America Is Back: The Final Economic Update

All things come to an end; I believe I can finally close this chapter on the AB (America is Back) Economic Model that I created, specifically for 2020, due to the deep contraction that Covid19 created in our economy. I wanted to create a set of data lines and specific events with certain dates for people to track to see the recovery for this year. It’s time to close the books here because this model was only created for 2020, and we need to start to think about 2021, which has a much different path to walk. We still have a lot of work to heal our country physically, mentally, and especially on the economic front. This wasn’t a pretty picture by any means and, in fact, got very dark at times, but we do see the light at the end of the tunnel. I truly believed in what I wrote back 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.”

What I wrote back on April 10:

For those who are looking for the bright side of light. This is for you.

These are dark times. But even in dark times, we are preternaturally prepared to see the light at the end of the tunnel. We learned in the human physiology class that the photoreceptors of the human eye could detect a single photon of light. While it may not be until nine or more photos hit the retina that we perceived light, we detect before we can perceive. Likewise, if we are diligent, we will be able to identify the return of hope and light coming back into the American economy before it is perceived by all those poor masked souls around us.

For HousingWire, I wrote this week 5 things we really want to see to know that the economy is genuinely headed from the AD ( After The Disease) stage into the AB (America is Back) Stage.

This doesn’t mean that we don’t have a massive amount of work that needs to be done with the economy. However, I wanted to show you the path to how we got to this day in which we can see the light at the end of the tunnel. 

First, two things we should have tried to avoid since April 7th.

Number One:

Don’t focus on the recovery’s shape; 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 show a V-Shape recovery, but that is only part of the picture. I emphasize this because we can lose focus on early positive economic indicators in the current world. 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. People start to go crazy wild with their economic, ideological beliefs instead of focusing on the data itself. Ladies and Gentlemen, I give you Twitter finance in its purest form. If people are honest with themselves, they were way too bearish. For me, 2020 actually had economic meaning. This was the first year in my big macro housing thesis to have the best housing demographics ever recorded in history. Also, Americans’ balance sheets were good going into this crisis. We didn’t have the over-leveraged consumer credit bubble that needed deleveraging. This is a really critical aspect to remember for decades to come.

Number Two:

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.

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

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

1. Flattened Curve  

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.”

We didn’t do the best job of trying to control the spread of the virus over time. However,  by May 18th, the country started to get off its frozen state regarding learning how to consume goods and services while having an active virus infecting and killing Americans every day. It was essential to get control of the virus and get people less afraid to change behavior. I know this doesn’t sound very pleasant. However, I am talking about this from an economic standpoint. People were too afraid early on to consume goods and services because they had no idea what the economy would be like. Getting control of the virus and then adding the fiscal and monetary disaster relief were key factors in this recovery. We have had two different surges in cases since the first wave. The bond market, the stock market, and the economic data so far have held up better than anyone has imagined during the 2nd and 3rd surge.

I have to give great Kudos to Bill McBride at Calculated Risk for keeping so many people informed during this crisis. Bill’s values of protecting those who need our help the most should be admired.

From Calculated Risk:

2.  End Stay At Home Orders

We really didn’t have a national stay-at-home order in place that accounted for the entire country for a long period. While some business restrictions are still in place, especially here in California again, for the most part, the current stay-at-home orders aren’t the same as it was in March, April, and the first half of May. Also, we are learning to live with this virus as best as we can. We had many people talking about a W shape economy downturn happening, which I didn’t agree with for this reason.

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 as they did in March and April. Nobody is hoarding toilet paper in scale as they did back then; the fear of not knowing what is happening next isn’t freezing people anymore. As a country, we are starting to learn to live and consume goods and services with an active virus in our economy.  While this isn’t an optimal full capacity operating economy, we started to live again. We still have a personal savings rate and disposable income above Pre Covid19 era with real income without transfer payments coming back as over 12,000,000 jobs have been regained. Giving people money works in a recession, let’s not forget this the next time around.

From Advisor Perspectives:

I believe some people are not emphasizing the income coming back from all the jobs gained. Yes, we still have 9.8 million unemployed and many others on some form of government support. However, this aspect is a big positive story.

