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Saturday, December 16, 2017 7:35:42 AM
StreetTalk<>Weekend Reading: Ignorance Is No Excuse
Written by Lance Roberts | Dec, 15, 2017
The “tax bill cometh.” According to the press, this is going to be the single biggest factor to jump-starting economic growth since the invention of the wheel.
Interestingly, even the Fed’s economic projections are suggesting that economic growth will pick up over the next two years from the impact of tax cuts. (Chart is the average of the range of the Fed’s estimates.)
Of course, you should note the Federal Reserve has NEVER accurately forecasted future economic growth. In fact, it has become an annual tradition of over-estimating growth and then slowly ratcheting down estimates as reality failed to achieve overly optimistic assumptions.
However, despite the Administrations hopes of long-term economic growth rates of 3% or more, in order to pay for the deficits created by cutting revenue, even the Fed has maintained their long-run outlook of less that 2% annualized growth. (Down from 2.7% in 2011) Hardly the supportive stamp of endorsement for the “greatest tax cut” of all-time.
But for economic growth to blossom, the consumer will have to pull their weight given consumption makes up roughly 70% of GDP. The problem, as witnessed by the latest retail sales report, is that consumptive spending is far weaker than headlines suggest.
On Thursday, the retail sales report for November clicked up 0.8%. Good news, right?
Not so fast.
First, sales of gasoline, which directly impacts consumers ability to spend money on other stuff, rose sharply due to higher oil prices and comprised 1/3rd of the increase. Secondly, building products also rose sharply from the ongoing impact of rebuilding from recent hurricanes and fires. Again, this isn’t healthy longer-term either as replacing lost possessions drags forward future consumptive capacity.
But what the headlines miss is the growth in the population. The chart below shows retails sales divided by those actually counted as part of the labor force. (You’ve got to have a job to buy stuff, right?)
As you can see, retail sales per labor force participant was on a 5% annualized growth trend beginning in 1992. However, after the financial crisis, the gap below that long-term trend has yet to be filled as there is a 22.7% deficit from the long-term trend. (If we included the entirety of the population, given the number of people outside of the labor force that are still consuming, the trajectory would be worse.)
But wait, retail sales were really strong in November?
Again, not so fast.
The chart below shows the annual % change of retail sales per labor force participant. The trend has been weakening since the beginning of 2017 and shows little sign of increasing currently.
While tax cuts may provide a temporary boost to after-tax incomes, that income will simply be absorbed by higher energy, gasoline, health care and borrowing costs. This is why, 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank. It is also why, as wages have continued to stagnate, that the cost of living now exceeds what incomes and debt increases can sustain.
Yes, corporations will do well under the “tax reform” plan, and while the average American may well see an increase in take-home pay, it will unlikely change their financial situation much. As a result, economic growth will likely remain weak as the deficit expands to $1 Trillion over the next couple of years and Federal debt marches toward $32 trillion. As noted by the CFRB
“Fiscal conservatives on the right have lost a massive amount of credibility based on the GOP budget they passed this year. After many years of calling for a budget that cut spending, reformed entitlements, controlled the debt and balanced the budget, they failed to enact even one of those goals when they finally had a chance.
Out of a possible $47 trillion in spending over 10 years, the budget called for cutting an utterly pathetic $1 billion. Their fiscal credibility died with a whimper. I doubt that credibility can be regained, but it seems quite likely that some of the more conservative GOP members will call for letting the sequester hit.”
So, when someone acts astonished that things didn’t work out as planned…just remind them that “ignorance is no excuse.”
Just something to think about as you catch up on your weekend reading list.
