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The Equity Market Faces a Growth Risk in the Second Half of 2021
Mott Capital Management | Tactical Update May 30, 2021 Mott Capital Management, LLC Reading The Markets | The Week Ahead Michael J. Kramer MARKET STRATEGIST The Equity Market Faces A Growth Risk In The Second Half of 2021 As we enter June, we will quickly be approaching the end of the first half of 2021, and with that, investors are likely to begin turning their attention to 2022. As that happens, investors may quickly learn that equities face more than just interest rate and inflation risk. Growth risk is likely to become an overwhelming issue for equities and as the high earnings growth rate of 2021 moves to a much slower pace in 2022. Consensus analysts' estimates using a bottom-up approach suggest that earnings growth rates in 2022 will sink to 11.9% from 36.5% in 2021 and 10.6% in 2023 (Figure 1). I believe this is likely to result in the PE multiple of the S&P 500 compressing in the second half of 2021. This process may have already started. The PE multiple of the S&P 500 has not expanded since the beginning of 2021. More recently, it began to decline in April. Looking back to the late 1990s and early 2000s, another period of high PE multiples, we saw that the cycle only lasted for as long as the growth rate held up. Once growth rates in 2001 began to roll over the PE multiple, and the broader S&P 500 began to roll over with it. Based on that cycle, it would appear that the current cycle has now peaked, and from here, the PE should continue to compress (Figure 2, 3 & 4). -
Is the Fed Too Active?
OPINION BY KARTIK ATHREYA Is the Fed Too Active? ome observers have recently voiced concern that Fed So the goal of redressing at least some aspects of activities in the areas of climate change and inequal- economic inequality has long been a Fed concern. Indeed, Sity may put the institution at risk. In a forthcoming the Richmond Fed strives to understand the full range of Duke Law Journal article, for instance, Christina Parajon economic outcomes of Fifth District residents, including Skinner of the University of Pennsylvania’s Wharton School inequities, and among them, those that occur along racial argues that the Fed must avoid the temptation to engage in lines. To fail here would hinder our ability to fulfill our “central bank activism” by pushing its powers beyond the mandate under the CRA and to provide better informa- text and purpose of its legal mandate to address “imme- tion via the Beige Book and other means to guide mone - diate public policy problems” such as climate change tary policy. As Richmond Fed President Tom Barkin and economic inequality. She cautions, “Activism under- has pointed out, “The regional Fed banks are charged mines the legitimacy of central bank authority, with understanding the dynamics within our erodes its political independence, and ultimately “We should districts. In pursuit of that goal, we have been renders a weaker central bank.” In a recent Wall investing in research that addresses these Street Journal op-ed, Michael Belongia of the always strive to issues and the racial inequities that result.” University of Mississippi and Peter Ireland of understand forces Lately, the connection between mone- Boston College voiced similar concerns about Fed that plausibly tary policy and economic inclusion has drawn activities in the area of income inequality. -
Live from Atlanta, It's the Ben Bernanke Show
Live from Atlanta, It’s the Ben Bernanke Show By Sherilyn D. Narker Federal Reserve Bank of Atlanta Lesson Plan of the Year Contest, 2007–2008 First Place LESSON DESCRIPTION This three-day lesson can be used as a review activity for a macroeconomics unit or as a supplement to a classroom discussion of how the Federal Reserve’s Monetary Policy affects individuals’ lives. Students first review economic terms by conducting a Web search, either individually or in groups, depending on the availability of computers. Students then work in groups of about three to five people, and use the most recent Beige Book information from the Atlanta Fed district to research economic conditions. (Any district can be substituted for the Atlanta district). The student groups create different characters who perform in a hypothetical talk show, which is fictionally proposed by the chairman of the Federal Reserve, Ben Bernanke, as a way of informing young people about the importance of the Federal Reserve in their lives. The teacher or an adult playing the role of Dr. Bernanke will participate in the talk show presented by the students, and ask them to describe, using correct economic terms, how their lives are affected by economic conditions in their district. BACKGROUND INFORMATION The Federal Reserve System (the FED) is the central banking system of the United States. The major goals of the FED are full employment, price stability, and sustainable economic growth. The functions of the FED are supervising and regulating banks, providing financial services, and conducting monetary policy. The Federal Reserve System is composed of three divisions—a seven-member Board of Governors; the 12-member Federal Open Market Committee (FOMC), which is responsible for conducting monetary policy through open market operations, the discount rate, and reserve requirements; and 12 regional Federal Reserve Banks, each of which has its own district and is located in a major U.S. -
