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[munger]
Q2 hedge fund letters, conference, scoops etc
In order to gauge the trajectory of this economy, it’s important to examine the data behind our recent growth and the price we’re paying for it. It’s also important to look at whether growth will last into the third quarter of 2018 and examine the one significant factor that underlies real growth: wage revitalization.
This summer featured upbeat headlines coming out of Washington, highlighting second-quarter 4.2% real growth in this nation’s GDP. It was the fifth-highest quarter since the Great Recession, and subsequently, the U.S. unemployment rate remained at a low 3.9% in August.
While a growing GDP and falling unemployment rate are popular indicators of the health of a nation’s economy, working-class wage growth, or lack thereof, is a crucial, yet often overlooked, metric that skews the nation’s long-term economic outlook.
Recent economic success has widely been credited to the GOP tax cuts instituted at the end of 2017. These cuts were in part intended to promote corporate reinvestment in the form of increased hiring, higher wages and a boost to consumer confidence.
Instead, as of the beginning of June, companies in the Standard & Poor’s 500 Index were on track to invest $2.5 trillion in 2018 on stock buybacks, shareholder acquisitions, or shareholder dividends, according to a report from UBS.
This demonstrates that the influx of cash flowing into corporate coffers largely incentivized the companies to prioritize rewarding their own investors over the corporate reinvestment policymakers had hoped to achieve. And with respect to being deficit-neutral, the Congressional Budget Office’s April report projected that this tax plan, plus the March spending bill, will increase the national deficit to $1 trillion by 2020.
Furthermore, while unemployment is as low as it has been in almost two decades, real wages are lagging significantly behind economists’ expectations. The capital, after pricey stock buybacks, is simply not there – or not incentivized – to fund wage increases. In addition, data shows that inflation and the rising cost of living have erased any modest wage gains in recent years.
While consumer confidence is generally strong, it has been wavering from month to month, and the impact of the threat of tariffs has not helped. Without an increase in wages, there’s simply not much more money for the middle class to spend. Economic growth has come at the cost of a marked increase in the deficit and deregulation that may not have long-lasting impacts.
The second-quarter growth in GDP is more likely to be an outlier than the start of a trend. This growth was fueled by aggressive stock buybacks and increased export activity ahead of the implications of tariffs. Noted economists agree, saying that this may be a “sugar high,” and that consumer confidence may backtrack in coming months, dragging the GDP down with it.
Pantheon Macroeconomics’ chief economist Ian Shepherdson explained, “If you borrow enough money from your grandchildren and throw it at the economy, it will grow faster, for a while. You just have to hope your grandchildren are big on the forgiveness front when the check for your not-so-free lunch arrives.” He believes that the third quarter will come in closer to 3%.
Read the full article here by Steve Frazier, Advisor Perspectives
