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Authored by Lance Roberts via RealInvestmentAdvice.com,

What’s the big “hubbub” over raising the minimum wage to $15/hour? After all, the last time the U.S. lifted the minimum wage was in 2009. The argument for increasing the minimum is to create a “livable wage” for those working at that level. However, is that the best way to help “the poor?”

The Biden Administration wants to include an increase of the minimum wage in the proposed “Infrastructure” plan. Many may forget the attempt to hike the minimum wage during his tenure as Vice-President with the Obama Administration. At that time, there was such an immense level of table-pounding you would assume a majority of Americans got trapped at minimum wage. However, let’s take a look at some numbers.

How Many Work For Minimum Wage?

According to the latest available annual data from the Bureau Of Labor Statistics:

“In 2019, 82.3 million workers age 16 and older in the United States were paid at hourly rates, representing 58.1 percent of all wage and salary workers. Among those paid by the hour, 392,000 workers earned exactly the prevailing federal minimum wage of $7.25 per hour. About 1.2 million had wages below the federal minimum.

Together, these 1.6 million workers with wages at or below the federal minimum made up 1.9 percent of all hourly paid workers.”

Notably, that 1.9% of minimum wage, or less, workers declined 50% from the same report in April 2015:

“In 2014, 77.2 million workers age 16 and older in the United States were paid at hourly rates, representing 58.7 percent of all wage and salary workers. Among those paid by the hour, 1.3 million earned exactly the prevailing federal minimum wage of $7.25 per hour. About 1.7 million had wages below the federal minimum.

Together, these 3.0 million workers with wages at or below the federal minimum made up 3.9 percent of all hourly-paid workers.”

Notably, this number has been reduced drastically from the 13.4% of workers earning minimum wage in 1979.

Of those 1.6 million workers, 49% were aged 19-25, according to the KFF Organization.

Not surprisingly, we primarily find these individuals in the fast food, retail, and service industries.

So What?

“So what? People working at restaurants need to make more money.”

Okay, let’s hike the minimum wage to $15/hr. That doesn’t sound like that big of a deal. Let’s do that math:

My son turned 16 last November and got his first job. He works as a “packer/runner” for a local restaurant to pack orders for pickup due to Covid-19 seating restrictions. Importantly, he has no experience. He also has no idea what “working” actually means and is about to experience the cruel joke of taxes.

However, let’s do the math of $15/hr assuming he works full-time this summer.

• $15/hr X 40 hours per week = $600/week

• $600/week x 4.3 weeks in a month = $2,580/month

• $2580/month x 12 months = $30,960/year.

Let that soak in for a minute. We are talking about paying $30,000 per year to a 16-year old to run food out to customers. (That salary would put him in the top 1% of  wages earners globally.)

Now, let’s expand the math to the current situation.

• 1.9 Million Workers

• $30,960 / year (assuming all workers work full time)

• Assuming everyone worked previously at $7.50/hour

• Wages increase by $29.4 billion over the year.

An increase in wages of $29.4 billion will either get passed onto consumers at higher costs, or the number of jobs decline.

The Trickle Up Effect:

According to Payscale, the median hourly wage for a restaurant manager is $13.00 an hour.

What do you think happens when my son, with no experience, is making more than the restaurant manager?

The owner will have to increase the manager’s salary. But wait. Now the manager is making more than the district manager, which requires another pay hike. So forth, and so on.

Of course, none of this is a problem as long as you can pass on higher payroll, benefits, and rising healthcare costs to the consumer.

Small Business Already Noticing

But that is a problem already. As the National Federation Of Independent Business (NFIB) noted in a recent survey. To wit:

“Yes, injecting stimulus into the economy will provide a short-term increase in demand for goods and services. When the funds are exhausted, the demand fades. However, small business owners understand the limited impact of artificial inputs. As such, they will not make long-term hiring decisions, an ongoing cost, against a short-term artificial increase in demand. 

Also, given President Biden is focused on more government regulation and higher taxes (which falls squarely on the creators of employment), increased costs will further deter long-term hiring plans.”