Friedman and Schwartz's a Monetary History of the United States 1867
NBER WORKING PAPER SERIES NOT JUST THE GREAT CONTRACTION: FRIEDMAN AND SCHWARTZ’S A MONETARY HISTORY OF THE UNITED STATES 1867 TO 1960 Michael D. Bordo Hugh Rockoff Working Paper 18828 http://www.nber.org/papers/w18828 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2013 Paper prepared for the Session: “The Fiftieth Anniversary of Milton Friedman and Anna J. Schwartz, A Monetary History of the United States”, American Economic Association Annual Meetings, San Diego, CA, January 6 2013. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Michael D. Bordo and Hugh Rockoff. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Not Just the Great Contraction: Friedman and Schwartz’s A Monetary History of the United States 1867 to 1960 Michael D. Bordo and Hugh Rockoff NBER Working Paper No. 18828 February 2013 JEL No. B22,N1 ABSTRACT A Monetary History of the United States 1867 to 1960 published in 1963 was written as part of an extensive NBER research project on Money and Business Cycles started in the 1950s. The project resulted in three more books and many important articles. A Monetary History was designed to provide historical evidence for the modern quantity theory of money. -
Thoughts on Fiscal and Monetary Policy Since the Onset of the Global Financial Crisis
The Great Moderation and the Great Confusion: thoughts on fiscal and monetary policy since the onset of the Global Financial Crisis “The central problem of depression-prevention [has] been solved for all practical purposes” Robert Lucas, incoming address to the American Economic Association, 2003 “I’ve looked at life from both sides now From win and lose and still somehow It’s life’s illusions I recall I really don’t know life at all” Joni Mitchell Clouds (1967) “The Great Moderation” is a term used in 2002 by James Stock and Mark Watson and given wider currency by Ben Bernanke, amongst others. It was presumably chosen to contrast with the Great Depression of the 1930s and, perhaps, the great stagflation of the 1970s. It began in the mid-1980s and lasted until the onset of the Global Financial Crisis in 2007. Between 2002 and 2007 much was written about the Great Moderation in what became an orgy of self-congratulation, especially on the part of monetary economists. The Great Moderation was characterised by two related, and obviously beneficial, phenomena. The first was much reduced volatility in business cycles. The second was an initial downward trend in inflation, followed by a sustained period of relatively stable low inflation. It is reasonable to argue that this occurred despite the fact that both the American and world economies suffered a number of shocks while the Great Moderation was occurring. The most notable of these were the sharemarket crash of 1987 and the Asian financial crisis of 1997. Interestingly enough, Stock and Watson argue that luck did play a significant part, that in fact the shocks were weaker than in previous eras. -
[Speech at The] Midwest Journalist Seminar
MIDWEST JOURNALIST SEMINAR FEDERAL RESERVE BANK OF CHICAGO Chicago, Illinois July 16, 1998 ..................................................................... I. Introduction A. Good afternoon and thank you again for joining us today. B. I know you’ve had a heavy day of tours and briefings, so I think it’s time to give you a little break from the facts and figures. C. What I’d like to do is wrap it all up with what you and your colleagues in the media refer to as “a lit- tle bit of color” regarding the role of the Chicago Fed in setting monetary policy. D. I’ve noticed that the two set pieces that all Fed-watching journalists seem to have on their assignment sheet are the pre-FOMC meeting story and the post-FOMC meeting story. The former predicts what you think we’ll do, and the latter analyzes what you think we’ve done. E. With that in mind, I thought it’d be useful to do the same thing for you. 1. First, I’ll give you a little flavor of what we do to prepare for each FOMC meeting. 2. Second, I’ll take you with me to an FOMC meeting, giving you a taste of what goes on there. F. Before we do so, let’s set the stage. 360 Michael Moskow Speeches 1998 II. Monetary Policy/FOMC Prep A. You’ve heard about a lot of Fed functions today, but our most important by far is monetary policy. 1. Ask most Americans, and they’ll say interest rates are set by Alan Greenspan in Washington, D.C. -
Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling
NBER WORKING PAPER SERIES FACTS AND CHALLENGES FROM THE GREAT RECESSION FOR FORECASTING AND MACROECONOMIC MODELING Serena Ng Jonathan H. Wright Working Paper 19469 http://www.nber.org/papers/w19469 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2013 We are grateful to Frank Diebold and two anonymous referees for very helpful comments on earlier versions of this paper. Kyle Jurado provided excellent research assistance. The first author acknowledges financial support from the National Science Foundation (SES-0962431). All errors are our sole responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w19469.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Serena Ng and Jonathan H. Wright. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling Serena Ng and Jonathan H. Wright NBER Working Paper No. 19469 September 2013 JEL No. C22,C32,E32,E37 ABSTRACT This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession which was unlike most other post-war recessions in the US in being driven by deleveraging and financial market factors. -
What Is Past Is Prologue: the History of the Breakdown of Economic Models Before and During the 2008 Financial Crisis
McCormac 1 What is Past is Prologue: The History of the Breakdown of Economic Models Before and During the 2008 Financial Crisis By: Ethan McCormac Political Science and History Dual Honors Thesis University of Oregon April 25th, 2016 Reader 1: Gerald Berk Reader 2: Daniel Pope Reader 3: George Sheridan McCormac 2 Introduction: The year 2008, like its predecessor 1929, has established itself in history as synonymous with financial crisis. By December 2008 Lehman Brothers had entered bankruptcy, Bear Sterns had been purchased by JP Morgan Chase, AIG had been taken over by the United States government, trillions of dollars in asset wealth had evaporated and Congress had authorized $700 billion in Troubled Asset Relief Program (TARP) funds to bailout different parts of the U.S. financial system.1 A debt-deflationary- derivatives crisis had swept away what had been labeled Alan Greenspan’s “Great Moderation” and exposed the cascading weaknesses of the global financial system. What had caused the miscalculated risk-taking and undercapitalization at the core of the system? Part of the answer lies in the economic models adopted by policy makers and investment bankers and the actions they took licensed by the assumptions of these economic models. The result was a risk heavy, undercapitalized, financial system primed for crisis. The spark that ignited this unstable core lay in the pattern of lending. The amount of credit available to homeowners increased while lending standards were reduced in a myopic and ultimately counterproductive credit extension scheme. The result was a Housing Bubble that quickly turned into a derivatives boom of epic proportions. -
Operationalising a Macroprudential Regime: Goals, Tools and Open Issues
Operationalising a Macroprudential Regime: Goals, Tools and Open Issues David Aikman, Andrew G. Haldane and Sujit Kapadia 2013 OPERATIONALISING A MACROPRUDENTIAL REGIME: GOALS, TOOLS AND OPEN ISSUES David Aikman, Andrew G. Haldane and Sujit Kapadia (*) (*) David Aikman, Andrew G. Haldane and Sujit kapadia, Bank of England. The authors would like to thank Rafael Repullo for his excellent comments on an earlier draft of this paper. This article is the exclusive responsibility of the authors and does not necessarily reflect the opinion of the Banco de España or the Bank of England. OPERATIONALISING A MACROPRUDENTIAL REGIME: GOALS, TOOLS AND OPEN ISSUES 1 Introduction Since the early 1970s, the probability of systemic crises appears to have been rising. The costs of systemic crises have risen in parallel. The incidence and scale of systemic crises have risen to levels never previously seen in financial history [Reinhart and Rogoff (2011)]. It has meant that reducing risks to the financial system as a whole – systemic risks – has emerged as a top public policy priority. The ongoing financial crisis is the most visible manifestation of this trend. Five years on from its inception, the level of real output in each of the major industrialised economies remains significantly below its pre-crisis path (Chart 1). In cumulative terms, crisis-induced output losses have so far reached almost 60 %, over 40 % and over 30 % of annual pre- crisis GDP in the UK, Euro-area and US respectively.1 With the benefit of hindsight, the pre-crisis policy framework was ill-equipped to forestall the build-up in systemic risk which generated these huge costs. -
Explaining the Great Moderation: Credit in the Macroeconomy Revisited
