The Deadweight Loss of California’s 1,200 New Laws
California started the new year with almost 1,200 new laws. The laws included coverage on issues ranging from gun control, high interest rate loans, protection for exotic animals, and increased pay for low wage jobs. Most of these new laws reflect the liberal perspective of California’s Democratic majority.
Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). In this theory, Dr. Wendee shows how excessive government regulation, such as that found in California, creates a deadweight loss which reduces economic prosperity. The full paper on Intrinsinomics will be published in the near future.
Economic and Investment Highlights
Last Week
Many online retailers are struggling to adjust to taxes after the Supreme Court gave states the right to tax online transactions.
Many homeowners are taking cash-out mortgages and are paying higher interest rates to do so.
Stocks of many of the most hyped IPOs of 2019 are trading before their last private market valuations.
A few of the big tech companies’ stocks are driving the stock market indexes. 2019 was one of the best years for stock market indexes around the world in a decade.
2019 was the fourth best year for mergers and acquisitions on a global basis. Total 2019 M&A activity was $3.8 trillion (through December 27th).
North American oil and gas companies have more than $200 billion of debt maturing over the next four years.
California started the new year with almost 1,200 new laws.
China loosened its monetary policy.
Manufacturing in the U.S. and Asia stabilized, while manufacturing in Europe continued to slump.
A survey of U.S. CEOs showed fear of a recession as the number one concern going into the new year.
The U.S. launched an airstrike in Iraq which killed a top Iranian general and an Iraqi paramilitary commander.
U.S. auto sales slowed in 2019. Auto executives expect a continued slowdown in 2020.
Former Fed Chair Ben Bernanke said he believes the Fed has sufficient tools to counter a potential recession.
U.S. stock mutual funds posted a 28.3% average gain in 2019.
The Dow Jones Industrial Average and the S&P 500 both fell from records last week, while the Nasdaq rose slightly. The Dow fell 0.04%, the S&P 500 fell 0.16%; and the Nasdaq rose 0.2%. The 10-year treasury yield ended the week at 1.787%.
The Week Ahead
This link takes you to Econoday’s Economic Calendar and Economic Events and Analysis which shows the upcoming economic reporting events scheduled in the week and months ahead.
Summary
Note: The comments that follow are derived from the economic indicators referenced in the Resources section of this newsletter and other sources in this report.
The Aruoba-Diebold-Scotti Business Conditions Index (ALS) has been trending up the last several weeks and is now comfortably above the zero line, although the ALS Index dipped slightly this past week. This is a very positive indicator for the economy on a short-term basis.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the fourth quarter of 2019 is 2.3 percent. This reading continues to support the ALS model assessment of an improving short-term economic environment.
The New York Fed Staff Nowcast stands at 1.2% for both 2019:Q4 and 2020:Q1..
The Chicago Fed National Activity Index (CFNAI) showed an increase in economic activity in November. The Chicago Fed National Activity Index (CFNAI) was +0.56 in November, up from –0.76 in October.
All told, these short-term economic indicators are a neutral to positive analysis for the economy, at least on a short-term basis.
Expectations that stock prices will rise over the next six months is now at 37.2% in the latest AAII Sentiment Survey. The historical average is 38.5% for the survey. 40.9% of the investors in the survey described their short-term outlook as neutral and 21.9% were bearish. Please see the AAII Sentiment Survey for the complete results.
The latest Gross output (GO) reading suggests moderate economic growth as we enter 2020.
On a longer-term basis, the forecasters in the Philadelphia Fed’s Survey of Professional Forecasters (as of November 15, 2019) predict real GDP will grow at an annual rate of 1.7 percent for the fourth quarter of 2019, 1.9 percent for the first quarter of 2020, 1.7 percent in the second quarter of 2020, 1.7 percent in the third quarter of 2020, 1.9 percent in the fourth quarter of 2020. On an annual-average over annual-average basis, the forecasters predict real GDP to grow 2.3 percent in 2019, 1.8 percent in 2020, 2.0 percent in 2021 and 2.0 percent in 2022. The forecasters predict the unemployment rate will average 3.7 percent in 2019, 3.7 percent in 2020, 3.7 percent in 2021, and 3.9 percent in 2022.