3. 10-year yield goes above 1% 

Before the 10-year yield broke under 1%, I talked about this on that I believe recessionary yields would be between -0.21% and 0.62%. Due to the dramatic deflationary crisis, Covid19 was about to do to us, having negative yields here in the U.S. was not out of the question. However, the lowest level I saw on Monday morning, March 9th, was 0.32% on the 10-year yield. The fact that we were above 0.62% a lot during this recent downturn told me that the bond market, in its odd way, was telling us things were going to be better in Q3 and Q4. Everyone has their take on the bond market, and that was mine. Now the 10-year yield hasn’t officially printed a 1% 10-year yield print yet. We got close recently with a 0.99% print after the vaccine news. However, we are getting close as it is 0.95% as I write this article. Our real goal is to get into a new range between 1.33% -1.60%. This will require more disaster relief while we try our best to provide the vaccine to as many Americans as possible. However, once the economy runs somewhat normal again and millions of Americans are back working with incomes to spend, it’s not out of the question that we get between 1.33% – 1.60% next year on the 10-year yield.

4. Decline In Credit Stress And Jobless Claims

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  -0.6546%. With both of these data lines, the trick is once it breaks positive, you need to believe that move and go with it.

My best advice for people is to know the components of this data line, track it live, and see what can send this higher in the future. Be the detective not the troll.

Jobless claims. At the same time, we are at a massively high level for jobless claims and continuing claims. The data broke 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. Once the vaccine can be distributed, being able to walk the earth freely again will be a jobs program itself. Also, then we can actually do a real stimulus plan and stop calling it a disaster relief.

5. Data from the hardest-hit sectors start to trend upward. 

All I need to do here is show the multiple V-shape recovery charts we have had in the economy. Hate all you want, but this is the truth that the numbers were getting better and people froze on accepting them thinking it was a fluke or that a W was coming. Then we went on some K shape recovery talk! Do you see why I stressed not to talk about the shapes of the recovery, focus on the data. This isn’t 2008, our demographics are much better now and we didn’t have a consumer credit bubble to deleverage. Also, major fiscal and monetary disaster relief was a big success. Also, to note, the trade deficit getting larger is bullish!

From Advisor Perspectives:

Of course, the single most outperforming sector in the world, The U.S. housing market. Those who have followed my work over the years know that I work off this one thesis for many years. The U.S. housing market would have its weakest recovery period ever in the years 2008-2019. However, the years 2020-2024 have the best housing demographic patch ever. Talk about being tested with the most damaging health and economic shock in a long time. Guess what happened in 2020?. Demographics and low mortgage rates won!

More on that subject here

Purchase application data after nine weeks of negative year-over-year prints due to Covid19 has come back to give us 29 straight weeks of year-over-year growth, averaging a tad over 20%. Before Covid19 hit us, the existing home sales report in February showed me that total existing-home sales should end the year between 5,710,000 – 5,840,000. Part of this strong growth in purchase application data is just to make up for demand for those lost nine weeks. So, if we don’t end the year at those levels, Covid19 actually took demand off for 2020, which could be made up in early 2021.

From Calculated Risk:

Remember that for the economy, the new home sales market matters the most. As of now, it hasn’t ever looked better. Regarding the low monthly supply and the need to build more homes. 2021 would be a great time to start a major infrastructure plan to build more homes

More on that subject here:

Notice nothing about the stock market here, even though we have made a robust comeback to 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 an outstanding year trading stocks. I retired this past June due to the stock market. However, tracking economic data is much different from 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 portfolio to be the economy. People sometimes get too caught up with the stock market doing well and ignore that the economic data is getting better. The stock market would not have gotten here without those data lines above getting better. This goes back to the shapes of the recovery discussion. This distraction can make you lose focus on positive economic data and prevent you from saying things are getting better.

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, and the bond market yields would fall. All these things came true. However, even in that article, I talked about how we had three different shocks in the longest economic expansion ever in history, all to recover back. Now, this isn’t your standard one-time shock; this is our Thanos snapping the finger moment and creating 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 had the most significant comeback nobody saw coming. This is why I wanted to write this model specifically for 2020. We still have so much work to do as a country and so many more tools to use to get us there.

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 Coronavirus) era but make no mistake, we see the light and the end of the tunnel because we don’t give up; we are not soft people; we are all Americans!

New Addiction:
In September of 2021, I did an interview with Bill Brewster who goes into the details of the AB recovery, you can listen and find more new details about this period in time.

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.