Place of the Week: Des Moines, Iowa

Econ Weekly (Nov. 15, 2021)

Issue 44: November 15, 2021

Inside this Issue:

• Costing More at the Store: The Inflation Problem Worsens

• As Prices Inflate, Economists Debate: Is the Fed’s Transitory Story Stunted?

• G.E. Divided by Three: The Once-Vaunted General Electric Breaks Itself Up

• Wisdom, or Is Dumb? The Impact of Stock Market Crowd Trading

• Holy Bit! The Crypto Market Tops $3 Trillion in Value

• Chemical Origins: How Today’s JPMorgan Chase Came to Be

• America’s Homeless Crisis: How it Came to Be

• 1997 Heaven: A Golden Year for the American Economy

• Downtown Frown: How Remote Working Harms Cities

• And this week’s Featured Place: Des Moines, Iowa; Corn, Coverage and Clean Power       

Quote of the Week

“Air travel demand is highly durable. The pandemic temporarily suppressed it, and travel restrictions have constrained it. But at the end of the day, people want and need to take trips, do business and connect with each other in person. Whenever we see travel restrictions lifted globally, there is an immediate surge in passenger bookings.”

- Air Lease Corp. CEO John Plueger

Market QuickLook

The Latest

The troubling scourge of rising prices is getting worse, not better. That’s the chief takeaway from October’s consumer price index (CPI), published last week by the Bureau of Labor Statistics. Prices rose 0.9% just from September. And they’re now up 6.2% versus this time last year. That’s a far cry from the Fed’s longterm target of 2%. It’s also a far cry from 2019’s rate of 1.8%, though not yet in the neighborhood of 1980’s 13.5%.

Just as importantly, the current pace of inflation is starting to seem more pervasive and persistent. No longer are the high index readings driven by just a few categories like used cars or gasoline. Those remain elevated, for sure. But consider all of these other areas with annual gains exceeding 5% last month: food, electricity, new vehicles, furniture, home appliances, footwear, sporting goods and hotel rooms. But good news: The price of sewing machines dropped nearly 6%!

Joking aside, costs related to housing (which carry the greatest weight in the index) were up 3.5% y/y in October. Remember, that’s not reflective of prices paid when buying a house—that’s treated as an investment, not consumption; the costs relevant here are rents and their equivalent for owners (rents in particular are rising fast). Medical care, another big slice of the index, soothingly saw a gain of just 1.7%. But that stems from a big drop in health insurance costs, itself owing to anomalous factors (i.e., rebates paid to customers and the repeal of certain taxes). Hospital care and doctor services were up about 4%.

It’s all a lengthy way of saying that inflation is indeed a significant problem, at least right now. That’s not to say it outweighs other positives in the economy, most importantly that demand is strong, corporate profits are strong and household balance sheets are strong—the railroad Union Pacific for one says emphatically: “The underlying economy is feeling pretty darn good.” Nor is October’s CPI reading sufficient evidence to conclusively judge the Fed—still sticking to its “inflation is transitory” thesis—completely wrong. Maybe Americans will return to work as Covid strains ease, alleviating wage pressures. Even if they do, maybe age demographics are such that overall labor participation rates will continue their longterm downward trend, limiting the economy’s productive capacity. If the economy does become more productive, maybe it will be thanks to cost-suppressing technologies like automation and artificial intelligence. Maybe America’s severe income inequality problem will continue to suppress demand (because wealthier households allocate more of their income to savings, buying stocks rather than stuff). Maybe supply chain bottlenecks will disappear as Americans shift their spending back to services like travel. Maybe commodity prices will ease. Maybe waning government stimulus will dampen demand. Maybe the bond market’s lack of concern about inflation should relax everyone—the bond market, after all, continues to lend long at ultra-low interest rates, which are actually deeply negative now when adjusted for current rates of inflation. Why would any lender do that unless they expected inflation to ease? Inflation means, after all, that they’ll get paid back in future dollars that aren’t worth nearly as much.

To be clear, there are plenty of compelling arguments among the inflation worrywarts too. Maybe cost-suppressing forces like globalization, immigration and just-in-time supply chains are waning. Maybe there’s still too much money in people’s pockets—after trillions in government stimulus—chasing too few goods and services. Maybe labor markets were changed forever. Maybe the more influential impact from the growth in retirees is a shrinking pool of labor that drives up wages. Maybe the more important demographic trend is the entrance of the large millennial generation into their prime spending years. Maybe the Fed’s being too complacent. Maybe bond markets aren’t such a good predictor anymore, with so many government Treasuries owned by entities with motivations beyond mere maximizing their returns, i.e., central banks including the Fed itself. And when arguing that inflation is a problem, never forget the Three H’s: housing, health care and higher education; all three are characterized by low productivity gains and demand that’s artificially boosted by government spending and lending.

There you have it, arguments for and against the likelihood of inflation remaining a big problem. Relief, in any case, won’t likely come too soon, with supply chains now confronting the busy holiday shopping season. Corporate America, for its part, will find it frustrating that it can’t meet all the demand it’s seeing. But it will also feel thankful this Thanksgiving for pricing power that’s in most cases sustaining strong profits. The fast-food chain Wendy’s, for example, spoke of “overall results that are pacing well ahead of our initial 2021 plan,” despite higher labor and commodity costs. “We continue to expect very strong results in 2021.”