Such was explicitly a point made by the Congressional Budget Office as well.

“Higher wages would increase the cost to employers of producing goods and services. Employers would pass some of those increased costs on to consumers in the form of higher prices. Those higher prices, in turn, would lead consumers to purchase fewer goods and services.

Employers would consequently produce fewer goods and services. As a result, they would tend to reduce their employment of workers at all wage levels. When the cost of employing low-wage workers goes up, the relative cost of employing higher-wage workers or investing in machines and technology goes down. Some employers would therefore respond to a higher minimum wage by shifting toward those substitutes and reducing their employment of low-wage workers.”

Been Here Before

That analysis dovetailed with previous research from the Manhattan Institute when the Obama Administration tried lifting the minimum wage previously.

“By eliminating jobs and/or reducing employment growth, economists have long understood that adoption of a higher minimum wage can harm the very poor who are intended to be helped. 

But this groundbreaking paper by Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, and Ben Gitis, director of labormarket policy at the American Action Forum, comes to a strikingly different conclusion:

Overall employment growth will be lower as a result of a higher minimum wage. Furthermore, much of the increase in income that results for those fortunate enough to have jobs, would go to relatively higher-income households. It would not help those households in poverty in whose name the campaign for a higher minimum wage gets waged.”

Problems With Hiking The Minimum Wage

• Raising the minimum wage has a variety of effects on both employment and family income. By increasing the cost of employing low-wage workers, a higher minimum wage generally leads employers to reduce the size of their workforce.

• The effects on employment would cause changes in prices and different labor and capital types.

• By boosting the income of low-wage workers who keep their jobs, a higher minimum wage raises their families’ real income, lifting some families out of poverty. However, real income falls for some families because other workers lose their jobs, business owners lose income, and prices increase for consumers.

Net Impact

• The net effect of a minimum-wage increase is to reduce average real family income.

Minimum Wage Impact On Employment

• Higher wages increase the cost to employers of producing goods and services. The employers pass some of those increased costs on to consumers in the form of higher prices. Those higher prices, in turn, lead consumers to purchase fewer goods and services.

• The employers consequently produce fewer goods and services, reducing their employment of low-wage and higher-wage workers.

• When the cost of employing low-wage workers goes up, the relative cost of hiring higher-wage workers or investing in machines and technology goes down.

Net Impact:

• An increase in the minimum wage affects those components in offsetting ways.

  • It increases the cost of employing new hires for firms

  • Reduces the costs of higher-wage workers and productivity-increasing technology

  • Makes firms raise wages for all current employees whose salaries are below the new minimum, regardless of whether new workers get hired.

Minimum Wage Increase Effects Across Employers

Employers vary in how they respond to a minimum-wage increase.

• Employment tends to fall more at firms whose sales decline when they raise prices. Also, at firms that can readily substitute machines or technology for low-wage workers.

• They might reduce workers’ fringe benefits (such as health insurance or pensions) and job perks (such as employee discounts). Such lessens the effect of the higher minimum wage on total compensation. 

• Employers could also partly offset their higher costs by cutting back on training. They could also opt to assign work to independent contractors who the FLSA does not cover.

Net Impact

• Employers respond to higher minimum wages by cutting costs or benefits elsewhere.

Conclusion

Should we raise the minimum wage from $7.25 an hour to say $9.00 an hour? Probably. The cost of living has risen since the 2009 wage hike, and an increase would likely be more palatable than a doubling.

However, while a drastic hike to $15 sounds innocent enough, it has the most significant negative impact on the poor, as reported by the Foundation For Economic Freedom:

“Minimum wage laws create a barrier to getting a job that the privileged are better able to overcome than the underprivileged. When jobs are scarce, then immigrants, workers with few skills or little education, and those with limited English proficiency are going to have a harder time convincing employers that their labor is worth $15 an hour than their better-skilled, native, English-speaking competitors. As Thomas Leonard has recently shown, unemploying such marginalized groups are regarded as part of the point of minimum wage laws by early 20th-century ‘progressives’ who saw the minimum wage as a useful tool for keeping immigrants, blacks, and women out of the labor market.”

