ASH BENNINGTON: Real Vision Daily Briefing Friday edition. Welcome back, everybody, live without a net with Ed Harrison and Jack Farley. Welcome back, guys.
ED HARRISON: Good to talk to you.
JACK FARLEY: Great to be here, Ash.
ASH BENNINGTON: Always great to have the old band back together again. We were talking a little bit off air lots going on. Let's start with you, Ed. What are you looking at these days?
ED HARRISON: We had a lot of numbers that came out today. I was looking at the Markit numbers in particular, that's the company that does the PMIs, and those were really good. You look at the composite PMI, 62.2 versus the previous month in March, 59.7. Obviously, 50 is the dividing line between when you have expansion and contraction, a number like 62 is pretty high. If you get above 60, that's considered a really robust economy.
Then if you break it down into the component parts, look at services, the services sector PMI was 63.1, they only expected 61.9, and the previous month was 64. Still going up but more than expected. Then finally, look at manufacturing, previous month was 59.1, they expected 60.5 and we got 60.6. You put all that together, and what it says is both the manufacturing and the services sector in the United States are expanding and they're expanding at a more rapid rate than anticipated, and that has GDP Now from the Atlanta Fed up 8% for Q1, and it looks like Q2 is continuing in that same bullish fashion.
ASH BENNINGTON: Yeah. We should say on the spirit of covering the day's stories here now that we're live, US equity markets smiling on this news. S&P 500 up 1.09% on the day to settle at 4180, NASDAQ up almost 1.5% closing at 14,1681. Russell 2000 up one 1.8% to close at 2271.
ED HARRISON: The question is, what are we supposed to make of this? This is a good opportunity to throw it to Jack Farley. Because, I read David Rosenberg as an example, we're going to be talking to him in next week, I think, and he's like, yeah, 100%, we're seeing upticks but really, you got to look at the macro picture, the big picture and ask yourself, what happens after this initial burst of energy? What does the economy look like after people have returned to a new normal? Is it a robust economy or is it like the economy that we left two or three years ago, which was secular stagnation? That's the real $64,000 question.
JACK FARLEY: Yeah. Ed, you mentioned that the composite PMI in the US was good. What I had my eye on was that the services PMI showed particular strength, 63.1 relative to 61.5, as you mentioned, so I think the fact that the services are really recovering is important because as both of you know, it was the service sector that was hit hardest by COVID and the corresponding lockdowns. Also, on the topic of PMI, I believe Europe posted some very strong numbers from the UK, Germany and France. It seems that the recovery remains in good stead in the US and in Europe.
ASH BENNINGTON: I always wonder these days in the wake of this recovery, what exactly are we measuring here, and what does it say? What does it mean, and why does it matter, if it matters? Commerce Department report out today, new home sales surged up 21% month-over-month, this is on a quanta or count basis, not on a price basis. This is numbers of new homes sold. It's up 66.8%. That's roughly two-thirds, almost exactly two thirds, I should say, year-over-year, but what are we measuring here?
We're looking at dramatic low base effects. and the chart that I keep coming back to-- I know we're live here today, it's not easy to pull charts up, so I'll just describe it for you, but really, if you think about the real economy, and I'm curious to hear what Ed thinks about this, I'm curious to hear what Jack thinks about this. I've been zoomed out just trying to think about the big picture. Ed, look at all employees nonfarm payrolls. This is the PAYEM series. PAYEM series at the Fred, the Federal Reserve Bank of St. Louis database, and it goes like this.
It goes up for 50 years, incredibly sharp decline. That's the carnage that we experienced around the time that the virus broke here in the United States in March, and then the V-shaped recovery, but inverse radical, it stops, it goes up. Then there's an acceleration of the rate at which it's going up. That's a good sign certainly to see more hiring, but significantly, significantly below the numbers that we were at at the beginning of the crisis and needless to say, also, way, way, way below trend, meaning where we would have been if that line had continued to get sketched up. Ed, what are your thoughts on the big picture? How do you process the data that's come out today, how do you frame the micro in context with the macro?
ED HARRISON: The first person that comes to mind when you say that is Daniel Lacalle who I've interviewed twice recently, and his view had been last year, and again, it was this year when I spoke to him, that the US would outperform relative to Europe. Even though that picture that you presented is somewhat worrying, I think the first thing I think about is the PMIs that came out of Europe. If you look at the PMIs for Europe, they were all above expectations and the numbers were above the previous month's numbers, just like in the US, but if you look at the numbers, they're not anywhere near as robust.
