Bottom line, companies have delivered earnings like a .300+ hitter with 35+ hrs. But you're paying that hitter $35m+/yr (record salary). Good for now. But will this hitter earn its pay next year, and the year after?
1/8
As of August 23, 2021, 475 (95%) S&P 500 companies have reported Q2 2021 earnings with a beat rate of 87%, a new record. This compares to an average beat rate of 71% since the Great Recession ended.
2/8
Analysts expected YoY earnings of ~55%. The latest blended est. is ~ 95%. This jump of ~40% is record.
YoY earnings is compared to Q2 20220, the worst point of the lockdown, big base effect. This is why estimates for Q3 2021 earnings growth drop to 29% and 20% for Q4 2021.
3/8
Company guidance, an index of which is shown below, shows companies continue to see strong earnings growth.
It remains to be seen if more COVID restrictions or rising inflationary costs will dampen expectations for earnings in the future.
4/8
Hefty earnings growth is still needed. The 12-mo forward earnings P/E ratio, a Wall Street fav, is still quite high at 22.
Investors do not seemed bothered by these valuations. But should earnings disappoint, which has not been the case recently, investors may reconsider.
5/8
@5thrule argues that SPX valuation is made up of 3 parts:
* The current value of assets, or the book value
* The NPV of expected future earnings. Or, the median SPX earnings forecast by WS analysts for the next 3 years
* A residual component he calls “Hopes and Dreams”
6/8
Normally a market should factor in “Hopes and Dreams” as companies have flexible structures and can re-make themselves as needed. How much should this be?
The next chart shows “Hopes and Dreams” make up the largest part of valuation since the bubble peak of 2000.
7/8
Finally, market capitalization to GDP is also at a new record (the so-called Buffett Indicator).
So nothing about this market is cheap. But companies are delivering on earnings and they expect to continue to do so.
How long will they continues to is the question.
8/8
• • •
Missing some Tweet in this thread? You can try to
force a refresh
Following every recession, the tenor of inflation shifts.
The current post-COVID recovery, as shown in blue, indicates inflation has reached a significantly higher level, with more volatility (wider standard deviation) than during the post-financial crisis period.
3/6
Something more may be at play, as larger trends in inflation seem to have shifted with the COVID pandemic.
The problem is not mortgage rates, it's inventory (not enough).
Cut rates and home sellers raise prices, and monthly payments remain unchanged. The affordability problem remains. Greedy boomer homeowners get richer.
How to fix affordability?
Reduce zoning and building regulations to increase inventory. The problem is that selfish boomer homeowners wield these laws to restrict supply and drive up the price of their homes.
The Atlanta Federal Reserve calculates a Housing Affordability Monitor.
The median income in the United States (blue) and the income needed to qualify for a mortgage (detailed below the chart). The bottom panel shows the difference.
At 58%, this means one needs 58% more than the median income ($ 83k) to qualify for a median mortgage ($ 130k).
This is a new record, even greater than the peak before the housing crash from 2007 to 2009.
Home prices are too high. Cutting mortgage rates will only incentivize home sellers to increase their asking prices, and the problem persists.
We need more supply, that is what the record "unaffordability" is saying..
A home is considered “affordable” if it costs less than 30% of a household’s income.
The following chart indicates that the average home in the United States now costs 47% of the median household’s monthly income.
An all-time record, surpassing the bubble peak in 2006 before the housing crash.
The OMB Director and Acting CFPB Director @russvought laid out the charges of lying to Congress and mismanaging the renovation of the Fed (Eccles) building.
While the betting market still has Powell getting fired at less than 50%, it is now trending higher.
--
The Federal Reserve Act says that a Fed Governor (including the Chair) may be removed “for cause by the President.”
However, “for cause” is not defined in the statute and has never been tested in court in this context.
I would argue "for cause" is not a disagreement over Monetary Policy ("too late" cutting rates), but can be lying to Congress and/or mismanaging the rules around renovating the Fed (Eccles) building?
Powell said this to the Senate Banking Committee on June 25, 2025, as part of the semiannual Monetary Policy Report to Congress.
---
"Generally, I would just say we do take seriously our responsibility as stewards of the public’s money. ... There’s no VIP dining room. There’s no new marble—we took down the old marble, we’re putting it back up. We’ll have to use new marble where some of the old marble broke. But there’s no special elevators; there’s just old elevators that have been there. There are no new water features. There’s no beehives, and there’s no roof terrace gardens."
---
Technically, Powell is correct because the renovation has not been completed. However, such details are outlined in some plans for the renovations.
Is this a big deal? No. However, if Trump is looking for ANY reason to remove Powell, this might be enough. And it might be enough "for cause" that the Supreme Court will uphold it.
Furthermore, no one in Congress wants to spend any political capital defending a $2.5 billion marble Washington, D.C. building with private elevators, beehives, and private roof terraces.
---
Bottom line, Powell may have given Trump an opening to remove him. Will Trump take it?
Or, does Trump want/need "Too Late" Powell to stay as Fed Chairman until May 2026 to use as a punching bag?
Yesterday, Jim appeared on Bloomberg TV, warning that if the Fed cuts rates and the market thinks this is wrong, 10-year yields could surge through 5%.
(Perspective ... 10-year yields were last above 5% in October 2023 and as high as 4.85% in January).
🧵
2/8
President Trump disagrees with this thinking and believes the federal funds rate should be 1% right now.
From a "truth" posted on June 30.
3/8
If (or should I say when) Trump gets a Fed Chair to make 1% happen, how will the 10-year react?
Reminder of what happened last year to long rates when the Fed cuts rates (peach arrow) and the market does not think it's a good idea (cyan arrow).
I would argue that if the Fed cuts rates and you assume mortgage rates follow the federal funds rate lower (they may NOT be the case), home prices would rise, putting the monthly payment right back at $2,860.