Notably, the unintended consequences of a minimum wage hike in a weak economic environment are not inconsequential. Given that businesses are already fighting for profitability, hiking the minimum wage, given the subsequent “trickle up” effect, will lead to further increases in productivity and a reduction in employment.

The key event in the first week of May will be another outstanding jobs report with April nonfarm growth expected around 950k (some whispers have it as rising as high as 1.5 million, a number that will unleash another reflation tantrum) and the unemployment rate dropping to 5.7% from 6.0% in March. ISM surveys are likely to push even higher in April, with the manufacturing index rising to 66 and services reaching a new record of 65. As BofA summarizes, with the US economy reopening amid vaccinations, real activity should be robust.

While more than half of S&P companies have now reported, and we are due for a slowdown in earning season, there is still a bevy of heavyweights reporting including iRobot and Chegg on Monday, Pfizer, TMobile on Tuesday, GM, PayPal and Rocket on Wednesday, Moderna, Square and Roku on Thursday and retail darling DraftKing on Friday.

Focusing on the US economy, the key economic data releases this week are the ISM manufacturing and non-manufacturing reports on Monday and Wednesday, jobless claims on Thursday, and the April employment report on Friday. There are several speaking engagements from Fed officials this week.

Here is a daily breakdown courtesy of Goldman:

Monday, May 3

• 09:45 AM Markit manufacturing PMI, April final (consensus 60.7, last 60.6)
• 10:00 AM Construction spending, March (GS +1.8%, consensus +1.8%, last -0.8%): We estimate a 1.8% increase in construction spending in March, reflecting a rebound following winter storm effects in February.
• 10:00 AM ISM manufacturing index, April (GS 65.2, consensus 65.0, last 64.7): We estimate that the ISM manufacturing index increased 0.5pt to 65.2 in April, reflecting a 1.8pt increase in our manufacturing tracker (to 63.3) and a boost to the supplier deliveries time component from chip shortages.
• 02:20 PM Fed Chair Powell (FOMC voter) speaks: Fed Chair Jerome Powell will speak at a virtual event hosted by the National Community Reinvestment Coalition. Prepared text and moderated Q&A are expected.
• 05:00 PM Lightweight motor vehicle sales, April (GS 17.4m, consensus 17.5m, last 17.75m)

Tuesday, May 4

• 08:30 AM Trade balance, March (GS -$74.6bn, consensus -$73.5bn, last -$71.1bn); We estimate that the trade deficit increased by $3.5bn in March, reflecting an increase in the goods trade deficit. Goods imports are now well above their pre-pandemic level, and goods exports are slightly above their pre-pandemic level. Both imports and exports of services have recovered only slightly from their 2020Q2 troughs.
• 10:00 AM Factory orders, March (GS +1.3%, consensus +1.6%, last -0.8%); Durable goods orders, March final (last +0.5%); Durable goods orders ex-transportation, March final (last +1.6%); Core capital goods orders, March final (last +0.9%); Core capital goods shipments, March final (last +1.3%): We estimate that factory orders increased by 1.3% in March following a 0.8% decrease in February. Durable goods orders increased by 0.5% in the March advance report, and core capital goods orders increased by 0.9%.
• 01:00 PM San Francisco Fed President Daly (FOMC voter) speaks: San Francisco Fed President Mary Daly will take part in a virtual Q&A moderated by Minneapolis Fed President Kashkari and hosted by the Economic Club of Minnesota.
• 01:00 PM Dallas Fed President Kaplan (FOMC non-voter) speaks: Dallas Fed President Robert Kaplan will take part in a moderated virtual discussion hosted by the North Texas Commercial Association of Realtors and Real Estate Professionals.