When you talk about the base effect, yes, the manufacturing PMI for April in Europe was 63, but the composite was 53.7. The services PMI in Europe was 50.3. That tells you that Europe is delayed relative to the United States. Obviously, lockdowns have a lot to do with that, but it tells you that the United States is really moving forward in the fast way. The question is, can we continue that? That's my macro picture.
Can we continue? Is it priced into the market? I think that it's a compelling point from Daniel's perspective that it gives you reason to continue to pay more of a market multiple for the United States over Europe, because you're getting more growth for those shares.
ASH BENNINGTON: Yeah, such an important point. Obviously, as you're doing what you always do, Ed, which is adding yet another dimension to it multiple time horizons, but also the comparative question about the performance of the US economy relative to the rest of the world and where investors are going to find that return. Jack, over to you, what are your thoughts about that precise point and Ed's perspective, as well as the blending of the macro and the micro, processing the numbers that come out today in relationship to the bigger picture?
JACK FARLEY: Well, Ash, I'll quickly explain a phenomenon that you and Ed mentioned, which is base effects. The simple fact of the matter is, is that most economic data, as well as a lot of financial data is measured over on a year-over-year change basis, and we're at the point now, where if you compare current data to a year ago, you're going to get things that are very distorted. For example, a little over a year ago, or actually, about a year ago, oil was negative, so are you going to look at the year-over-year change of oil? It makes no sense.
That's what we're seeing in terms of inflation. There's a deflationary spiral that was occurring last March, last April, so comparing year-over-year changes to the consumer price index doesn't make a whole lot of sense. One thing that I've got my eye on, Ash, is lumber, which is a key input in tons of infrastructure, which is obviously on the topic but specifically housing and as housing has surged for variety of secular as well as perhaps cyclical reasons, such as people leaving the big cities because they're getting taxed to death, perhaps we'll get onto that, I know it's got some thoughts on that, but as people are bidding to buy all these houses, the price of housing goes up.
Therefore, people are trying to build homes, so therefore, people want to buy a lot more lumber. Lumber being treated wood, not timber, which is basically a tree that was just cut down. In 2016-2017, the price of front month futures lumbers was well below $400. It's currently at $1,372 or almost $1,000 higher and that is actually the front month futures which is a financial contract. In terms of spot price, if you look at the US lumber oriented strand board or OSB composite, which is a monthly index which measures the price of OSB, it was at 999 for the month of March.
I was just reading report today from an exchange that said that they just closed a contract that was at $1500 per spot lumber, so you could see the price going a lot, lot higher. This trend is continuing and looking at this chart, Ash, it just reminds me of an exponential trend that is perhaps not mean reverting, at least for now.
ASH BENNINGTON: Hey, Jack, right speaking of the point about people leaving New York City report today on the back of this Commerce Department report that shows this blowout number in new housing sales. Meanwhile, New York City rents down to new lows on the cycle per report out by StreetEasy, so folks leaving New York City.
ED HARRISON: You spoke by the way, Ash, to your friend, James Altucher, in retrospect now that you have a chance to look back at that, the death of cities, what's your take?
ASH BENNINGTON: Look, I guess you could say it's still pretty early in the game here. Obviously, you have this mass exodus, New York City has not been the most fun place to be during the pandemic, not because of the gloom and doom sayers who say that that is basically the warriors out there, that's not the case. Obviously, we've seen some upticks in crime but the real challenge with being in New York is all the things that make New York great aren't happening right now. Obviously, you're not going to Broadway shows, you're not going out to packed nightclubs, there are a lot of great things about the city that are not that are not happening.
Also, if you've got to ride out a pandemic at home, you probably don't want to do it in a 480 square-foot studio apartment, you probably would prefer to do it out in the suburbs with a car and you can jump in and go out to the park and play frisbee and enjoy your life. New York City is not a great place to be during the pandemic. I think it's probably a little bit too soon to say how the city is going to come back or not come back as the case may be, but we're going to have to keep a very close eye on it. I'm, of course, going to be keeping a close eye on it because I'm here.
ED HARRISON: Where do you lean on thinking, is it going to come back? Is the death of cities a legitimate likelihood, or do you lean towards the optimistic?
ASH BENNINGTON: Well, I don't know. Look, we've had a trend. What is it, like a 250-year trend of urbanization in the United States. Obviously, some ticks are up and down on that but obviously, the secular trend is toward people, especially younger people want to be in big cities, want to be in densely populated areas, we're going to have to see. There's also the question about the individual cities themselves. Specifically, mismanagement and in taxation, as Jack points out.
