This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Some Taper, No Tantrum
Paulsen’s Perspective
The Leuthold Group
June 3: Many investors worry what will happen when the Federal Reserve finally begins tapering. Quit worrying. Tapering has been happening for the past three months! Annual growth in real M2 money supply contracted from its February high of slightly above 25% to 13.8% in April. Moreover, annual growth in the nominal money supply declined from 27% to just under 18% over this period, and higher inflation has reduced the real supply even further. Considering the recent slowdown in M2 money supply and the faster pace of inflation, it is a good bet that both the nominal and real money supply weakened even more in May.
No, this isn’t quantitative bond-buying; QE is still rising—it hasn’t been curtailed. But the money supply has historically been one of the most important measures of economic liquidity and monetary policy. While the Fed impacts the money supply, its growth rate is ultimately determined by the actions of public-policy officials and private-sector players. The Fed may say that it has not yet even started “to talk about talking about tapering,” but private-sector players stopped talking long ago and have been tapering most of this year.
—James W. Paulsen
The Age of Hyperconnectivity
Mid-Year Outlook 2021
Citi
June 3: While “old economy” sectors like banks, traditional energy, airlines, cruise lines, hotels, and restaurant groups are enjoying a powerful recovery in earnings forecasts and equity performance, it is unlikely that they will lead markets higher in the medium or long term. One reason is that digitization still has far to go. For example, we believe the rollout of the fifth generation of wireless data technology (5G) will enable a vast increase in the number of devices connected to the internet. Rather than just computers or smartphones, these devices will include household appliances, clothing, cars, and machinery. The total number of connections globally could increase from 0.76 billion today to 3.6 billion by 2025.
We envisage a vast increase in the production, collection, and real-time analysis of data. An opportunity in its own right, the age of hyperconnectivity has implications for many other dimensions of digitization. Data proliferation means a greater requirement for artificial intelligence to make sense of it all. It also increases the need for enhanced cybersecurity to protect privacy. Faster 5G communications are set to enable the development of smart cities and robotics, including self-driving vehicles. Hyperconnectivity also impacts other unstoppable trends, including the rise of Asia. Many millions of people in Asia will gain internet access for the first time, transforming their consumer behavior.
—Wietse Nijenhuis, Joe Fiorica
Reading the Beige Book
Ivan Feinseth Market View 360
Tigress Financial Partners
June 3: The Fed’s Beige Book continues to highlight the U.S. economy’s acceleration, but with some pricing pressure. The latest Beige Book out yesterday highlighted that the U.S. economy continued to expand at a moderate pace from early April to late May [and] at a faster pace than in the prior period. Several districts reported increasing vaccine tailwinds, as well as reduced capacity and social-distancing restrictions, [which] are also helping to drive growth and increases in consumer spending. However, the report noted adverse impacts from supply-chain issues, and manufacturers reporting material and labor shortages. Selling prices increased moderately, but less than the pace of input costs. I believe the report highlights the typical recovery pattern of consumer and other end-user demand increasing faster during the initial phases of recovery than supply and raw-material availability. Eventually, supply and production will catch up, and prices will normalize.
—Ivan Feinseth
Negative Demographic Trends
Special Commentary
Wells Fargo
June 2: Current economic indicators suggest that the U.S. economy is shaking off the shock induced by the pandemic, and that real GDP growth likely will be robust in the next few quarters. But the bounce from reopening the economy will eventually fade, and U.S. economic growth will return to more trend-like rates sooner or later. Demographic trends suggest that the U.S. economy may eventually settle into growth rates that historically have been considered to be slow. Acceleration in labor productivity and/or a sustained rise in the labor-force participation rate could offset the growth-retarding effects of slow labor-force growth. But the imminent downshift in the growth rate of the working-age population will exert headwinds on the long-run potential growth rate of the U.S. economy, everything else equal.
If a slow-growth environment does indeed materialize in coming years, then income (i.e., wages, salaries, profits, etc.) will also grow at a subdued pace. Furthermore, political choices about societal priorities may become more difficult.
—Jay Bryson, Hop Mathews
Scary Debt-Service Scenario
PCM Report June 2021
Peak Capital Management
June 1: There is a growing concern among economists that we are on an unsustainable path with respect to the debt and the associated interest costs. The narrative has been told countless times since the financial crisis of 2008. When the Covid-19 pandemic hit, the yield on the 10-year Treasury bond more or less hit the zero bound. Since then, interest rates have gone in one direction—up. Now, higher inflation expectations are part of the reopening narrative. How high would yields have to rise to attract investment in the bond market under an inflationary scenario?
• A 3% jump in yields would send the debt service from $303 billion to $975 billion. We would spend more on debt service than defense, and would approach the cost of funding Social Security. The Federal Reserve knows how tenuous the situation can become if yields were to surge higher.
• Consequently, they are prepared to provide as much liquidity as possible through direct purchases of Treasuries to keep yields in check (i.e., the Fed will print money). Of course, we do not fully understand how this would end, or if it would end. If there comes a time when the dollar is no longer the world’s reserve currency, there could be dire ramifications.
—Brian Lockhart
Silver, Gold Are Headed Higher
The Harley Market Letter
The Harley Market Letter
May 28: The precious-metals complex is stair-stepping higher without much media fanfare. Both silver and gold are back above their respective 15-week and 50-week moving averages, with the prospect for developing some noteworthy upside traction. The recent pullback served to work off the prior overbought condition and has renewed the technical underpinnings to push the overall precious-metals complex higher. Silver continues to be the leader of the pack, and I would not be surprised to see the junior member bust out above the 30 level [$30 an ounce] in the next month and the gold market put in a serious challenge to its former high as well. I have no idea what the fundamental catalyst will be to push these markets northbound, but the technical picture points to continued bull-market action across the entire complex.
—Stan Harley
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