Fed Rate Hikes Hurt Nasdaq More Than S&P, 1985-2022

The Federal Reserve has effectively promised the nation another 1.5% - 2% in short-term interest rate hikes. How will this likely affect equity (stock markets)? Below, I have charted the Federal Reserve’s short-term interest rates (in red) versus the ratio of the Nasdaq Index to the S&P Index between 1985 and 2022. Growth companies such as Facebook (FB) and Google (GOOG) with earnings in more distant years, are more likely to suffer differentially since those far off earnings are worth less with higher interest rates resulting from higher inflation.

Note that in September 2007, three months before the beginning of the Great Recession, the Federal Reserve’s short-term interest rate was 5.4% and the ratio of the Nasdaq to the S&P was 1.73. As the recession ensued, Fed rates declined to 0.2% and the ratio of indices climbed to 1.98. As rates moved even lower, the ratio rose to 2.40 in September 2016.

Over the full period, the correlation coefficient was a strong -0.62, indicating that as short-term interest rates fall, the ratio of the Nasdaq Index to the S&P rises. With the Federal Reserve slated to increase short-term interest rates by as much as two to three percentage points, this ratio should drop dramatically. This analysis does not encourage buying either, but if you just gotta buy—buy the S&P Exchange Traded Fund (SPY), not the Nasdaq ETF (QQQ).
Ernie Goss

Biden’s Next Budget Punishes Success: Education, Innovation, and Productivity Are Discouraged

The IRS just performed its yearly financial appendectomy on the U.S. taxpayer. But apparently this year’s removal was not large enough for the Biden Administration. For fiscal year 2023, in terms of tax burdens, Biden has proposed making the U.S. number one among developed nations with $2.5 trillion in new taxes. Not to worry, he has guaranteed that these taxes will fall on what he terms as the “rich,” or workers and entrepreneurs who have achieved higher income via education, bright ideas, or just plain hard work.

For the current fiscal year, the federal government will spend $6.011 trillion, or 26.1% of the total U.S. economy. Since the beginning of the pandemic, federal spending has soared by 47.5%, while the economy has inched up by only 7.6%. Biden’s proposed budget will push spending as a share of the economy to its highest level since economists began the process of national accounting.

To pay for this indulgence, Biden will the raise the tax on each additional $1,000 of income that high income individuals earn from $429 to $573. On top of this increase, the administration proposes a complex tax on the unrealized capital gains of high-net worth individuals including hard entrepreneurial founders. Under this plan, high income taxpayers with a gain in company stock values, or in the entrepreneur’s net worth would pay taxes on the gain even though the stock, or company, has not been sold. Mr. Biden would also raise the combined state and local corporate income tax rate from 25.8% to 32.3% and well beyond the 22.8% average for the 37 nations of the OEDC.

Not only will these actions punish entrepreneurs and investors financially, it will create bookkeeping nightmares for taxpayers while enlarging the IRS bureaucracy to handle the new tax law.

Biden’s Budget Blooper (BBB): more leisure, less work; more bureaucracy, less entrepreneurship.

Ernie Goss

2017 Tax Reform and Remote Work Push Workers To Move to Low Income Tax Rate States

Iowa Governor Kim Reynolds and the Iowa Legislature took the bold step of reducing the state’s income tax to a flat rate of 3.9%, thus joining 10 other states with some form of flat income tax. Critics have questioned the economic development wisdom of what they judge as a radical change which is argued will undermine the state’s ability to fund needed public services.

However, the passage of the 2017 federal tax reform bill, which limited the deduction of state and local taxes on federal income returns to $10,000 incentivized the migration of individuals from high to low-income tax rate states. Furthermore, Covid-19 freed workers to work remotely also encouraged workers to move from high to low-income tax rate states.

Not surprisingly, the 10 states with the highest income tax collections as a percent of GDP, excluding Kentucky and Oregon, lost a total of 1.8 million in population to migration between 2017 and 2021.

On the other hand, the 10 states with the lowest income tax collections as a percent of GDP, excluding Alaska, gained a total of 1.2 million in population to migration between 2017 and 2021. Tables 1 and 2 lists the highest 10 and lowest 10 income tax rate states using 2017 tax data. Ernie Goss  

 

Which Presidents Serve Workers or Businesses? President Johnson: Best for Workers; President Ford: Best for Businesses

President Biden recently touted the February 2022 jobs report showing a worker wage gain of 5.7% since he took office as evidence that his policies are helping workers. This is small comfort to workers staring at inflation running at 7.5% during the same time period. This means that in terms of inflation adjusted wages, U.S. workers’ inflation adjusted wages, termed "real wages," actually declined by 1.8% since January 2021.

Even workers like Omaha manufacturing laborer Johnny Jones, who this month accepted a position at a competing food processing company for a 5% wage improvement, and a $500 bonus, is feeling the inflation pinch. Just this month his landlord raised his monthly rent by the national average increase of 14.1% or $141, and his family’s food bill soared by 6.3% (the national average), or approximately $43 monthly. And as he shops for a used auto to ferry him to his new job, he found the cost has skyrocketed by 37.3% to $19,000 over the past 12 months.

Jones, much like other Americans, is discovering what economists have been howling for over a year — that the rising costs of living has overwhelmed income gains for even those receiving raises. “So much for my raise and bonus,” complained Jones.

While Jones’ experience under Biden has not been great, expected presidential boasting, such as Biden’s, advances the more important question: which U.S. president has provided the most support for wage earners, and which president has been most supportive of businesses?

Table 1 below ranks each U.S. president since 1950 in terms inflation-adjusted growth in worker compensation (hourly wage plus benefits) and business profits during his time in office.

As listed among the 13 presidents since 1950, President Biden ranked fifth in terms of worker compensation growth, but twelfth in terms of business profit growth.

