Olac Pallan 12/8/21 Olac Pallan 12/8/21

US Economy On Good Track

Hi there, just felt like doing a quick write up on my views on the US Economy.

It is on fire

We are looking at good growth for the next few quarters. BBB and BIF should help keep the economy growing, and giving more money to Americans.

Inflation hawks keep telling us that inflation is a huge problem, that the rescue plan only stoked inflation, and we should be reducing deficits and Fed support.

In short they are proposing restrictive fiscal and monetary policies, to stem an inflation that is nowhere historical high levels. See graph below, we were seeing inflation rates close to 15% in the 1970’s.

Yes, inflation has been higher, but to argue that you should break the recovery, just to keep inflation levels down, when we are not even at employment levels seen before the pandemic, is downright wrong.

Look at what’s happening in the U.S. economy—inflation-adjusted consumer spending, jobs, business investment, and household balance sheets— all growing. The economy is clearly on a winning path, and everyone is benefitting, unlike after The Great Recession when the recovery was uneven, with income gains went to the wealthier groups.

Even with these levels of inflation, consumers have gained more than inflation, this is not only due to wage increases, but the incredible levels of support that the US government has provided during the pandemic. PPP, QE, Unemployment benefits, Stimulus Checks, Child Tax Credits, all have helped, directly or indirectly, lower income, middle class and wealthy Americans.

The graph below shows the race between inflation and consumption, we had been beating in just before the pandemic, and the government support helped us keep the trend, plans like BBB and BIF would help us keep that trend, above inflation, this is not the time to step off the gas, America can grow, and can grow at rates we didn’t think possible 5-10 years ago.

Further supporting the growth thesis, we have added an average of 500,000 jobs each month, during 2021. This is probably the most difficult hurdle to return to pre-pandemic levels. the labor force is effectively smaller, and the only two quick ways to bring it back to previous levels are to increase immigration and increase compensation, we can’t grow workers in 6 months, it takes decades. We need to increase wages to bring back people to the labor force, and increase immigration, to raise the people in prime working age EPOP, which would also increase demand for goods and services, and further support a virtuous circle of growth.

See the graph below, showing our labor force gap.

Finally, business investments, for years corporations have been returning money to investors via stock buybacks and dividends, this has been driven by opportunity cost and return of capital, with a lack of good investment opportunities to increase profits, investors have been demanding return of their investments, profit taking.

I am not saying it is the only reason, it is one of them, I am neither saying it is bad. I bring it as a point to illustrate how important it is for wage growth, for GDP growth, that corporations invest in the future, that they create jobs and opportunities, and usually those opportunities sink with a recession, a crisis, a pandemic.

Business investment is back, and BIF and BBB will only help increase the opportunities for corporations and Americans in general. See the graph below.

In summary, we are not out of the woods yet, but we are in a very good path, and this is not the time to press the breaks, this is when we drive hard to make the most of it.

This is not The Great Recession, this is The Pandemic. Fundamentally different. It is deadly, global, still not under control. The GFC was a housing market meltdown during which millions lost their homes and jobs.

Of course the info I presented is not complete, and there are counterpoints, but they are weak, and current data does support a strong recovery. If we play hard, push for an even better recovery, there is no telling what we can do.

One thing is certain, this is not the time to raise rates, cut spending and create a recession that costs jobs, not when we are not to pre-pandemic levels, not because we are worried with inflation levels that so far have not outstripped recent gains.

Olac Pallan 1/21/18 Olac Pallan 1/21/18

Term Structure of US Inflation Expectations

Just a little tidbit I found interesting, sourced from the Cleveland Fed data and "Inflation Expectations, Real Rates and Risk Premia: Evidence from Inflation Swaps". Review of Financial Studies, Vol. 25, no. 5, 2012.

Interesting to see how it's shifted, from a normal sloping inflation term structure in Dec 2015 to Dec 2016 and Dec 2017.

Olac Pallan 10/9/17 Olac Pallan 10/9/17

A New Beginning

Oct 9th 2017

Welcome everyone, this is a new area where we will be posting ideas and outlook on the markets.

Congratulations to Richard Thaler, of the University of Chicago, on winning the Nobel Prize on economics. His work on Economics and Psychology has been quite eye opening.

People tend to focus on the basic assumptions of economics, and forget that they are assumptions, used so the model works in a very strict boundary. The real world is very different, perfect markets hardly ever exist, if ever, people don't behave "rationally" all the time, and what some of us consider rational, may not be so rational for another group.

His prize is a good reminder that models, in economics as in most fields, are subject to very narrow channels and are apply to the world only under very strict circumstances.

In less words, they are a generalization that doesn't work all the time.

Bienvenidos. esperamos poder ayudarlos a lograr sus metas de inversion.

Olac Pallan