Wednesday, May 5

• 08:15 AM ADP employment report, April (GS +800k, consensus +888k, last +517k); We expect an 800k rise in ADP payroll employment, reflecting strong underlying job growth and a boost from lower initial jobless claims. We expect ADP to underperform the BLS payroll measure this month, in part because workers returning to their previous employers may not be fully captured by the ADP panel methodology.
• 09:30 AM Chicago Fed President Evans (FOMC voter) speaks: Chicago Fed President Charles Evans will give a virtual speech on the U.S. economy and monetary policy at an event hosted by Bard College. Prepared text and Q&A with audience and media are expected.
• 09:45 AM Markit services PMI, April final (consensus 63.1, last 63.1): 10:00 AM ISM services index, April (GS 64.0, consensus 64.1, last 63.7): We estimate that the ISM services index increased 0.3pt to 64.0 in April, reflecting a 2.5pt increase in our services tracker to 60.4 and possible seasonal drag.
• 12:00 PM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Fed President Loretta Mester will give a virtual speech on the economic outlook to the Boston Economic Club. Audience Q&A is expected.

Thursday, May 6

• 08:30 AM Nonfarm productivity, Q1 preliminary (GS +4.2%, consensus +3.7%, last -4.2%); Unit labor costs, Q1 preliminary (GS flat, consensus -0.8%, last +6.0%): We estimate nonfarm productivity growth of 4.2% in Q1 (qoq saar), reflecting a larger increase in business output than in hours worked. We expect that Q1 unit labor costs—compensation per hour divided by output per hour—remained unchanged.
• 08:30 AM Initial jobless claims, week ended May 1 (GS 530k, consensus 540k, last 553k); Continuing jobless claims, week ended April 24 (consensus 3,620k, last 3,660k): We estimate initial jobless claims decreased to 530k in the week ended May 1.
• 10:00 AM Dallas Fed President Kaplan (FOMC non-voter) speaks; Dallas Fed President Robert Kaplan will take part in a moderated discussion hosted by Bard College.
• 01:00 PM Cleveland Fed President Mester (FOMC non-voter) speaks: Cleveland Fed President Loretta Mester will take part in a virtual conversation hosted by the University of California, Santa Barbara. Audience Q&A is expected.

Friday, May 7

• 08:30 AM Nonfarm payroll employment, April (GS +1,300k, consensus +978k, last +916k); Private payroll employment, April (GS +1,200k, consensus +900k, last +780k); Average hourly earnings (mom), April (GS flat, consensus flat, last -0.1%); Average hourly earnings (yoy), April (GS -0.4%, consensus -0.4%, last 4.2%) ;Unemployment rate, April (GS 5.5%, consensus 5.7%, last 6.0%): We estimate nonfarm payrolls rose 1,300k in April (mom sa). Mass vaccinations and the easing of business restrictions likely supported rapid job growth in virus-sensitive industries, including leisure and hospitality, retail, and education (public and private). Additionally, Big Data signals generally indicate monthly job gains of 1mn or more in the month. We note the possibility that the establishment survey undercounts job gains from reopening establishments, which other things equal would result in a relatively stronger household survey. Reflecting this and an expected rise in the participation rate, we estimate a five-tenths drop in the unemployment rate to 5.5%. We estimate a flat monthly reading for average hourly earnings (mom sa) due to negative composition and calendar effects; coupled with the anniversary of the spring 2020 lockdowns, this would result in a sharp drop in the year-on-year rate (from +4.2% to -0.4%).
• 10:00 AM Wholesale inventories, March final (consensus +1.4%, last +1.4%)

Source: Goldman, BofA

If you’ve been following the Tesla saga for the last several months, there’s no doubt your attention has likely turned to the relationship between the company, its “founder” Elon Musk and the Chinese Government.

Over the last couple of months, we have observed how the honeymoon between the world’s largest auto market and Tesla have slowly but surely soured. The change in the relationship is notable because Tesla has been heavily reliant on sales to China and production from its Shanghai factory to make analyst estimates.

Now, it appears that Tesla is getting the message and trying to play “damage control”, ostensibly before the the soured relationship becomes obvious enough for even the most unsophisticated Tesla investors (all of them?), which would likely cause a run on the proverbial bank. 

