Second-Quarter Economy Continues the Strength of the First
Second-Quarter Economy Continues the Strength of the First
And my long-promised take on the Gamestop/Reddit fiasco
Some very significant life events prevented me from posting a newsletter last weekend, and is cutting short this weekend's efforts. Future weekends look questionable, too, but I thank you for sticking with me thus far, which has been about 7 months.
So for this abbreviated effort, I present only a few quick images, headlines, and links, followed by my long-promised and -delayed editorial comments on the Gamestop/Reddit fiasco of this January, including what I believe are its larger implications.
Without going deeply into my usual routine, I at least show you the overview of where we think we are, or have recently been in the first quarter of the year. On Thursday morning we'll get the Bureau of Economic Analysis' first estimate of the official rate of growth. Marketwatch reports that the median forecast is for 5.6% (annualized). The Federal Reserve Bank of Atlanta's GDPNow nowcast that I follow so closely has bumped up significantly since I last checked two weeks ago. Its mechanistic, formulaic method of nowcasting presently foresees a rate of growth of 8.3%. The sudden rise from 6.0% came on April 15, mostly in response to the excellent news that morning about a 9.8% pop ["surged" per CNN] in retail sales—a proxy for a big piece of the Consumer Spending portion that accounts for about 70% of GDP. Here's how the outlook for Q1 GDP has evolved over recent months:
The "Blue Chip consensus" seen on the blue line shows one survey of economists' guesspectations. Another is seen at the same Marketwatch page [which constantly evolves, so anyone reading this after the passage of any appreciable amount of time will not see the what I am seeing now]. Marketwatch shows a median forecast of 5.6%--just a small degree higher than Blue Chip. It's probable that the true number on Thursday will come in somewhere between that 5.6% and GDPNow's 8.3%; it will be interesting to see which number is more accurate. Either way, it shows the economy is coming back strongly, again last quarter, from the COVID catastrophe of one year ago right now.
The good news only gets better, according to really every forecast you can find. Marketwatch's bevy of economists are thinking +8.2% for the present quarter as re-opening approaches 100%, and +6.9% for the late summer to fall. Those are again (as always for quarterly stats) at annualized rates of growth.
Again from Marketwatch, I relay a tabular summary of last week's indicators. It highlights that the "Actual" column surprised on the up-side in all cases with the sole exception of existing home sales. Observers agree the reason there is the severe shortage of homes made available for sale; those that are available are subject to bidding wars often won by buyers paying cash and offering well over asking price. That is according to rafts of anecdotal reports from seemingly every region of the country.
(The first line of data about Initial jobless claims did surprise on the up-side, because a lower number in this case is better news.)
To repeat what I wrote two weeks ago: "The guesspectationists are having trouble keeping up with the improving reality."
Now for a few quick links I collected when I had a chance these last two weeks. On my morning Dunkin' run on Monday 4/12, I saw that the local Republican newspaper out of Springfield, MA ran on its front page a story very closely matching the news here:
(If you know anything about the Massachusetts political/media machine system you recognize that the name Republican has absolutely nothing to do with this paper's recent history of political endorsements and editorial slant.)
Then 8 days later, you probably saw or heard this news (it’s worth following the link to see the details):
Procter & Gamble will raise prices in September to fight higher commodity costs
To provide a broader perspective on all this inflation talk, I recommend John Mauldin's latest weekly newsletter, "Stumbling to Scarcity." I won't summarize it except to say that although Mauldin ultimately comes down on the side of a fairly benign view of our present inflationary environment, he does an admirable job of giving fair voice to the side that sees the inflationary risk as more severe.
Specifically, Mauldin gives more information behind the quotation that I relayed two weeks ago from a contact of mine: "Plastics prices are through the roof at the moment"; and he repeats the news mentioned just above about lumber prices.
A couple of hours ago Sunday evening I talked to a guy in my locality who repairs cars and sells a few used ones, who said his wholesale prices are up 28% just during this year and that a used car that sells now for $9000 will likely sell for $13,000 later this year. That would be another 44% bump from today's elevated prices. Even after taking into account the appropriate degree of sales hype involved in his numbers, I agree with him that we're in a pretty significant—or even historical—inflationary spike, whether everyone yet recognizes it as such or not.
And now I print the text I had written in late Jan and Feb about what I can only call the Gamestop/Reddit fiasco. If your memory is far worse than average or if you never really heard about this topic, this little essay contains some info and links to catch up.
I had prepared a paragraph or two about Gamestop and Reddit last weekend [i.e., the final days of January], but found it didn't fit into that already-full newsletter. If you can remember back one week, the huge runup of something like 1700% in GME stock had occurred on the last days of January, and it seems like everyone was talking about it. Many observers have noted, darkly, that last point: when your Uber driver and the people bagging groceries are talking about a stock or the stock market in general (or gold, or bitcoin, or flipping houses, or whatever) you know that that market is overhyped, overpriced, and ready for a big letdown.
After calling a trusted confidante to get confirmation that it was morally acceptable to steal candy from Reddit babies, I tried everything I could think of to short sell ticker symbol GME. But TD Ameritrade made no shares available for that purpose, and I didn't figure out that there's a video-game-related ETF I could have shorted, so I had to watch helplessly while the stock fell from the $300s or at one point over $400 down to below $50 on Tuesday night and $66 at the end of the week.