Wendy’s by the way, is trumpeting a new strategic partnership with Google, which speaks to Big Tech’s pervasiveness and usefulness throughout all corners of the economy. The once venerable General Electric is itself no technology slouch—it produces state-of-the-art airplane engines and medical equipment. But the storied company, co-founded by Thomas Edison and once marketed by Ronald Reagan, got mixed up in the risky lending that led to the 2008-09 financial crisis. Still trying to right itself, GE said it will now break into three separate companies, one that builds jet engines, one that builds power turbines and one that builds hospital equipment.

It’s not alone in breaking into pieces. Johnson & Johnson announced a split, making its consumer health division a separate company, distinct from its business making pharmaceuticals and medical devices. Remember that the next time you use a Band-Aid or take a Tylenol.

There’s a lot else going on. The U.S. last week lifted its travel ban on foreigners from Europe and elsewhere, boosting the travel sector. On the other hand, it’s premature to call an end to the Covid crisis, with cases rising again in states like Minnesota and Colorado; roughly 40% of Americans remain unvaccinated (or 30% excluding children under 12). Some good news in the realm of fiscal health: tax receipts are up thanks to the growing economy, shrinking the federal deficit to $2.8 trillion last fiscal year, from $3.1 trillion a year earlier. But beware: Another federal debt ceiling fight looms.

Investor rage for electric vehicles was again on display with Rivian’s spectacular IPO—the Los Angeles-area company is backed by both Amazon and Ford. The online real estate firm Zillow, on the other hand, is under siege following a failed attempt at house flipping. The Justice Department, concerned about excessive corporate consolidation, is suing to stop the book publisher Penguin Random House from buying rival Simon & Schuster. Will it have something to say about Canadian Pacific’s acquisition of Kansas City Southern, further consolidating an already consolidated North American railroad industry? How about Nvidia's planned takeover of Arm? Disney disappointed investors with slowing growth in streaming video subscriptions. John Deere made progress in its labor dispute. The Labor Department said more people are quitting their jobs than ever, in most cases to grab a higher paying job elsewhere (job openings, meanwhile, are most… (TO CONTINUE READING, VISIT www.econweekly.biz)

Markets

• Crypto: According to Coingecko, the market value of all cryptocurrencies now exceeds $3 trillion. For reference, the entire GDP of the U.S. is about $21 trillion. As of Nov. 8th, there were 121 different crypto coins worth more than $1b. That’s a lot of money chasing hopes that these coins will one day produce value or—more commonly and perhaps dangerously—hopes that more people will keep buying them so their price keeps going up.

• Treasuries: Why can governments issue longterm debt so cheaply, even sometimes at negative real and even nominal rates? Because government debt has value and usefulness as collateral in modern finance. That’s the perspective of Peter Stella, the former head of the IMF Central Banking division. Speaking on the Macro Musings podcast, he emphasizes that government-issued debt is much more important to the international financial system than government-issued money. The discussion mentioned economist William Barnett who devised a comprehensive measurement of money called M4, which includes Treasuries (i.e., debt borrowed by the U.S. government). During the 2008-09 crisis, incidentally, M4 plummeted, implying a sharp decrease in the effective money supply. The vast majority of new money, to be clear, is created by private sector lending, not But private sector lending is greatly influenced—especially post-crisis—by the availability of government securities serving as collateral.

• Stocks: New York University professor Aswath Damodaran, on the Pivot podcast with Kara Swisher and Scott Galloway, talked about the stock market and its long bull run. One important explanation, he says, is the rise of crowd trading as retail investors gather on social media sites like Reddit and “tell each other the same stories,” buying favored meme stocks at the same time. It’s a reason why momentum can trump a stock’s fundamentals, and why a stock’s price can be very different than its true value. He cites how Tesla is worth more than the entire auto industry combined. Stocks, to be sure, are rising because alternatives—think ultra… (TO CONTINUE READING, VISIT www.econweekly.biz)

Places:

• Des Moines, Iowa: Corn? Soybeans? Hogs? Yep, that’s Iowa. But financial services? Iowa is indeed an agricultural powerhouse, ranking second behind California in the value of its farm output. But in the state capital Des Moines, you’ll more likely encounter someone measuring risk than harvesting crops. Des Moines is home to more than 70 insurance companies, not to mention the industry’s Global Insurance Symposium held each year. Principal Financial and Nationwide are the two largest insurance firms in the area. The largest private-sector employer is Wells Fargo, which houses its giant home mortgage business in Des Moines, employing nearly 15,000 locals. According to the Census, no major metro area in the country has a higher concentration of workers in financial services. The category accounts for a full 15% of all nonfarm payroll jobs, higher than even New York City’s 11%. Just north of the city (in Ames) is Iowa State University, which offers actuarial science degrees to aspiring insurance professionals. Drake University in downtown Des Moines offers these as well. Combined with lots of jobs in state government, local government, education and health care, the financial service sector forms the backbone of a strong Des Moines labor market, currently sporting an unemployment rate of just 2.9%. The national rate is 4.6%. Agriculture certainly matters.… (TO CONTINUE READING, VISIT www.econweekly.biz)

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