Economic Recovery Update - Dec 31

[dan_s]

From a long report send to me by one of our Super Smart members. "Economic Expansion" = higher demand for energy, which = higher demand for oil.

The Bottom Line
The overall picture that emerges is that economic growth is likely to start slowing to the normal long-term growth rate, although the economic recovery so far has been strong and V-shaped. Real GDP for Q3 was up sharply at 33.4% q/q (annualized) from the highly depressed -31.4% q/q for Q2, but is still down -2.8% y/y, well below the median growth rate of 3.1% y/y since 1950. The five-year annualized growth rate is 1.2% as of Q3, which is 72.3% below the 4.5% five-year annualized growth rate as of Q2 2000 (Chart 7).

As of press time, the Atlanta Fed’s latest estimate for Q4 2020 real GDP is now 10.4%, revised down from the 11.1% q/q published in our prior reports.

As announced during the December FOMC meeting, the Fed is on track for its massive bond-buying program, which at $120B per month, adds up to $1.440 trillion per year. So, on top of already high financial liquidity, plenty of new liquidity will be added every month. This engine of financial liquidity is likely to persist until market-driven forces can raise interest rates, which will most likely be due to either higher inflation, higher economic growth, or unanticipated external shock. The next economic expansion is likely to be much longer than the 11-year cycle of 2009 to 2019, as the monetary stimulus that is in place from the Fed’s bond-buying program cannot be removed in a hurry, nor can the federal deficit be reduced in a time span of 10 to 20 years. As the historical evidence shows, Congress rarely seriously attempts to reduce the Federal deficit.

As measured by CPI and core CPI, inflation is up 1.2% y/y and 1.6% y/y, respectively, as of November. Inflation as measured by the PCE index and core PCE index is up 1.1% y/y and 1.4% y/y, respectively, as of November. The yield for 10-year Treasuries is currently at 0.92%; the yield for 30-year Treasuries is currently at 1.66%.

As the table above shows, current equity market valuations, measured as earnings price yield, are still attractive relative to the level of interest rates, as shown for the stock market peaks in the table.

Daily trendline volatility is likely to be influenced by earnings guidance for Q4. Any serious stock market correction due to an unexpected event should provide a strong buying opportunity.