America Is Back: Economic Model Update Part III

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When I first wrote about the AB (America Is Back) economic model back on April 7th, 2020, I gave specific dates to where I thought we would need to see real progress with this model. September 1st, 2020, was the big date, and now that we are roughly 2 weeks away, I thought its time to write another article to show what kind of progress we have made.

First, two things we should try to avoid.

1. Don’t focus on the shape of the recovery right now, this kind of talk draws too much energy away from tracking early-stage recovery data. When I mean the shapes of the recovery, I am talking about the general recovery. Certain economic data lines are showing a V Shape bounce, but that is only part of the picture. The reason I emphasize this is that in the current world we are in, we can lose focus on early positive economic indicators. What I thought would happen did occur. People missed the first economic recovery signs and were too bearish too long. This is similar to what happened after the Great Financial Crisis.

2. Don’t focus on the fact that we are nowhere close to having the same type of solid economic data lines that we enjoyed in January and February of 2020. The BC (Before Coronavirus) economic data was expansionary, as I showed here.

https://loganmohtashami.com/2020/04/12/2020-economic-data-before-coronavirus-bc/

The reason for this is that in February 2020, the economic data was good, and we were working from the longest economic and job expansion ever recorded in history. In fact, the data was not only getting better toward the end of 2019, in the first 2 months of 2020 the rate of growth in a few economic indicators were improving. However, If you’re looking to get back to this level in 2020, it simply can’t happen as we still have an active virus, infecting and killing Americans every day. We simply can’t have our economy running at full capacity, while Covid19 is with us.

The AB economic model was introduced on April 7th, 2020, on Housing Wire. I believe that due to the deep contraction that the virus did to our economy, it was crucial to separate 2020 into 3 different segments.

BC (Before Coronavirus)
AD ( After the Disease) 
AB  (America is Back) 

5 things I needed to see to get back to the full AB stage, and we have made progress for sure.

5 indicators that will show when the housing market is rebounding from COVID-19

1. Flattened Curve   ( We still have a lot of work to do here and winter is coming)

From April 7th.

“It is from this data that I have based my virus turnaround thesis, which is that by May 18 or sooner, we will see a flattening of the new infection curve, and by September 1, we will be at a much higher capacity to fight this virus.”

The positive was that we did flatten the curve by May 18th. Then we got sloppy, and the infections spread again, forcing states to make some hard choices. As we can see below, we are trending better now.

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Once it was apparent that the virus was breaking out again, the choice I had to make was will my September 1st date still show us making an improvement. Because the government started to take measures before the July 4th Holiday, and even Republicans were telling people to wear a mask. I blasted on twitter that the data should get better by September 1st. Back in early July, that looked way too optimistic. While deaths are rising as they do lag cases, the rate of growth on the virus is heading back then. Hopefully, this sticks by September 1st, and we are all more careful about our activities in public.

Risk: A significant increase in the new cases during the winter, which would be the  2nd wave. This would force the government to make hard choices on what to do. Also, we don’t make more progress on testing and the vaccine.

It might not be pretty, but I still believe what I wrote on April 7th, 2020

“I believe the months of April and May are going to tell an epic story of America’s start in defeating this virus.  If we do this right and document the cause and effect of our efforts, future generations will be able to look to this period in time for how to handle a global pandemic. My faith in America winning has never let me down because I always believe in my people and country. I can tell you now, this virus isn’t changing my view on that.”

 

2.  End Stay At Home Orders ( checked off to a degree) 

While some business restrictions are still in places. For the most part, the stay at home orders isn’t the same as it was in March, April, and May.

What we need to start believing is that we shouldn’t see a W in our economy. What I mean by a W is that the recent economic gains fall straight back down.  The fear of the virus simply can’t be replicated working from the longest economic expansion ever. Let me give you an example. Here in Irvine, even though the State of CA had some new restrictions, people are not acting like they did in March and April. Nobody is hoarding toilet paper, the fear of not knowing what is happening next isn’t freezing people anymore. We as a country are starting to learn to live, consume goods and services with an active virus in our economy.  While this isn’t an optimal full capacity operating economy, we are starting to live again. We also have a significant savings glut that we are working off now.

From Advisor Perspectives 
https://www.advisorperspectives.com/dshort/updates/2020/07/31/real-disposable-income-per-capita-in-june

August savings rate per event

August DPI

3. 10-year yield goes above 1%  ( Not yet but we are trying to get there) 

Before the 10-year yield broke under 1%, I talked about this on BankRate.com that I believe recessionary yields would be between -0.21% and 0.62%. The fact that we were above 0.62% a lot during this recent downturn told me that the bond market in its own odd way was telling us things were going to be better in Q3 and Q4. Everyone has their own take on the bond market, and that was mine. Our real goal is to get into a new range between 1.33% -1.60%. We still have a way to go, but better news did drive yields higher before the 2nd surge in cases happened. Recently yields have risen from their short term lows.

As we can see, stil below 1%, the 10-year yield still not into us just yet! However, a double-bottom in yields? Wink Wink.

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Risk: Bad vaccine headlines, bad virus data, any stock market pullback will draw money into bonds. Also, be mindful of China headlines, especially if things get a bit testy on the Military side of things. Also, the bond market didn’t like the fact that we haven’t had a deal signed by congress. However, it looks like to me, at least that for now, that fear has left. We are going into a period where a lot, and I mean a lot of political drama can happen. So, we do have multiple events that can send yields lower.  

4. Decline In Credit Stress And Jobless Claims ( Double Check-Off Here) 

The most unloved data line in America, the St. Louis Financial Stress Index, has made an impressive recovery and has stayed below my critical level of 1.21% during the recent recovery stage and below zero with some duration now. Currently at  -0.4098%

814 Stress 0.4098%

As you can see below, we have recovered much faster in this crisis that the great financial crisis. Thank the Federal Reserve and Fiscal Disaster Relief here!