In response, the company is “boosting its engagement” with Chinese regulators, according to a Reuters report Monday morning. A follow up by Bloomberg reported that “Tesla executives attended at least four policy discussions in China, on topics including auto data storage, vehicle-to-infrastructure communication technologies, car recycling and carbon emissions”.

Interesting that quality control and braking weren’t on the list.

Tesla also is expanding its “government relationship team” in China (one can’t even imagine what they are tasked with). Recall, recently, Tesla paid back $614 million in loans that it owed on its Shanghai Gigafactory. The company also said in its most recent 10-Q that it no longer had access to $758 million from a fixed asset facility as a result. 

The loans were part of a whirlwind of variables that all mysteriously went Tesla’s way when the automaker sought to get up and running, extremely quickly, in China. Tesla was able to ascertain financing, land and staff to build the Gigafactory with blistering turnaround time when the company made the decision to build in China.

The quick turnarounds and China’s willingness to help finance the project raised numerous eyebrows at the time, including ours. Recall, back in April 2020, we were one of the first to ask if Musk risked becoming a Chinese asset. We raised pointed questions about Musk’s cozy relationship with the Chinese government – before their relationship started to fall apart – more than a year ago. 

Recently we’ve covered the China risk to Tesla’s business in our piece suggesting that Elon Musk’s Chinese fairy tale could eventually come to an end. We noted how in late April 2021, Chinese state media is now suggesting that the automaker’s sales could be “doomed” in the country.

By Michael Every of Rabobank

It’s not often that I will recommend a segment of contemporary TV as having direct pertinence to financial markets, but did anyone watch Bill Maher’s not-safe-for-work monologue raging against cryptocurrencies last week?

In particular, his opening remark that things starting with “crypto-” generally aren’t good spoke to me. Pre-2008, the only “crypto” word I had in my memory-bank was “crypto-fascist”; but that compound noun has since been bisected, with both halves going viral in the eyes of different parts of society. Maher really did not pull his punches as he continued: “Nothing is ever actually being accomplished and no actual product made or service rendered….It’s like Tinker Bell’s light. Its power source is based solely on enough children believing in it…Our problem is not economic but psychological. People who have been raised in a virtual world are starting to believe they can really live in it.”

“OK, Boomer,” no doubt respond the cryptonites, swiping right under lock-down and waiting for their pizzas to arrive. There is not much one can say to that oft-heard, dazzling rhetoric. Yet by the power of pure serendipity, the same day Maher was speaking our own Wim Boonstra published his rebuttal of crypto too, which can be found here. To summarise, Wim goes in just as hard as Bill, but without the allusions to Peter Pan’s fairy friends. And this Daily only differs in striking a communication tone somewhere between the two – caveat Tinker Bell!

Of course this view is hugely unpopular in some circles – those who own crypto. “You just don’t get it,” will no doubt be the politer of the iterations of the message I will receive.

No, I don’t.

Or rather, I do. Trust me, I know my monetary history; and heterodox economic theory, and economic history (not the comic-book version ‘taught’ to economists); and geopolitics; and realpolitik. And it is precisely because of that wider view that I can’t bring myself to believe we are going to see both a collapse of the global international monetary order and the power of the nation state, allowing crypto to thrive, and yet we also poodle around in self-driving Teslas on smooth roads (in underground tunnels) while checking our crypto balances, as gig-economy workers or drones deliver us delicious food we didn’t grow and certainly can’t cook.

In short, if you are in full survivalist mode, or at least long commodities, then I can see the skin in the game; or, if you are entirely lacking in ideology but just buy things that go up – until they go down again. But “OK, Crypto-Boomer,” is the message to those who think they can say “Roads? Where we are going, we don’t need roads,” to avoid any future potholes.

