Lead Story… Really short on time this week so didn’t have a whole lot of time to blog but I did find an interesting tidbit that I wanted to share. A couple of weeks ago, in a post entitled Round We Go, I discussed how a correction in a large capital market (real estate, stocks, bonds, etc) could lead to a recession since capital gains are fueling much of the underlying growth and investment in today’s economy. In other words, the economy may look great on the surface but we could still be subject to a reduction in hiring and investment if capital gains and asset appreciation were to reverse course. Since that post, the stock market has been in a volatile tailspin and bond yields have surged. Greg Ip of the Wall Street Journal wrote a story this week that used some data from Goldman Sachs to show just how much of US growth in 2017 was based upon inflating asset prices (in this case the stock market). From the Wall Street Journal (emphasis mine):
Even before he became Fed chairman this past Monday, Jerome Powell had observed how recent expansions ended not with inflation but collapsing asset bubbles. And they don’t need to bring on a financial crisis to do damage. Goldman Sachs estimates that higher stock prices added 0.6 percentage point to U.S. growth last year via the wealth effect—households spending their stock winnings. By Goldman’s calculation, a 20% hit to prices this year could knock 1.1 points off growth. That would more than wipe out the stimulative effect of the tax cut.
Again, consider that this is only talk about growth generated by higher stock prices – it does not include housing, commercial real estate or the cheaper capital cost from rising bond prices and declining yields. The point that I’m trying to make is that the economy is arguably more fragile than it appears currently due to a reliance on capital appreciation to fuel growth. I have no clue if the current stock and bond market volatility will be the eventual economic turning point in this cycle but it bears watching as economic fundamentals (employment rate, wage growth, GDP, etc) still look strong but are perhaps more vulnerable to a market downturn than typically acknowledged.
Economy
On the Rise: The prime working-age population made a new peak for the first time since 2007 in January.
Keep Truckin’: Buoyed by strong demand and flush with cash from recent tax overhaul, trucking companies accelerating plans to replace or expand fleets and ordered the most big rigs of any time in the past 12 years in January.
No Silver Lining: The median young family has almost zero net worth.
Commercial
Funny Money: Google is buying the iconic Chelsea Market building in NYC for over $2 billion because, why not.
Your Daily Productivity Killer: This Bloomberg video game where you buy a mall and have to make leasing decisions to keep it from going under (all while hunting rats and cyber punks) is strangely addictive. Bonus points for the kitschy 80s graphics. Also – spoiler alert – there’s a great Jeff Bezos graphic at the end when you inevitably lose.
Residential
Residual Damage? The housing market is not in a bubble. However, continuing stock market volatility could cause the market to cool off.
Crickets: Portland’s bet on forcing developers to build affordable housing is getting awful results. As usual, inclusionary housing provisions = less housing built.
Profiles
Who Blinks First? Bitcoin’s recent price plunge means that mining the virtual currency is no longer profitable and the only way for it to become so again – excluding higher prices – is to have less miners. However, existing miners all seem to want to be the proverbial “last man standing” and are soldiering on despite the losses in what has turned into a giant game of money-losing chicken.
Backstory: Why the volatility apocalypse on Wall Street earlier this week was not exactly what it seemed and how Credit Suisse likely made a lot of money despite being the underwriter of a failed product.
This Will End In Tears: Millennials are afraid that stocks are too risky so they are investing in Bitcoin and other cryptocurrencies instead.
Just Another Brick in the Wall: Tack on a massive most massively underfunded pension plan, of any S&P 500 company to GE’s ongoing woes.
Chart of the Day
Student debt forgiveness is becoming a very expensive problem for the federal government with no end in sight.
WTF
Eye of the Tiger: Scottish police were in a standoff with what they thought was a real tiger for an hour before they discovered that it was just a massive stuffed animal.
Chicken or the Egg? An alleged drunk driver totaled a lime green Lamborghini in Costa Mesa last weekend when he crashed into a construction trailer. This raises an interesting question that I’ve often pondered: does one have to be a massive douche bag in order to buy a Lamborghini or does the act of buying a Lamborghini turn one into a massive douche bag?
Gotta Hear Both Sides: A legal associate, fired for allegedly stealing money returned to the firm she was dismissed from to allegedly steal more money to buy sex toys. (h/t Darren Fancher)
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