Bubble, Bubble… Toil and Trouble…

PEmax eliminates distortions in the price/earnings multiple caused by sharp falls in earnings during recessions. It uses the highest trailing earnings rather than simply the most recent earnings. This provides a better estimate of future earnings potential than using more recent results during a market downturn.

The current PEmax of 26.93 in the graph above, uses the index at December 31, 2020 and the highest trailing earnings of 139.47 for the 12 months ended December 2019. Using expected earnings of 95.22 for the 12 months ended December 2020 would yield an even higher PE ratio….

Biden’s First Spending Blowout

From the WSJ Editorial, 16 January 2021:

…“With in­ter­est rates at his­toric lows, we can not af­ford in­ac­tion,” Pres­i­dent-elect Joe Biden de­clared Thurs­day night. He wasn’t kid­ding as he out­lined a $1.9 tril­lion Covid spend­ing plan, which comes on top of the $900 bil­lion Con­gress ap­pro­pri­ated last month, and the $2.9 tril­lion in the spring. And this is only Mr. Biden’s “first in­stall­ment,” as Sen. Bernie Sanders put it.

…this blowout has noth­ing to do with eco­nomic stim­u­lus. Nearly all of the money is for in­come re­dis­tri­b­u­tion—some to peo­ple in gen­uine need, but most to ad­vance long-term De­mo­c­ra­tic so­cial poli­cies, and to mas­sage con-stituen­cies like teach­ers unions and state politi­cians.

… Mr. Biden pro­poses $70 bil­lion for vac­cines, ther­a­pies and test­ing in ad­di­tion to the $42 bil­lion that Con­gress passed last month.

Most of the rest of the Biden plan is a re­peat of the 2009 Obama plan—dou­bled. State and lo­cal gov­ernments will get $350 bil­lion, though many have more rev­enue than be­fore the pan­demic thanks to buoy­ant eq­uity and hous­ing mar­kets…

Mr. Biden also wants to raise [both unemployment benefits and] the min­i­mum wage … It’s hard to imag­ine a more de­struc­tive pol­icy for small busi­nesses strug­gling to sur­vive, es­pe­cially in rural ar­eas and mid-Amer­ica states with lower wage lev­els than New York City. The strange eco­nomic logic seems to be to make it more ex­pen­sive for busi­nesses to re­hire work­ers while giv­ing those work­ers less in­cen­tive to re­turn to work.

He also wants to ex­pand the earned-income tax credit for child­less adults, a …child tax credit …a larger Oba­ma­Care pre­mium tax credit and a $4,000 child-care tax credit. This is De­mo­c­ra­tic so­cial pol­icy trav­el­ing as tem­po­rary Covid re­lief. Don’t be sur­prised if the tax cred­its all be­come per­ma­nent fea­tures of the tax code—and a dis­in­cen­tive to earn more at the risk of los­ing the cred­its as they phase out.

An Old Foe of Banks Could Be Wall Street’s New Top Cop

From WSJ, 16 January 2021, by Paul Kiernan and Scott Patterson:

Gary Gensler [who ran the Com­mod­ity Fu­tures Trad­ing Com­mis­sion from 2009 to 2013] is expected to be Joe Biden’s pick to take over the Securities and Exchange Commission. ‘He will do things that are controversial.’

…The fi­nance in­dus­try has thrived un­der the Trump ad­min­is­tra­tion’s light reg­u­la­tory touch. Mr. Gensler, who sources fa­mil­iar with the tran­si­tion say is likely to be tapped by Mr. Biden for SEC chair­man …would be tasked with tough­en­ing reg­u­la­tion and en­force­ment of pub­lic com­pa­nies and the fi­nance in­dus­try.

… Lawyers, reg­u­la­tors and lob­by­ists say Mr. Gensler would likely be the most ac­tive, pro-reg­u­la­tory SEC chair­man since … the early 2000s… They also ex­pect a re­newed ea­ger­ness to pur­sue en­force­ment cases against ma­jor cor­po­ra­tions and Wall Street banks. …Mr. Gensler earned a rep­u­ta­tion for an ag­gres­sive, sharp-el­bow style of man­age­ment more rem­i­nis­cent of Wall Street than Wash­ing­ton, at times even clash­ing with of­fi­cials in his own party.

Mr. Gensler’s record …fits with the De­mo­c­ra­tic Par­ty’s pro­gres­sive wing, which hopes to use the SEC as a lever for dri­ving do­mes­tic pol­icy goals. These in­clude com­bat­ing cli­mate change and racial in­jus­tice, forc­ing more trans­parency around cor­po­rate po­lit­i­cal spend­ing and tilt­ing the bal­ance of power from ex­ec­u­tives to work­ers and small in­vestors…

Fed Reinforces Plans to Provide Open-Ended Stimulus to Spur Recovery

The Wall Street Journal reports that most central bank officials project interest rates will remain near zero for at least three years.

(What do you think this will do to the price of gold??)

Fed officials slashed their short-term interest rate to near zero in March as the coronavirus pandemic disrupted financial markets and the economy. They also launched an array of emergency lending programs and began large-scale purchases of government debt and mortgage securities.

On Wednesday, officials updated their formal guidance around how long those purchases would continue…

The Fed has been buying $80 billion in Treasurys and $40 billion in mortgage bonds a month since June while pledging to maintain those purchases “over coming months.” On Wednesday, the central bank stated those purchases would continue “until substantial further progress has been made” toward broader employment and inflation goals. Officials don’t expect to reach those goals for years, according to projections they released Wednesday.

‘These measures will ensure that monetary policy will continue to deliver powerful support for the economy,’ Fed Chairman Jerome Powell said Tuesday at a virtual news conference.

Goldman Sachs acquires Perth Mint Physical Gold ETF

From ETF Strategy, by James Lord, CFA | Category: Commodities:

Goldman Sachs Asset Management has entered into an agreement to acquire the $500 million Perth Mint Physical Gold ETF (AAAU US).

The fund, which will be GSAM’s first commodity ETF, currently provides exposure to physical gold [held] and guaranteed by The Perth Mint, a wholly owned subsidiary of the Government of Western Australia.

…The ETF will remain listed on NYSE Arca and its ticker will be unchanged.

However, the mint will no longer act as custodian, with a new third-party custodian, as yet undisclosed, set to be appointed.

Michael Crinieri, GSAM’s Global Head of ETF Strategy, commented, “Our team aimed to respond to investor demand for an asset class that has demonstrated resilience and popularity …

“Our goal at GSAM is to continue to give investors thoughtful and cost-effective ways to diversify their portfolios, and we believe this fund is an attractive addition to GSAM’s growing ETF suite.”

AAAU …is one of the lowest-cost gold ETFs in the US with an expense ratio of just 0.18%…

Proposed US Trade Alliance

WSJ reports that Trump wants to create an informal alliance of Western nations to retaliate when China uses its trading power to coerce other nations.

The US Administration conceived the plan in response to Chinese economic pressure on Australia after the Australian government called for an investigation into the origins of the Covid-19 pandemic.

“China is trying to beat countries into submission by…economic coercion,” said one senior official. “The West needs to create a system of absorbing collectively the economic punishment from China’s coercive diplomacy…”

Under the plan, when China boycotts imports, allied nations would purchase the boycotted goods or provide compensation. Alternatively, the group could jointly agree to assess tariffs on China for the lost trade.