Yes, I fully grasp our flailing, failing, always-be-bailing financial system justifies nausea rather than back-patting; I fully recognize the logic that what cannot continue will not; and I am always flagging the risks of geopolitical potholes about to be dug,…or caused by munitions: e.g.,

• The EU aiming to cut its dependency on Chinese and other foreign suppliers in six strategic areas including raw materials, pharmaceutical ingredients and semiconductors, under an industrial action plan to be announced as soon as this week;

• A (non-binding) EU parliament resolution that any further Russian aggression should prompt its removal from the global SWIFT payments system just before US Secretary of State Blinken is due to visit the UK and Ukraine;

• The Economist magazine openly flagging Taiwan as a geostrategic flashpoint, which it is;

• Reports in the Washington Post that allege China’s Belt and Road Initiative used forced labor;

• China warning Australia to avoid getting ‘burned’ by colluding with ‘terrorists’;

• Australia reviewing China’s 99-year lease on the Port of Darwin signed in 2015;

• North Korea sabre-rattling again against the US;

• Rumors –subsequently denied– that the US and UK will offer Iran USD7bn in unfrozen oil assets in exchange for four American prisoners (or USD1.75bn per person, which at least shows no inflation since the 2015 Iran deal, when the US sent Tehran7bn in non-USD cash);

• The US also withdrawing from Afghanistan this year (and not for no reason?); and

• The appalling virus situation in India (while Europe and the UK worry about summer holidays);

Yet all of this, along with that flailing, failing, always-be-bailing financial system also argues for higher gold prices,…and they have gone nowhere compared to the constant promises from gold bugs that the only way is up in this kind of environment.

Crucially, imagine what gold and crypto might do if we were to see major economies taper their current pedal-to-the-metal stimulus. China is leaning towards deleveraging rather than further credit expansion. Moreover, the BOC have just started to edge down their QE; there is enormous pressure on the RBA to do the same – which it is resisting as much as it is seeing rampant house-price inflation (CoreLogic today says they were up 1.8% m/m in April); the RBNZ now *have* to look at house prices, which means doing *something*; and there are suggestions the BOE might soon move in the same direction (tapering, not deliberate blindness or being forced to look at house prices). Of course, the Fed is still unmoved – for now. Yet watch the Anglo central banks closely. If they all start to move further towards tapering by the summer, what might August’s Jackson Hole then offer as platform for the Fed?   

Of course, then we would still get back to the issue of whether tapering means higher or lower long yields, which is intimately tied up in political-economy and power, which it itself at the root of the whole crypto (and crypto-fascist) debate. So Bitcoin’s time to shine then?

When a TV comedian can poke fun at you, and get a mainstream audience roaring with laughter, it suggests one is not as powerful or fashionable as one thinks: which is why the dictators that cryptonites ironically profess to hate so much are allergic to comedy even as they are the best material for it.  

In January 2020, Bridgewater’s Ray Dalio warned “cash is trash,” suggesting investors should diversify into gold.

“You can’t jump into cash. Cash is trash,” says @RayDalio. “You have to have a well-diversified portfolio, you have to be global, and you have to have balance…and you have to have a certain amount of gold in your portfolio.” pic.twitter.com/lZqCnvsqBh

— Squawk Box (@SquawkCNBC) January 21, 2020

A year later, the billionaire warned “investing in UST bonds (and most financial assets) has become stupid.”

And last month, the founder of the world’s largest hedge fund warned that the “United States could become perceived as a place that is inhospitable to capitalism and capitalists” under the Democrats and his firm got behind bitcoin as a storehold of wealth.

So, no cash; no bonds; buy gold, buy bitcoin… and now  Bridgewater’s co-chief investment officer Greg Jensen warned investors that parts of the U.S. equity market are in a bubble, but shorting too early is the “easiest place to die” for an investor.

Jensen joined Bloomberg’s “What Goes Up” podcast to discuss this week’s Federal Reserve meeting and how ample liquidity from the central bank, combined with a booming economic rebound, make conditions ripe for markets to get more bubbly.

Q. Bubbles are a very strange phenomenon because the risk-reward relationship is so interesting. It almost seems that as an investor, you have to participate in bubbles. Because if you think it’s a bubble too early, you really miss the best returns from them. How do you know when it’s time to get out of an overvalued market?