Trump, Economy & Fed
Is 3% Growth The New Normal by Caroline Baum via MarketWatch
Drop In Public Investment Picks Up Steam by Gary Burtless via Brookings Institute
Could The Tax Plan Still Fall Apart by Jim Newell via Slate
Avoid The Budgetary Wrecking Ball With Tax Bill by Committee For A Responsible Federal Budget
Economy On Sugar High, Tax Cuts Won’t Help by Larry Summers via Washington Post
Minsky’s Financial Instability Hypothesis & The Fed by Edward Harrison via Credit Writedowns
Fed’s Failure To Tighten Conditions A Mistake by Michael Heise via FT
Is Tax Reform Falling Apart by Scott Sumner via Econolog
Don’t Expect An Investment Boom by Paul Kasriel via Financial Sense
Republicans Say They Have A Tax Deal by Jim Tankersley via NYT
Job Creators The Victim Of The GOP Tax Plan by Rob Arnott & John Tamny via IBD
Biggest Cuts Could Be To Living Standards by Eduardo Porter via NY Times
Best Ways To Improve GOP Tax Bill by Stephen Moore via The Washington Times
Tax Changes Coming In 2018, Prepare Now by Paul Sullivan via NYT
A Proposal To Reform Corporate Taxation by Eric Toder via AEI
Markets
Ms. Yellen: Here Is Your Risk by Tyler Durden via ZeroHedge
A Sing Of Frothy Markets by Paul Davies via WSJ
Bitcoin, Most Obvious Bubble Ever by Derek Thompson via The Atlantic
4-Paths To Retirement Income by SA Gil Weinreich via Seeking Alpha
Instant Gratification by Erik Swarts via Market Anthropology
Trading Bitcoin Is A Bad Way To Invest by Simon Constable via US News
Investors Wish List Is Reality Catches Up With Prices by Mohamed El-Erian via MarketWatch
Bitcoin – A Miracle Of Any Price by Tyler Cowen via Bloomberg
Cryptos In One Graph by Shawn Langlois via MarketWatch
Markets Point To Lower Interest Rates by Michael Kahn via Barron’s
Corporate Profits Are Soaring, Why It Can’t Last by Shawn Tully via Fortune
The Double-Edged Sword by Nick Maggiulli via Dollars and Data
A Disaster Waiting To Happen by Jeff Reeves via MarketWatch
Bitcoin & A Dead Parrot by Buttonwood via The Economist
A Question For Every Investor by Michael Lebowitz via RIA
An Unhealthy Absence Of Doubt & Fear by Doug Kass via RIA
Research / Interesting Reads
Yellen Shrugs Off Risk by Wolf Richter via Wolf Street
Must-Have Tools For Retirement Planning by Robert Powell via USA Today
Jim Simons, The Numbers King by DT Max via The New Yorker
Active Fans Are Wrong, Bogle Is Right by Cliff Asness via AQR Capital Management
How To Sort Facts From Fictions by Justin Wolfers via NYT
Inequality & The Coming Storm by Eduardo Campanella via Project Syndicate
Free Markets Are Hard by John Cochrane via The Grumpy Economist
Who Broke The Economy by Annie Lowrey via The Atlantic
Bonds Versus Economists by Jeffrey Snider via Alhambra Partners
Everyone In The Pool by Dana Lyons via The Lyons Share
Time To Get Real With Your Portfolio by Jesse Felder via The Felder Report
“When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” – Chuck Prince,
Citigroup
Use link to access reads:
https://realinvestmentadvice.com/weekend-reading-ignorance-is-no-excuse/
Written by Lance Roberts | Dec, 15, 2017
The “tax bill cometh.” According to the press, this is going to be the single biggest factor to jump-starting economic growth since the invention of the wheel.
Interestingly, even the Fed’s economic projections are suggesting that economic growth will pick up over the next two years from the impact of tax cuts. (Chart is the average of the range of the Fed’s estimates.)
Of course, you should note the Federal Reserve has NEVER accurately forecasted future economic growth. In fact, it has become an annual tradition of over-estimating growth and then slowly ratcheting down estimates as reality failed to achieve overly optimistic assumptions.
However, despite the Administrations hopes of long-term economic growth rates of 3% or more, in order to pay for the deficits created by cutting revenue, even the Fed has maintained their long-run outlook of less that 2% annualized growth. (Down from 2.7% in 2011) Hardly the supportive stamp of endorsement for the “greatest tax cut” of all-time.
But for economic growth to blossom, the consumer will have to pull their weight given consumption makes up roughly 70% of GDP. The problem, as witnessed by the latest retail sales report, is that consumptive spending is far weaker than headlines suggest.
On Thursday, the retail sales report for November clicked up 0.8%. Good news, right?
Not so fast.
First, sales of gasoline, which directly impacts consumers ability to spend money on other stuff, rose sharply due to higher oil prices and comprised 1/3rd of the increase. Secondly, building products also rose sharply from the ongoing impact of rebuilding from recent hurricanes and fires. Again, this isn’t healthy longer-term either as replacing lost possessions drags forward future consumptive capacity.
But what the headlines miss is the growth in the population. The chart below shows retails sales divided by those actually counted as part of the labor force. (You’ve got to have a job to buy stuff, right?)
As you can see, retail sales per labor force participant was on a 5% annualized growth trend beginning in 1992. However, after the financial crisis, the gap below that long-term trend has yet to be filled as there is a 22.7% deficit from the long-term trend. (If we included the entirety of the population, given the number of people outside of the labor force that are still consuming, the trajectory would be worse.)
But wait, retail sales were really strong in November?
Again, not so fast.
The chart below shows the annual % change of retail sales per labor force participant. The trend has been weakening since the beginning of 2017 and shows little sign of increasing currently.
