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It’s a savings, not a disgusting demand

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Good morning. Treasury yields on Wednesday showed a short lifespan and the stock market contrast wasn’t too unpleasant. I’m still worried, but it’s probably congenital. Today: See more comments on spending, Jamie Dimon’s weird bonuses, and yields and bond yields.

I have a little break so I don’t have a newsletter on Friday and Monday.Please read while I’m going Due diligence newsletter instead of. it’s good.

Please send me the email: robert.armstrong@ft.com

Are stagnation in demand and future earnings growth exaggerated?

Deutsche Bank has published a great study based on the idea that many stagnant demands will be released into the economy.Written by Olga Kotaga and Luke Templeman (Luke is a former member) Rex column Mafia; we are everywhere). The points are as follows.

Many companies have achieved a strong recovery in earnings this year, backed by forecasts of strong demand stagnation. Still, so far, there is little evidence of a surge in spending that many expect. .. .. As investors are concerned about the spread of delta variants, our research and analysis shows that customers are equally vigilant. Most importantly, people are ready to resume their purchases, but not to spend a lot of money on them.

The arguments are executed as follows: Cotaga and Templeman are looking for a good setup.

  • Savings are increasing in developed countries

  • I think consumers are set up to raise their income a bit

  • Purchases are no longer delayed

  • Companies are excited and are discussing ongoing demand.

Nice chart here:

But there are some unpleasant facts:

  • According to the survey, consumers are not expecting any more spending in the coming months.

  • European retail sales are fluctuating but not significantly up

  • Consumers in the United States seem to be paying off their debts rather than spending.

  • Expectations for economic improvement are beginning to decline in the UK, US and France, and are slowing in Germany.

  • Survey data show that people are less secure at work and less likely to demand a salary increase than they were before the pandemic.

  • Service-driven economies like the United States tend to recover slowly

  • People tend to save on the increase in storms, how they see government stimulus checks

  • Much of the increase in savings is held by the wealthy and the elderly, who have a low propensity to consume.

  • Everyone over the age of 35 is an adult in the 2008 recession and is cautious as a result

  • Discount shopping is becoming more and more popular

You don’t need to look at US retail sales to get a rough idea of ​​this argument. The monthly figures presented by Capital Economics are as follows: Look at monthly trends:

Paul Ashworth of Capital Economics expects “a little momentum” to come in the third quarter, with consumption expected to fall below overall GDP growth. “Monthly real consumption was flat in April and declined in May, and seems to have declined in June as the CPI increased more than last month’s retail sales increase.”

An important question for equity investors is how much over-optimism about spending is incorporated into earnings estimates.

According to FactSet data, we are currently making strong profits. S & P 500 companies had an 85% chance of surpassing their second-quarter earnings forecasts, with revenue growing 69%. No company has warned of weaknesses in the third quarter. The consensus forecast for year-over-year growth trends for the coming quarters is as follows:

Most of Q2 is in a bag. The pressing question is whether we can achieve 20% growth in the next two quarters. Keeping the focus on consumption, keep in mind that the year-over-year comparison with blockade spending is now over. US retail sales increased 4% in late 2020 compared to late 2019 before Covid. When shoppers make money, they have to shop much more than they did before the crisis.

Jamie Dimon’s extra money, or signaling is expensive

JP Morgan Board of Directors on Tuesday Gave Jamie Dimon 1.5m stock option. The standard option price model is worth about $ 50 million.

Why did the board suddenly do this in the middle of this year? They say: “This special award reflects the Board’s desire to continue to lead the company for more important years,” but as Matt Levine of Bloomberg. It pointed out On Wednesday this doesn’t make sense. Dimon, even symbolic, is unlikely to be motivated by this amount. He is already worth more than $ 2 billion, much of it in JP Morgan shares.He got Paid For $ 31.5 million last year alone, it’s clear that he loves the job.

And, as everyone has pointed out, if he intends to stay for years, the bank must now think harder about maintaining his best lieutenant.

The only thing I can imagine is that the board is trying to make it clear to investors that Dimon is really, really, really staying for a while. They think investors think Dimon is a great CEO, so by welcoming him as CEO, investors want to buy stock. The board also believes that investors may not be convinced if they or Dimon simply say “Dimon / I will stay at work for years.” But if they say it while throwing a $ 50 million high bill into the air, I think it might make it more credible. Probably it does.

People often believe in the magical abilities of leaders, so I tend to believe that JP Morgan’s stock may have a Dimon premium (banks). Similar evaluationDespite having significantly higher returns than both, like its rivals Morgan Stanley and US Bancorp, in terms of price / tangible books).

A more interesting question that surprises me is how much Dimon has to do with JP Morgan’s success. What I want is a baseball “Win over alternative players“.But last time I saw In the academic literature, it was fairly clear that there was no very good way to measure the contribution of executives to a company’s success. The standard approach is to look at a company’s financial performance, extract all possible exogenous variables (economic conditions, industry trends, currency impacts, input prices, etc.) and declare: Residual performance It is the result of leadership. This seems inadequate, but I don’t know what else I can do. This allows the Compensation Committee to easily throw money into the air.

What do you need to compare your earnings yield with?

on Wednesday I wrote that an important explanation for persistently high stock prices (although not justified) is the large gap between equity yields and actual government bond yields. There was a common dissenting opinion in my discussion. Here is one example:

I’m confused as to why the nominal yield, the S & P earnings yield, is compared to the actual US dime yield. Indeed, this is comparing apples and oranges. One pays the current dollar and the other pays $ 2016.

Using this logic, we can argue that a 10-year Argentine government bond with a yield of 48.8% has a more attractive excess yield of 47.6% than a US Treasury, ignoring paying pesos and US dollars.

This is fair, but equities are clearly different from bonds in their sensitivity to inflation. Bond cash flows are purely nominal. Equity cash flow can rise with inflation, starting with pricing power, depending on all sorts of factors. But that doesn’t mean that stocks are even a complete inflation hedge remotely, as it’s fairly clear that stocks will be devalued when inflation rises to a certain point. Investors seem to be starting to price the uncertainties that inflation always brings.

I think what we are looking for here is whether the real or nominal interest rate should be included in the stock discount rate. And I think my bad answer is: a little bit of both, do I guess?

I am interested in listening to your thoughts.

One good reading

In FT, George Magnus Extended to A comment he made to Unhedged last week about China’s decoupling and China’s stock discounts. Anxious reading. Both China and the United States seem to want to leave.How does it help businesses and investors? Stuck In the middle?

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It’s a savings, not a disgusting demand

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