A: All along through Bridgewater’s history we’ve been systematic. So we’ve taken the kind of discussion we’re having now — a very qualitative view of the world — but translated into ways to measure it. So you take something like a bubble, right? A classic qualitative thing. What do you mean by bubble? How do you measure that it’s a bubble? Is it enough to say prices are high relative to history, or what’s the actual measure? And then how reliable is it?

And we have six gauges of a bubble that we use all over the world. Then you could apply it to cryptocurrency. You can apply it to anything you wanted in the world to stocks, to bonds to anything. Our basic scoreboard is: Are prices high relative to traditional measures? Are prices discounting unsustainable conditions?

So, as an example today, there’s something like 10% of stocks that are pricing in more than 20% revenue growth and margin expansion. If you look at history, 2% of stocks actually achieved that. That’s an extremely hard thing to do.

Q: That’s not counting the base effects from last year, right?

A: No. I’m talking about ongoing growth rates without the base effect. It doesn’t happen. That’s very, very unlikely to happen. Potentially with inflation or something you might, but in a normal kind of forward-looking picture, you don’t get that. So that’s an example of discounting unsustainable conditions. They can’t, as a group, actually achieve that condition.

The third thing is new buyers entering the market. How many new buyers are there? How big a part of the market are they? There’s the broad sentiment measures. There’s purchases being financed by leverage and buyers and businesses sort of making extended forward purchases. That’s all part of our checklist for a bubble. And you see today a fair amount of the equity market in the U.S. in a bubble, but not the aggregate.

There are definitely pockets that meet those standards and that’s dangerous. And then, like you said, what do you want to do, buy or sell them? Well, that’s a whole other dangerous thing.

And that’s where, when we had a drawdown in 2000-2001 associated with the bubble — both the dollar and the equity market and how that was playing out at the time — that really forced us to get into flows, which is basically how we measure bubbles today. Where’s the money coming from? Who are the buyers and sellers? What are their balance sheets? How much more money can they put into this bubble versus how much income they’re getting and when does that start to flip? And so for us, that process of being able to look at the balance sheets of the buyers and sellers and think about when they’ve been stretched to an extreme — where they won’t have the money, where there’s more supply coming than possible demand.”

So you look at the IPO pipeline, you look at the creation of new instruments, how fast those balance sheets are growing. And that’s how we try to measure that criss-cross. And it’s still a very, very dangerous game, like you’re saying.

So the third part is be careful and be conservative in your thinking around the ability to time those things, because that’s kind of the easiest place to die in asset prices is trying to be short a bubble too early.

 Click here to listen to the full podcast…

Authored by Tom Ozimek via The Epoch Times,

Skyrocketing lumber prices that have tripled over the past 12 months have driven the price of an average new single-family home to rise by $35,872, according to new analysis by the National Association of Home Builders (NAHB), with the price spike threatening to hobble the momentum of the U.S. housing market, one of the bright stars of the recovery from the pandemic recession.

While homebuilder sentiment remains optimistic, as indicated by the NAHB Housing Market index, headwinds due to rising building costs have pulled the index down from recent highs.

“The supply chain for residential construction is tight, particularly regarding the cost and availability of lumber, appliances, and other building materials,” said NAHB Chairman Chuck Fowke in a statement.

At the onset of the health crisis, “the mills stopped producing,” said Dustin Jalbert, senior economist and lumber industry specialist at Fastmarkets in Burlington, Massachusetts. “As soon as they saw 20 million unemployed, they shut down production,” Jalbert added.

But the pandemic drove demand for housing in low population density areas and for home office space, while the Fed dropped interest rates, driving mortgage rates down to historic lows. This confluence of factors turned out to be a boon for housing, with surging demand pushing housing inventories to record lows.

Lumber producers have struggled to catch up with the bustling homebuilding activity, with lumber prices jumping more than 300 percent year-on-year to record highs.

“The logging operation, the shipping of the logs to the mill, the shipping of the finished product, getting workers back on the job, it’s not like flipping a switch to bring those back online,” Jalbert said.

