Consumer Price Index breakdownPCE Price Index breakdownBrighter Financial Future: New Neutral Edition

“The United States posted a $107 billion budget surplus in April, according to Treasury Department figures released on Monday, suggesting the federal government was on track to slash its annual deficit.  Washington usually runs a surplus in April because households have a deadline for settling tax bills that month.”  Also, overall debt-to-GDP projections for the United States are looking better: “Right after the credit crisis, projections showed the ratio of debt to gross domestic product in the U.S. reaching 225 percent by 2040.  Improvements to the economy since then have increased tax receipts and lowered demand for safety net programs.  According to the latest forecast, debt-to-GDP ratio will be a bit more than 100 percent by 2040.”  The Federal Reserve Bank of Cleveland has an Inflation 101 report meant to prepare the public for long-term lowflation.  Meanwhile, Bill Gross is calling his outlook for the next three to five years the “New Neutral”.  He sees “a global economy that remains under the weight of a lot of debt, including a ‘sharp increase’ in debt in China, and at the same time an economy that can’t generate demand that keeps up with potential output.”  Furthermore, “the investment implications are striking: low returns yet less downside risk than investors currently expect; an end to bull markets as we’ve known them, but no perceptible growling from the bears.”  Meanwhile, a new study finds that some investors “are living in a world of unrealistic expectations and conflicting sentiments, leaving them hoping impractically that events will work out their way because they see no other route to success.”  Jeffrey Gundlach seems to agree with Bill Gross, however he is adding his own “No Normal” spin: “more retirees mean a shrinking workforce, leading to less spending, slower inflation and greater demand for low-risk, income-producing investments.”  Also, Mark Gilbert is on the hunt for the market volatility killer: if “‘New Neutral’ has replaced the ‘New Normal’ as the prevailing economic backdrop, low volatility is (1) due to economic fundamentals and (b) here to stay.’”  Meanwhile, “investors have increased their holdings of cash to the highest levels in nearly two years (alt) and scaled down risk-taking, amid fears of geopolitical instability and questions about the strength of the global economic recovery… One-third of the global panel believes the possibility of Chinese debt defaults poses the biggest risk… Europe is the region most in favour (“eurozone periphery debt is seen as the most crowded trade globally”)… The US is the least-favoured region… Forward-looking sentiment for emerging markets has improved slightly over the past month.”  Also, S&P 500 companies have about $650 billion in cash sitting in foreign banks (alt) earning low interest; “if investors aren’t applying some sort of haircut to the valuations of companies with hefty amounts of cash overseas, perhaps they should be.”

Income Inequality May Exacerbate Recessions Depending On What Triggers Them

“Despite seeing similar nominal dollar losses, the housing crash led to the Great Recession, while the dot-com crash led to a mild recession…What explains these different outcomes?…we argue that it was the distribution of losses that made the housing crash so much more severe than the dot-com crash.  The sharp decline in home prices starting in 2007 concentrated losses on people with the least capacity to bear them, disproportionately affecting poor homeowners who then stopped spending.  What about the tech crash?  In 2001, stocks were held almost exclusively by the rich.  The tech crash concentrated losses on the rich, but the rich had almost no debt and didn’t need to cut back their spending.”

Brighter Financial Future: Wal-Mart Edition

The banks operating in Wal-Mart are pretty good at charging fees (alt): “some customers at banks inside Wal-Marts said they previously used payday lenders but switched to overdrawing bank accounts because it is less expensive.  That was the case with Frank Owens, 38, who opened his Woodforest account in the Cleveland Wal-Mart because of ‘financial difficulties’ at another bank.  Mr. Owens said he overdrew $300 in January and Woodforest repaid itself $330 from his next disability-check deposit three weeks later, the equivalent of a 174% APR.”

Fire All Phasers!

Sanctions against Russia are about to go to “Phase 3”:  “One option being discussed is a plan that would prevent western companies from exporting high-end energy technologies to Russian companies (alt)…Existing projects would be protected, but any new programmes would either receive extended scrutiny or be blocked…Russia is hoping to open up new oilfields in areas such as the Bazhenov shale of Siberia and the Arctic Kara Sea, which will be very difficult to develop without the most modern western technology and expertise.”

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