While tax cuts may provide a temporary boost to after-tax incomes, that income will simply be absorbed by higher energy, gasoline, health care and borrowing costs. This is why, 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank. It is also why, as wages have continued to stagnate, that the cost of living now exceeds what incomes and debt increases can sustain.
Yes, corporations will do well under the “tax reform” plan, and while the average American may well see an increase in take-home pay, it will unlikely change their financial situation much. As a result, economic growth will likely remain weak as the deficit expands to $1 Trillion over the next couple of years and Federal debt marches toward $32 trillion. As noted by the CFRB
“Fiscal conservatives on the right have lost a massive amount of credibility based on the GOP budget they passed this year. After many years of calling for a budget that cut spending, reformed entitlements, controlled the debt and balanced the budget, they failed to enact even one of those goals when they finally had a chance.
Out of a possible $47 trillion in spending over 10 years, the budget called for cutting an utterly pathetic $1 billion. Their fiscal credibility died with a whimper. I doubt that credibility can be regained, but it seems quite likely that some of the more conservative GOP members will call for letting the sequester hit.”
So, when someone acts astonished that things didn’t work out as planned…just remind them that “ignorance is no excuse.”
Just something to think about as you catch up on your weekend reading list.
Trump, Economy & Fed
Is 3% Growth The New Normal by Caroline Baum via MarketWatch
Drop In Public Investment Picks Up Steam by Gary Burtless via Brookings Institute
Could The Tax Plan Still Fall Apart by Jim Newell via Slate
Avoid The Budgetary Wrecking Ball With Tax Bill by Committee For A Responsible Federal Budget
Economy On Sugar High, Tax Cuts Won’t Help by Larry Summers via Washington Post
Minsky’s Financial Instability Hypothesis & The Fed by Edward Harrison via Credit Writedowns
Fed’s Failure To Tighten Conditions A Mistake by Michael Heise via FT
Is Tax Reform Falling Apart by Scott Sumner via Econolog
Don’t Expect An Investment Boom by Paul Kasriel via Financial Sense
Republicans Say They Have A Tax Deal by Jim Tankersley via NYT
Job Creators The Victim Of The GOP Tax Plan by Rob Arnott & John Tamny via IBD
Biggest Cuts Could Be To Living Standards by Eduardo Porter via NY Times
Best Ways To Improve GOP Tax Bill by Stephen Moore via The Washington Times
Tax Changes Coming In 2018, Prepare Now by Paul Sullivan via NYT
A Proposal To Reform Corporate Taxation by Eric Toder via AEI
Markets
Ms. Yellen: Here Is Your Risk by Tyler Durden via ZeroHedge
A Sing Of Frothy Markets by Paul Davies via WSJ
Bitcoin, Most Obvious Bubble Ever by Derek Thompson via The Atlantic
4-Paths To Retirement Income by SA Gil Weinreich via Seeking Alpha
Instant Gratification by Erik Swarts via Market Anthropology
Trading Bitcoin Is A Bad Way To Invest by Simon Constable via US News
Investors Wish List Is Reality Catches Up With Prices by Mohamed El-Erian via MarketWatch
Bitcoin – A Miracle Of Any Price by Tyler Cowen via Bloomberg
Cryptos In One Graph by Shawn Langlois via MarketWatch
Markets Point To Lower Interest Rates by Michael Kahn via Barron’s
Corporate Profits Are Soaring, Why It Can’t Last by Shawn Tully via Fortune
The Double-Edged Sword by Nick Maggiulli via Dollars and Data
A Disaster Waiting To Happen by Jeff Reeves via MarketWatch
Bitcoin & A Dead Parrot by Buttonwood via The Economist
A Question For Every Investor by Michael Lebowitz via RIA
An Unhealthy Absence Of Doubt & Fear by Doug Kass via RIA
Research / Interesting Reads
Yellen Shrugs Off Risk by Wolf Richter via Wolf Street
Must-Have Tools For Retirement Planning by Robert Powell via USA Today
Jim Simons, The Numbers King by DT Max via The New Yorker
Active Fans Are Wrong, Bogle Is Right by Cliff Asness via AQR Capital Management
How To Sort Facts From Fictions by Justin Wolfers via NYT
Inequality & The Coming Storm by Eduardo Campanella via Project Syndicate
Free Markets Are Hard by John Cochrane via The Grumpy Economist
Who Broke The Economy by Annie Lowrey via The Atlantic
Bonds Versus Economists by Jeffrey Snider via Alhambra Partners
Everyone In The Pool by Dana Lyons via The Lyons Share
Time To Get Real With Your Portfolio by Jesse Felder via The Felder Report
“When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” – Chuck Prince,
Citigroup
Use link to access reads:
https://realinvestmentadvice.com/weekend-reading-ignorance-is-no-excuse/
Pray for A Pain Free Day!
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