And contrary to the popular narrative that workers have lagged businesses in terms of economic returns, worker compensation expanded by 2.8% and business profits advanced by a smaller 2.6% under the 13 presidents in terms of CAGR 1960-2022.

Universities Drop Entrance Test Scores: Harvard and Berkeley Lead Discrimination Against Asian

In 2019, the average SAT score among all test-takers was 1059 while the average score among Asian students was a much higher 1223. As a result of superior test performance, Asians, who account for only 5.6% of U.S. population, represent 21% of the Harvard student body and 35% of the U.C. Berkeley student population.

However, even this strong Asian representation at top universities hides the discrimination against Asians in their admission decisions resulting in the current case before the Supreme Court (Students for Fair Admissions, Inc. V. President and Fellows of Harvard College). In June 2021, the justices deferred a decision in this case while they await an opinion from the Justice Department under President Joe Biden. Under Donald Trump, the department sided with the Asian American plaintiffs.

In an effort to hide the overt discrimination, Harvard and more than 1,240 of the nation’s 2,330 bachelor’s degree granting schools, including Creighton University, have ditched required standardized test scores as an element of admission decisions. Joining the avalanche against standardized test scores, U.S. News and World Report ranked test-blind colleges in its 2021 ratings.

Unfortunately by dropping standardized test scores, universities more easily heighten discrimination against high-achieving Asian and Asian American students by relying on high school grades and other less comparable metrics rather than standardized test scores. The irony is that these test scores were introduced in the early 20th Century to reduce discrimination in college admission.

Affirming the importance of Asian’s superior test score performance, Asians have secured 50.1% of jobs in Silicon Valley’s tech sector which is ten times their share of the U.S. population. Importantly, nearby Stanford maintains its use of standardized test scores in admission decisions.

We non-Asian citizens must, instead of abolishing test scores, engage the real enemy, which is the dumbing down of America’s education which produces students with low standardized test scores. Ernie Goss https://tinyurl.com/mr386h6j

Manchin Saves Biden from His 3Bs: Build Back Better or Budget Buster Blunder?

Not since President Lyndon Baines Johnson’s 1960’s launch of his “War on Poverty” has an administration proposed such sweeping changes to the welfare state as Biden has in his 2021 with the “Build Back Better” (BBB) plan. Not surprisingly, LBJ and subsequent presidents pushed the federal debt for each U.S. resident from just over $1,600 in 1965 to almost $90,000 in 2021.

Despite Biden’s assertion that BBB would cost $0, the Congressional Budget Office (CBO), the official budget scorekeeper, estimated that even with budget gimmicks, BBB will expand the debt by $454.1 billion over the 2022-31 period.

BBB is on top of four major Trump and Biden 2020-21 stimulus programs and Federal Reserve (FED) expansion efforts.

These programs sprouted:

*A 2021 budget deficit of more than $2.77 trillion, the second highest on record. Primarily responsible for the ballooning deficit and debt were:

**2020’s $3.6 trillion stimulus,

**2021’s $1.9 trillion stimulus,

**and a yet-to-get rolling $1.2 trillion infrastructure program passed in 2021.

In order to support the spending packages, the FED purchased $4.5 trillion of U.S. Treasury bonds, and reduced short-term interest rates to 0% - ¼%. This had the impact of increasing the money supply by 37.5%, and boosting the annual inflation rate from less than 2% to over 6%.

Due to the massive 2020-21 overspending, the U.S. debt will exceed $30 trillion by the end of 2021 even before the rollout of the infrastructure program and BBB.

Who pays, or will pay, for this fiscal indulgence? There are those in the political class that assume that, due to ultra-low interest rates, and the FED money creation, this lavish party has no end. But as the Nixon Administration’s Chief Economic Advisor, Herb Stein, once said, “If something cannot go on forever, it will stop.”

Current interest payments on the federal debt average a bargain 1.77%. Should rates on the debt rise to the post-2000 average of 3.48%, each U.S. worker would have to belly-up approximately $3,200, or federal spending would have to be slashed by approximately $485 billion, or a combination of both poisons.

Senator Manchin of West Virginia, by stopping BBB in its tracks, has saved Biden from his Budget Buster Blunder.

State Misery Indices (Updated): New York Most Miserable (Again), Utah Least Miserable

In the 1970s, Economist Arthur Okun created the Misery Index to calculate how the average U.S. resident was suffering economically speaking. It was calculated by adding the unemployment rate to the annual inflation rate.

In the accompanying table, I calculate a State Misery Index by adding each state’s current Covid-19 deaths per capita to the state’s most recent percentage of job loss since one month prior to the pandemic, February 2020. In the table, lower rankings indicate higher degrees of misery in the state. As in the March 2021 Economic Trends Misery Index, New Yorkers, once again, ranked number one in terms of the highest degree of misery, while Utah residents experienced the lowest level of misery.

In terms of employment, Hawaii experienced the greatest job misery with a loss of 13.0% of non-farm jobs, while Utah suffered the least job misery with a job shortfall of 3.0%.

In terms of Covid-19 death misery, Mississippi suffered the greatest misery with the Covid-19 death rate at 3.4 deaths per 1,000 in population, while Vermont suffered the least Covid-19 death misery at 0.6 deaths per 1,000 population.

Surprisingly, the 25 states with the greatest degree of misery had a higher full vaccination rate of 56.3%, or slightly lower than the full vaccination rate of 57.3% for the 26 least miserable states.

Estimated correlation coefficients reveal that there is a negative correlation between vaccination rates and Covid-19 death rates (i.e. higher vaccination rates, lower Covid-19 deaths), and that there is a positive correlation between vaccination rates and job losses (i.e. higher vaccination rates, higher job losses). Ernie Goss