Two months ago, I raised concerns regarding whether escalating gasoline prices would impact retail sales. At that time, surging energy costs were increasingly affecting consumer spending, which accounts for around 70% of GDP. It felt like an impending disaster. However, by early May, gasoline prices reached a plateau and have since stabilized or even decreased slightly. While there’s no guarantee that prices won’t spike again, we’ve thus far dodged a major setback in retail sales due to energy costs.
Our Real Deficit Problem Is Unrelated to Traditional Government
The Atlantic | July 25
In 1960, during the last full year of the Eisenhower administration, taxes constituted 17.8 percent of GDP, while primary spending (excluding interest) stood at 16.4 percent. Social Security accounted for 2.2 percent of GDP, while Medicare was not yet established. The remaining sectors had a primary surplus, with taxes at 15.6 percent and spending at 14.2 percent.
Fast forward to 2010, in what was labeled the era of “big government,” and spending on those other sectors only represented 14.7 percent of GDP, inflated by recession-induced stimulus expenditures. By 2021, the Congressional Budget Office (CBO) predicts that spending will drop to 13.0 percent—less than in 1960. Tax revenues from those sectors will hover around 12.5 percent of GDP, resulting in a mere primary deficit of 0.5 percent. This projection assumes that all tax cuts from 2001, 2003, and 2009 remain in effect indefinitely.
Forecasting is notoriously challenging—especially when it pertains to future events, as the old adage suggests. Yet, predictions are a fundamental part of finance and economics. Even a passive investor relies on some form of assumption—essentially, a forecast! For example, if you hold an S&P 500 index fund, you presume that you’ll benefit from an equity risk premium. But how did you come by that expectation? There are countless reasons to think positively, yet the crux lies in the inherent anticipation of receiving a premium simply by investing in risky assets.
Budget discussions in Washington are experiencing “gridlock”, which continues to raise concerns about a potential default. Meanwhile, the situation in Europe remains an evolving crisis. However, as of Friday’s market close, global asset markets do not seem alarmed. An examination of ETF proxies for major asset classes reveals that buyers have dominated the market recently, creating a somewhat unsettling atmosphere. Historically, broad increases across all sectors often signal an impending correction. Early indications point to this being the case for U.S. stocks, with futures reportedly “set to drop.” Below is a summary of how major asset classes are performing through July 22…
● The Man and the Statesman: The Correspondence and Articles on Politics
By Frédéric Bastiat
Review via The Wall Street Journal
Bastiat’s short essays, compiled under the title “Economic Sophisms,” are cherished by advocates of laissez-faire economics. In the late 19th century, small-government Democrats referenced him in Congress to counter high tariff proposals from the GOP. His presence often elicited dismay among Republicans, who were unable to refute his critiques against government intervention. While Bastiat’s economic writings are widely recognized, his letters have until now only been available in their original language. “The Man and the Statesman” is the inaugural volume in the anticipated English-language edition of Bastiat’s collected works, featuring 209 letters along with a selection of his political essays, notes, and an insightful glossary contributed by editors Jacques de Guenin, Jean-Claude Paul-Dejean, and David M. Hart. The letters themselves reveal the most delightful economist you’ll ever have a chance to know.
The recovery in commercial and industrial (C&I) lending continues, but for how long? Historical data supports a cautiously optimistic outlook. The value of C&I loans has increased each month for the past eight months through June, marking the longest period of growth since the recession officially ended in June 2009. This is a reassuring sign that lending, a crucial indicator of future economic activity, has entered a phase of consistent growth.
Today’s update on initial jobless claims indicates that the recovery in the labor market has plateaued. Many have suspected this for several months, and today’s figures reinforce that perception. The trend illustrates that we are currently stuck in a high claims range. It could have been worse; weekly new claims aren’t rising. Instead, they remain relatively stable but at levels that don’t inspire much confidence regarding future job creation or overall economic health. While growth remains somewhat steady and there are several reasons for optimism, the economy is operating perilously close to stall speed.
Bond vigilantes are pushing yields higher for certain European nations, while showing little indication of distress in the U.S. Treasury market. The dollar may not be flawless, but it remains the world’s reserve currency and enjoys significant advantages over the euro. Nevertheless, the persistently low yields on Treasuries are surprising to some, especially given numerous forecasts predicting that recent fiscal and monetary stimulus would drive yields up. Back in 2009, The Wall Street Journal noted that the vigilantes seemed to be making a comeback, thanks to Congress and the Federal Reserve flooding the economy with dollars to combat the recession. Remarkably, two years later, the benchmark 10-year Treasury yield sits at roughly 2.9%, which is about 50 basis points lower than the yield when those concerns were first raised in 2009.
As I prepare to leave for a week-long vacation, I noticed that Financial Advisor has published my latest article discussing a new wave of research focusing on the ongoing quest for excess returns resulting from skilled trading, often referred to as alpha. Titled as such, it delves into an age-old debate with intriguing new dimensions. For further insights, you can read the full article here…
I’ll be on the road for the coming week, which means that posting will be sporadic or perhaps nonexistent until I resume normal updates around July 20. After all, one cannot solely thrive on economics and finance.