Munich Personal RePEc Archive Explaining the Great Moderation: Credit in the Macroeconomy Revisited Bezemer, Dirk J Groningen University May 2009 Online at https://mpra.ub.uni-muenchen.de/15893/ MPRA Paper No. 15893, posted 25 Jun 2009 00:02 UTC Explaining the Great Moderation: Credit in the Macroeconomy Revisited* Dirk J Bezemer** Groningen University, The Netherlands ABSTRACT This study in recent history connects macroeconomic performance to financial policies in order to explain the decline in volatility of economic growth in the US since the mid-1980s, which is also known as the ‘Great Moderation’. Existing explanations attribute this to a combination of good policies, good environment, and good luck. This paper hypothesizes that before and during the Great Moderation, changes in the structure and regulation of US financial markets caused a redirection of credit flows, increasing the share of mortgage credit in total credit flows and facilitating the smoothing of volatility in GDP via equity withdrawal and a wealth effect on consumption. Institutional and econometric analysis is employed to assess these hypotheses. This yields substantial corroboration, lending support to a novel ‘policy’ explanation of the Moderation. Keywords: real estate, macro volatility JEL codes: E44, G21 * This papers has benefited from conversations with (in alphabetical order) Arno Mong Daastoel, Geoffrey Gardiner, Michael Hudson, Gunnar Tomasson and Richard Werner. ** [email protected] Postal address: University of Groningen, Faculty of Economics PO Box 800, 9700 AV Groningen, The Netherlands. Phone/ Fax: 0031 -50 3633799/7337. 1 Explaining the Great Moderation: Credit and the Macroeconomy Revisited* 1. Introduction A small and expanding literature has recently addressed the dramatic decline in macroeconomic volatility of the US economy since the mid-1980s (Kim and Nelson 1999; McConnel and Perez-Quinos, 2000; Kahn et al, 2002; Summers, 2005; Owyiang et al, 2007). -
The Great Moderation: Causes & Condition
THE GREAT MODERATION: CAUSES & CONDITION WORKING PAPER SERIES Working Paper No. 101 March 2016 David Sutton Correspondence to: David Sutton Email: [email protected] Centre for Accounting, Governance and Taxation Research School of Accounting and Commercial Law Victoria University of Wellington PO Box 600, Wellington, NEW ZEALAND Tel: + 64 4 463 5078 Fax: + 64 4 463 5076 Website: http://www.victoria.ac.nz/sacl/cagtr/ Victoria University of Wellington P.O. Box 600, Wellington. PH: 463-5233 ext 8985 email: [email protected] The Great Moderation: Causes and conditions David Sutton The Great moderation: causes and conditions Abstract The period from 1984-2007 was marked by low and stable inflation, low output volatility, and growth above the prior historical trend across most of the developed world. This period has come to be known as the Great Moderation and has been the subject of much enquiry. Clearly, if it was the result of something we were ‘doing right’ it would be of interest to ensure we continued in the same vein. Equally, in 2011 the need to assess the causes of the Great Moderation, and its end with the Great Financial Crisis, remains. Macroeconomists have advanced a suite of potential causes of the Great Moderation, including: structural economic causes, the absence of external shocks that had been so prevalent in the 1970s, the effectiveness and competence of modern monetary policy, and (long) cyclical factors. To this point the enquiry has yielded only tentative and conflicting hypotheses about the ‘primary’ cause. This paper examines and analyses the competing hypotheses. The conclusions drawn from this analysis are that the Great Moderation was primarily the product of domestic and international financial liberalisation, with a supporting role for monetary policy. -
THE FEDERAL RESERVE SYSTEM DISCUSSED: a Comparative Analysis
THE FEDERAL RESERVE SYSTEM DISCUSSED: A comparative analysis Prepared by M.M.G. Fase and W.F.V. Vanthoor De Nederlandsche Bank SociŽtŽ Universitaire EuropŽenne de Recherches Financi•res Vienna 2000 CIP The Federal Reserve System Discussed: A Comparative Analysis M.M.G. Fase and W.F.V. Vanthoor Vienna: SUERF (SUERF Studies: 10) ISBN 3-902109-02-5 © 2000 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyrightholder(s); the same applies to whole or partial adaptions. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other actions for this purpose. THE FEDERAL RESERVE SYSTEM DISCUSSED: A comparative analysis M.M.G. Fase and W.F.V. Vanthoor*) In the first half of 2000 the authors of this paper visited the twelve District Reserve Banks in the United States which was followed by a discussion at the Board in Washington. The aim of this visit was to get a deeper insight into the working of the American Federal Reserve System in order to see whether there is a sufficient basis for a comparison with the European System of Central Banks.The direct contacts with many senior and research staff members enabled them to deepen their factual empirical knowledge about the US banking system. The staff set aside a lot of time to discuss the relevant questions and made various members of the Economic Research Departments available for further conversation.