For a more in-depth review and analysis of the economy, please see our mini-book on economic analysis and forecasting entitled: Simple and Effective Economic Forecasting.
Stock Market Valuations
Our estimates of the market valuations for two stock market indices, the Dow Jones Industrial Average (DJIA) and the Standard & Poor’s 500 (S&P 500), can be found in the file below:
Conclusion
We continue to believe the economy is in a stable but somewhat vulnerable state. Recent economic reports have been showing signs of strengthening, particularly in the business sector, which had been weakening for some time. Overall, the economy has remained very strong. In fact, the extremely strong first and second quarter GDP showing, along with a better than expected 1.9% third quarter growth in GDP, and the strong labor market conditions give us confidence that the economy, now in its tenth year of expansion, can continue to grow. But we are cautious on this outlook! Please see our complete Economic and Investment Review in the Spring 2019 quarterly issue of the Intrinsic Value Wealth Report Newsletter.
The broad market remains overvalued, although the Dow Jones Industrial Average looks more fairly valued than the broad market. But that does not mean that a market correction is imminent. Markets can and do stay overvalued for long periods of time. As discussed above and in the Economic and Investment Highlights section of this Commentary, we believe the economy is in a stable but somewhat vulnerable state. If the economy remains strong, the markets will likely remain strong. If the economy deteriorates, the markets may well correct. There are other events that could trigger a market correction, of course, but economic conditions are the most likely and foreseeable events that could make that happen.
We believe it is important to maintain a long-term view toward investing. This means that you should continue building your investment portfolio using the Cassandra Stock Selection Model to select individual securities that offer growth and value opportunities.
Chart for Review and Thought
Simple and Effective Economic Forecasting Model
Notes (GDP Growth Chart):
- See the July 8, 2019 Commentary for an introduction to this model.
- Actual numbers 2007 through Q1 2019; forecasted numbers thereafter.
- Normal GDP growth is typically in the 2% to 3% range.
- A recession is generally defined as two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
Announcements
We have been researching the use of crowdsourcing for investment ideas. We will be sending a survey out in the next few weeks to get your input on the economy and the markets; and to get any investment ideas that you would like to share. We will compile this input and distribute the results to you and our other subscribers.
Dr. Wendee has been researching and writing a new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics). The full paper on Intrinsinomics will be published in the near future.
Finance 3350: Personal Finance-Portfolio & Risk Management – Dr. Wendee will be teaching Finance 3350 – Portfolio & Risk Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 4970:Strategic Management – Dr. Wendee will be teaching Business 4970:Strategic Management at California State University, Los Angeles (CSULA) starting January 2020. Dr. Wendee teaches courses in Management and Finance at CSULA.
Business 218 – Macroeconomics – Dr. Wendee will be teaching Business 218 – Macroeconomics at California Baptist University (CBU) starting January 2020. Dr. Wendee teaches courses in Finance and Economics at CBU.
Dr. Wendee presented a paper on his new theory of economics known as, The Value Creation Theory of the Economy (also known as, Intrinsinomics), at the International Leadership Association’s annual global conference which was held in Ottawa, Canada last Fall.
Intrinsic Value Wealth Creation pyramid
We always conclude our commentary with a discussion of the Intrinsic Value Wealth Creation Pyramid. The Intrinsic Value Wealth Creation Pyramid is designed to show some of the major categories for building wealth. It is the result of many years of study of the wealth building process; experience working with clients who have built considerable wealth; and my own personal experience building wealth. Newsletter subscribers should consult the Intrinsic Value Wealth Creation Pyramid as one of many useful investment tools while considering their investment plans.
The chart in this section is an expanded version of the Intrinsic Value Wealth Creation Pyramid Chart referenced in the Forbes.com article entitled, Nine Of The Best Ways To Build Wealth.
RESOURCES
See our Resources section for links to economic and other resources used in the preparation of this Commentary.