A worker loads logs at Ledwidge Lumber Co. in Halifax, Canada, on May 10, 2017. (The Canadian Press/Darren Calabrese)

This lumber price hike has also added nearly $13,000 to the market value of an average new multifamily home, NAHB said in a post. This translates into households paying $119 a month more to rent a new apartment, the association said, adding that its representatives on April 29 held a “productive” virtual meeting with White House staff from the Domestic Policy Council, National Economic Council, and the Office of the Vice President.

“The discussion covered mill capacity issues, mill worker shortages, and how soaring lumber prices are exacerbating the housing affordability crisis and putting the American dream of homeownership out of reach of millions of households,” NAHB said in a statement.

The association called on the White House to hold a summit on lumber and building material supply chain issues and to temporarily remove the 9 percent tariffs on Canadian lumber to help reduce price volatility.

“The administration was noncommittal on both requests but the door remains open for future talks,” NAHB said.

In the short term, mills are moving toward meeting the demand boom.

“The lumber industry is going to hit production capacity this summer, but things will calm down in 2022,” Jalbert said.

While lumber prices should come back to earth, headwinds remain. Resources remain constrained and Washington has to conduct trade negotiations with Canada, which provides the United States with about 30 percent of its lumber, according to Jalbert.

“There’s going to need to be more investment in the industry to meet this demand,” he said.

But while lumber prices have surged, the cost of concrete has remained stable, with more homebuilders considering this alternative to keep costs down.

Insulating concrete forms (ICFs), which are polystyrene forms that are stacked in place and then filled with concrete to form a solid wall, have become “a highly popular alternative to wood framing,” NAHB said.

“Home builders are not likely to leave behind traditional ‘stick-built’ homes without good reason,” NAHB said in a post. “But with lumber prices now adding nearly $36,000 to the price of an average single-family home and with recent advancements in building technology in other areas, certain framing methods at least deserve a look.”

Three weeks ago, just before the start of Q1 earnings season we said “Q1 Earnings Will Be Stellar, But Are Fully Priced-In” noting that “the past quarter is already fully priced in – and expected to be spectacular – which is why actual earnings may only disappoint.”

We were right.

As of this weekend, 303 S&P500 companies have reported first quarter results (75% of total market cap). 69% of companies reporting have beat street wide earnings estimates by >1SD (significantly higher than 46% historical avg) whereas only 6% have missed estimates by >1SD (significantly lower than historical avg of 14%). In short a spectacular earnings season not only in absolute terms, but also relative to expectations. Here is Goldman’s John Flood describing just how spectacular: 

This earnings period we are seeing the highest percentage of companies beat street wide earnings ests (by >1SD) in the 20+ years that we have tracked this data. Very few companies are missing.

That’s the good news. The bad news, as we also predicted, is that “beats are NOT being rewarded and the few misses we have seen are being severely punished” as Goldman puts it. Indeed, this is the second consecutive quarter in which earnings beats are being punished by a market which has been priced to beyond perfection. 

Here is JPMorgan with the dismal quantification: we are now more than halfway through earnings season, with the Tech sector largely completed, and companies that beat EPS estimates are seeing their stocks fall, on average 30bps and companies that miss EPS estimates are seeing their stocks fall 2%.

What does this mean? Well, for those who had hoped that the stunning beats by the likes of Google, Amazon or Apple would reprice the tech sector higher, it means more disappointment and a question of whether this is indeed “as good as it gets.” Here, again, is JPMorgan:

A strong, and improving, macro environment is filtering into earnings and companies are not necessarily being rewarded. If we see a strong NFP next Friday, does that give markets the boost that they are looking for?

Probably not, especially if it is so strong (see “Early Indications Point To 1.5 Million Jobs Number“) that markets freak out again about another inflationary tsunami. That said, there is one possible wildcard: corporate buybacks, which as we reported last weekend, resumed after exiting the blackout period last Friday. Here is JPM again:

With buybacks accelerating, can corporate demand act as the incremental buyer if institutional investors pullback on their activity into the summer?

We’ll find out soon enough but one thing is clear: if not even buybacks can push this priced to beyond perfection market to a new record high (if “transitory”) plateau, there is just one possible direction for stocks next.