813 Financial Stress Index Long -0.4098%

You can get an excellent live market update when stress is hitting the financial markets by knowing the components of this index. When the data gets better, believe it, don’t make the same mistakes the bears made in 2009-2012, and not believe things were getting better.

716 ST Modelggggg

Jobless claims. While we are at a massively high level for jobless claims and continuing claims. The data has broken in the right direction with some duration. I know some of you might think I am crazy for even bringing this up. However, the trend is your friend, and as long as we make progress against this virus and provide fiscal and monetary disaster relief, we should not see a reversal of this trend in any meaningful way.

From Advisorperspective:
https://www.advisorperspectives.com/dshort/updates/2020/08/13/weekly-unemployment-claims-963k-new-claims-down-from-last-week

813 Jobless claims cycle

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We have regained 9.3 million jobs in the past 3 months. We have so much work to do as a country, but the point is the trend is heading in the right direction. At some point in the future, when we have defeated this virus, we can move from disaster relief to a real stimulus bill. The goal is always to get a tighter labor market so wages can rise.

From Advisorperspective:
https://www.advisorperspectives.com/dshort/updates/2020/08/07/the-big-four-economic-indicators-july-employment
August Jobs total

Risk: The 2nd surge of cases that eliminated some labor will shows up in jobless claims soon. The 2nd wave in the winter, making the need for work to not come back in other sectors. Fiscal support fading away. Not being fiscally aggressive enough after we have defeated this virus too.

5. Data from the hardest-hit sectors start to trend upward.  (Checked Off)

This boat has sailed off, and we have tons of V shape recovery charts now to show this to be the case on multiple data lines. While some aren’t exact, V’s data has gotten better. Just remember we are working from a virus shutdown of our economy, not just the stay at home orders, but the initial shock of having a virus in our country changed behavior.

August Reatail Sales Control
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August Reginal Manu
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Then we have the U.S. housing market, which has been the most outperforming economic sector in the world today.

My recent interview with Bloomberg on this topic

https://www.bloomberg.com/news/audio/2020-07-22/u-s-housing-market-most-outperforming-sector-in-world-radio

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We have a V shape data line all over the housing map.

Purchase Application data has been on fire, with 12 straight weeks of positive year over year growth and 11 consecutive weeks of double-digit plus growth. We did not have this kind of data in 2018 or 2019. Now total volumes are hitting its seasonal stride lower, but a real success story in the world today has been the U.S. housing market, which is lead by good demographics and lower mortgage rates. My sincerest apologies to the housing bubble boys.

It’s official: The U.S. won’t see a housing bubble crash anytime soon

The recent 12 weeks of year over year growth from the Mortgage Banker Association:

+9%
+18%
+13%
+21%
+18%
+15%
+33%
+16%
+19%
+21%
+22% 
+22%

From Calculated Risk
https://www.calculatedriskblog.com/2020/08/mba-mortgage-applications-increase-in.html
MBAAug122020
Pending home sales are at pre cycles highs, which means we still have some legs to run higher with the existing home sales reports.
AUgust Pending Home sales
July Existing Home Sales

The V shape recovery in new home sale and inverse recovery in the monthly supply data means that housing starts still have legs to move higher.
July New home sales
July Monthly Supply
July Permits

AUgust HMI

Notice nothing about the stock market here, even though we have made a robust comeback to almost all-time highs. This is a separate beast all to itself.  I say this still not trying to hate on the stock market as I have had a great year trading stocks. I retired this past June due to the stock market. However, tracking economic data is much different than what Anti central bank stock traders try to push. This is why I have a focus on economic data and not personal stock gains. Only a crazy person would consider their own portfolio to be the economy. This will be my last personal post on the stock subject as this is something I do not do for my blog, and only on rare occasions, I talk about specific stocks on twitter. However, hopefully, you can understand my skeptical nature of stock traders. A few but not all are typically bearish 24/7 and seem angry that they rode this rally to near all-time highs. I am really talking about Gold bugs and anti central bank people here. This act is getting old, so be skeptical of anti central bank stock traders, especially those who seem mad all the time while the market is rallying.

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The chaos theory and the butterfly effect.

That is what I wrote about on Feb 3, 2020, for HousingWire. This wasn’t a forecast that the virus was about to crash the economy right away. It was just common sense that if the virus news got worse, the U.S. economy would tank, the stock market would drop, but also the bond market yields would fall as well. All these things came true. However, even in that article was the point that we had 3 different shocks in the longest economic expansion ever in history all to recover back. Now, this isn’t your ordinary one time shock; this is our Thanos snapping the finger moment and created chaos all over the world.  However, with our demographics, low rates, low inflation, and fiscal and monetary disaster relief capacity, which should be going on for some time now, we can have the most significant comeback nobody saw coming. This is why I wanted to write this model specifically for 2020. Now we still have a lot of risks remaining for the year, so keep an eye out on the data that matters. However, what I wrote above shows that a lot of people missed out on this story because they don’t believe in economic models.

Love each other, fight for one another, don’t fall into darkness and hate. One nation, one family, we are all Americans, and this is our home! We have a lot of work left for us to do to get back to the BC (Before Coronaviru) era but make no mistake we have made progress because we don’t give up, we are not soft people, we are all Americans!

Logan Mohtashami is a Lead Analyst for Housing Wire, financial writer, and blogger covering the U.S. economy with a specialization in the housing market. Logan Mohtashami, now retired, was a senior loan officer at AMC Lending Group, which has been providing mortgage services for California residents since 1987.