns Of “Substantial” Surge In Home Prices, Expects Bigger Housing Bubble Than 2007
One week ago, we said that in what is increasingly a stagflationary burst (or, as BofA put it “transitory hyperinflation“) right out of the 1970s playbook (and that was even before the latest blistering hot CPI and PPI numbers printed a few days ago)…
… amid this dismal “transitorily hyperinflationary” landscape where those whose incomes aren’t similarly hyperinflating find themselves at risk of being unable to afford a roof above their head, “there was one ray of hope: renting, with rent prices tumbling in recent months and according to the BLS’ monthly CPI metric, rent inflation had just dropped to the lowest in a decade, just below 2.0% annually…
… “which due to the way the CPI basket is weighted acted as a key anchor on overall CPI rates, and served to distort the broader inflationary picture. In short, the Fed would look at the relatively tame core CPI which was only tame thanks to “tumbling” rents and would conclude that there is nothing to worry about.”
The problem, as we cautioned, is that rents were about to soar, after American Homes 4 Rent, which owns 54,000 houses, increased rents 11% on vacant properties while Invitation Homes, the largest landlord in the industry, also boosted rents by similar amount. The other problem is that even without the rent hike, CPI has been undercounted by roughly 50% because if one actually uses house prices as an input in calculating shelter inflation instead of the politically accepetable owner-equivalent rent, core CPI would be about 8.5% (as discussed in “Biggest Rise In Consumer Prices In More Than A Decade Is Understated By Half.”)
Fast forward to today when in a note from Goldman’s economics team, the bank effectively echoed everything we said, and warns that in addition to all the other widely discussed inflationary pressures – most notably the surge in wages as the labor market collapses thanks to Biden’s trillions – it now expects that “a national housing shortage will fuel substantial home price appreciation for at least a couple more years.” To estimate the spillover to shelter inflation, Goldman then uses city-level data on home prices and rents and finds that 5%-15% of the rate of home price appreciation gets passed through to shelter inflation over a multi-year horizon.
Extrapolating to the national PCE data, Goldman then projects that shelter inflation is likely to surge to 3.8% YoY by end-2022 — boosting core PCE by about 0.3% relative to today — and to exceed 4% in 2023 (!), a higher rate than at any point in the prior economic cycle. At that point anyone countering that (hyper)inflation is transitory will be laughed right out of the room.
Here is some more detail from the Goldman note, first starting with why shelter inflation is arguably the most important component of the core CPI basket, and why it is also the one which politicians do everything in their power to manipulate… lower.
First, as Goldman’s Ronnie Walker reminds us, shelter inflation is a critical part of core inflation for two reasons:
First, its weight is substantial, with rent and owners’ equivalent rent (OER) accounting for almost 20% of the core PCE price index and 40% of the core CPI index.
Second, shelter inflation is among the most reliably cyclical components of the core and empirically is a significant driver of the Philips curve. As a result, it would be hard to get core PCE inflation to run sustainably above the Fed’s 2% inflation target without a helping hand from shelter inflation: over the last two decades, PCE housing inflation has averaged 3.0% YoY when core PCE is above 2%.
Now, as we have reported over the past year, shelter inflation dropped sharply since the start of the pandemic — with PCE housing inflation currently +2.0% YoY vs. +3.4% just before the pandemic…
… in part because the sharp decline in employment has reduced the ability of hard-hit households to afford rental payments and in part because of unique pandemic factors (not to mention the great urban-to-suburban exodus thanks to soaring taxes and militant gangs roaming the streets of liberal cities). Additionally, widespread eviction moratoriums have convinced some landlords to forgive rent for some tenants, which counts as a “zero” when calculating the average cost of shelter in the official statistics. According to Goldman calculations, those forgiven payments are weighing on year-over-year shelter inflation by about 25bp. These special factors will fade, however, as eviction moratoriums are lifted.
Next, Goldman looks at how cyclical improvement and the boom in home prices that it expects, will affect shelter inflation. To do this, it combines metro area-level CPI data with local-level data on unemployment rates, vacancy rates, and home price appreciation. While home prices do not directly enter the inflation statistics, the bank’s analysis suggests that home price appreciation does spill over into rent inflation and OER with some delay. Across a number of specifications, 5%-15% of the rate of home price appreciation gets passed through to shelter inflation over a multi-year horizon.
What does this imply for the long-term shelter inflation outlook? Well, once the unique pandemic factors are behind us, a rapidly improving labor market and a booming housing market should drive a significant increase in shelter inflation. The next chart shows that Goldman expects the unemployment rate to eventually fall into the low 3s, below the 50-year low reached last cycle, and expects a persistent imbalance between supply and demand in the housing market to generate double-digit home price appreciation this year and next.
Putting all this together, Goldman’s model projects that the front-loaded labor market recovery coinciding with historically high home price growth will boost shelter inflation to 3.8% YoY by end-2022 and to exceed 4% YoY in 2023, followed by a moderation as home price growth slows down.
For those confused, Goldman just predicted that by 2024 home prices will be rising at a pace far faster than the widely recognized 2006-2007 housing bubble, and that the spillover from this surge in prices will make the coming hyperinflation anything but transitory.
The nine campuses of the University of California system will no longer consider standardized testing scores as part of the admission process beginning in the fall of 2021.
The change is the result of a legal settlement (pdf) of a lawsuit brought by groups that claimed that the traditional SAT and ACT tests are racist.
Under the settlement, the university, which enrolls some 225,000 undergraduate students, said it won’t consider SAT or ACT scores sent along with admissions applications until 2025. The university further stated that it had no current plan to consider the scores after 2025.
The settlement specifies that the university can still use SAT and ACT scores to determine course placement after the students are accepted. But the nine campuses will no longer use the test scores to determine how to award scholarships.
The lawsuit was filed against the university on Dec. 10, 2019 by several students and groups, including Chinese for Affirmative Action, College Access Plan, College Seekers, Community Coalition, Dolores Huerta Foundation, and Little Manila Rising. The Compton Unified School District filed a similar lawsuit on the same day. The two cases were subsequently merged.
On Aug. 31, 2020, the Superior Court of the State of California, County of Alameda, ordered the university to stop using the SAT and ACT test results for admissions or scholarship decisions while the lawsuit was pending. The university appealed the decision and the appeal remains unresolved.
As part of the settlement, the University of California system will pay $1.25 million in attorney fees to the lawyers who represented the plaintiffs.
“The SAT itself is not a racist instrument. Every question is rigorously reviewed for evidence of bias and any question that could favor one group over another is discarded,” College Board, the maker of the SAT test, told The Epoch Times.
“Today’s SAT is an achievement test that measures what is taught in school and what students need to know to be prepared for college. Performance differences across groups of students reflect an unequal K–12 system. That’s why the SAT should only be considered in the context of where students live and go to school, and an SAT score should never be a veto on a student.”
ACT did not immediately respond to requests for comment.
Test scores from the SAT and ACT tests have been a mainstay of the college admissions process for decades. Opponents of the tests’ use for admission argue that students of certain races score lower on average as a group than other races. Proponents say standardized tests offer an equal playing field since all the students take the same test.