I saw someone writing some Down-with-the-Man stuff on social media at that time, and I replied:
My understanding is that hedge funds are a vehicle for 'institutional investors,' and those institutions consist largely of pensions of teachers, firefighters, and such (like the endowments of universities a philanthropic organizations like the Ford Foundation and a million others). I'm not sure where Illinois' teacher retirement (TRS) funds are invested, but it could very well be in these hedge funds.
People here seem to be assuming 'those guys' at hedge funds are independent plutocrat fat cats like the Monopoly guy (hence the reason someone in this thread posted a photo of a guy in a top hat, I think) playing with their own excessive stashes of money, and that Little People would win if those people lose. But it's actually a lot of (lower-)middle-class people's retirement funds and do-gooder philathropies that were squeezed. In the meantime, a few founder/insiders at Gamestop were made into multi-billionaires on paper for a few days. Probably they sold high and really are looking like the Monopoly guy now.
What's the rooting interest here? Mine is for the financial markets to lead listed companies to be valued somewhere near their proper, intrinsic value. Pretty sure that for GME, that was not >$300 or $400/share. It's now <$100, which by all accounts is closer to reality. Many analysts were valuing GME at more like $12 or $20, and I can't say they're wrong.
On Sunday Feb 7 I happened to catch a 27-minute show from NPR's "Planet Money" featuring an interview with the Reddit WallStreetBets guy known as "Imposter22." The show was to my surprise pretty good. If you somehow missed this story, those 27 minutes would be one of the best ways I know to catch up. Even the part at the end—where the journalists drop all pretense of journalism and come right out and tell the listeners what they should think about all this—was not that bad. Here is one of the several other links I had saved last week for the purpose of recommending it here as a tutorial.
But nowhere online did I notice anyone saying my own particular 'take' on the Gamestop story, going beyond my social media post above. To conclude this week, here it is:
Lots has been written about the generational nature of the Reddit attack on hedge funds plus the generational nostalgia angle of championing a certain kind of retailer reminiscent of the youth of these 20- or 30- somethings—i.e., video game retailers, movie theaters, legacy cell phone makers, the fashion retailer Express, and the like. My take starts there and adds this: One major thread of this story seems to be the Reddit-ers' taking on a form of magical thinking whereby the price of a thing (a company's stock, in this case) can be whatever they decide they wish it were, untethered to any realistic basis.
This dismays but does not particularly surprise me, insofar as people under a certain age have grown up in a context where many prices, to them, seem like just arbitrary constructs. In their world:
health care and food and rent can be 'free' once we decide they are 'rights';
wages can be arbitrarily set by the government at a level that is conveniently (to some people) high;
the same government can just create unlimited amounts of money to distribute to people without diluting the value of all money;
we can borrow money and pay nothing for it, not even the principal;
we can borrow books from the library and pay no late fines, and even just keep the books without penalty;
in the COVID era, test kits and PPE and vaccines can just be called into existence at the snap of a finger and distributed to everybody for 'free,' and any snag in the production process is evidence of an unjust and immoral …
… wait, what do you mean 'production process'? Isn't everything already existing and just waiting to be distributed and redistributed in whatever manner we decide is just and equitable? So if some people who do half their communication in emojis decide that a share of GME stock should be $400 because that's what they feel like it should be, why not?
(In my NPR market, in an adjacent hour to "Planet Money" we get "Freakonomics Radio," to which I've never gotten into the habit of listening. But now that the NFL is done for the season, I'll make a point of it. "Freakonomics" is, as I hear it, rarely about economics per se, but more about the social sciences broadly defined, and the one I heard on Feb 7 was about cancer research. Even though this wasn't their main point, the evidence I heard on that show deepens my understanding of how astronomically expensive medical research is and how ridiculous—and in the long run horribly destructive—is the idea that medicines and medical treatments should be 'free.' They're not free; they take a lot of resources and a lot of people's work to produce. Nothing that is scarce or uses scarce resources is or can ever be 'free.')
So, for a lot of people the idea that prices should reflect some type of reality of the balance between my so-called "production process" and the effective demand of consumers is something they're mostly unacquainted with. OR, it is something that, to them, reflects systemic power dynamics that need to be uprooted, exposed, and erased. If SME stock rising from the teens to the hundreds would afflict the powerful on Wall Street, then it should be done.
Again I repeat one my themes in these newsletters: We need a lot more information and education about economics than most people get. I'm trying to do my little part, for the tiny sliver of an audience that I reach, to help with that. You can help by sharing or re-posting the link to this website.
… now back to the present of April 2021:
Even as I share the Planet Money link (the transcript to which is here), I have to say that I almost never hear this show. I'm mostly glad that I haven't sought it out and added it to my regular informational diet. The show's 'voice' is described by Wikipedia thus: "Intimate stories are used as a leading thread and use commonplace language with entertaining plots to describe abstract or complex economic and political issues. This method translates political or economic topics, once historically dependent on academic language and higher education, to stories that engage the general public." Call me a snob as much as you like, but I've generally found the show to be grating to the point of annoyed distraction. Even so, they probably do some pretty good work for those who can stomach that voice. Probably it's a generational thing.
I found this particular episode pretty informative, but also pretty maddening for pulling its punches and failing to come to the conclusions that I thought stared us all obviously in the face, even that early stage back on February 7.
As a p.s., here's one more sign of the times from the CBS affiliate in Boston, worth a quick read beyond my one pull quote:
It’s even harder for specialized industries to fill positions. Michael Plump, owner of Elements Massage Stoneham, says jobs that pre-pandemic would take days to fill are sitting stagnant for months.
“Between the stimulus and unemployment [benefits], it’s hard to incentivize people.” said Plump.