I'll tell you a story that I've heard. Now, I can't confirm this. I don't know it firsthand, I've only heard it but apparently, New York City dating apps, the fish are biting, guys and gals both swiping furiously. I have friends telling me that they're getting more hits on their dating apps than ever before. I don't know if that's a function of vaccination and the weather starting to hopefully look up here in the city but look, people want to be, especially younger, single people, urban professionals want to be in places where there are other people they can hang out with. We'll have to see.
I do have to say, and maybe this is the tie here to bring us into the story that Jack was alluding to, which is taxation. Some of these numbers are coming out, I know you've got a lot to say about it. I'll just read through some of the data and get some commentary from you, Ed, because it's an important story. Obviously, this rumor of capital gains tax increase, this is significant. Currently, capital gains taxes at 20%, could rise to 39.6%, under some circumstances, 43.4% proposed capital gains tax ceiling, but to take that to this story about cities, blue states.
Look, California, that would add another 13.3%, live in New York, 11.85%, live in New York City, another 3.88% on top of the 11.85%. That starts to look pretty near 60% capital gains tax rates for residents of New York City.
ED HARRISON: Yeah, that's a lot. Doubling any tax rate is honestly, I don't think it's going to fly. You can debate the positives and negatives of increasing taxes, I'm probably negative in terms of increasing taxes. We don't necessarily want to go into why because we talked about taxes, Jack and I, yesterday and that was a huge debate in the comments. The thing is it's the step change. Going from 28% to almost 40%, that is a massive increase so I don't really think that it's going to happen.
This is interesting. If you look at the data, here's what Bloomberg says the proposal does, he proposes doubling the tax rate to 39.6% for those earning $1 million or more according to people who are familiar with the proposal, coupled with the existing surtax on investment income. That means that the federal tax rate could be as high as 43.4%. The marginal rate 39.6% but add in the surtax and you get up to 43.4%.
He also it says this was the Phil-Biden's campaign pledge to subject to capital gains tax to the top marginal income tax rate, which is 39.6% or being proposed to increase from 37% to 39.6% for people making $400,000 or more as a household. It's really, to me, about equating the two together, the 39.6% level and the 39.6% level on capital gains. That's a massive change, I have to say. I think that there's going to be a lot of resistance to that.
ASH BENNINGTON: Ed, just for context and politics aside, if something like this were to go through in your view, you've been watching these markets for a very long time, thinking about these fiscal issues, what happens to investment? That's just an incredible distortion in terms of the base effect from where we are today to where the proposal is to take us.
ED HARRISON: Well, there are two outcomes or two possible outcomes. Outcome number one is the same thing that you get with inflation. When people talk about inflation, really, oftentimes, you're talking about a step change. That is that you're going from this level to this level plus 5%. Then you go back to the previous levels of inflation that you had before. That's not a big deal.
The other possibility is instead of now, we take the 16% hit, this is what David Rosenberg said yesterday in his piece, that when you put the corporate tax increase together with the capital gains tax, that's a 16% hit. If you take that hit in a market that's overheated, it could potentially be the straw that broke the camel's back, causes people to reassess, and you have some massive selloff in in equities. 16% over time, or a potential massive selloff. Those are the two outcomes that I see if it passes. It's distinctly negative for equities.
ASH BENNINGTON: Yeah. Jack, any thoughts on that?
JACK FARLEY: Well, I think a lot of people approach taxes this way, if someone makes more than me, then they should be taxed higher because they're a plutocrat. If they make less than me, they should pay more in taxes. They need to learn the value of hard work. I don't know, I don't quite know how to approach it but in terms of its impact on the market, I saw a report today that increases in long term capital gains historically have not harmed the returns of the S&P 500.
However, I am thinking of the huge Trump tax cut which was on corporations, which many think and I think probably is very likely to be one of the reasons that the stock market just absolutely soared before, March of last year. I think that you can directly tie the cut in the corporate tax rate to the S&P 500. The question is, if you raise the capital gains tax, how does that impact the marginal investors behavior? Are they going to say, oh, I'm actually not going to buy the S&P 500, I'm going to go buy bonds, let's say?
Well, to me, that doesn't make a ton of sense, because the S&P 500 is still on a very long term time view, will generate higher returns, no matter what your tax rate. Does it incentivize people to post short term gains if they have a certain reason to? Are people going to, not conspire, but are people going to work with banks and tax advisers, so that if they have a huge taxable gain, they can borrow money against that, and then use that as a loss? They're going to derivative hedge so that they actually can report a loss.
I've read Matt Levine from Bloomberg. He used to be an equity structure at Goldman Sachs, that a lot of derivative hedges are actually people who want to sell their stock, but they're not allowed to sell their stock. I think that it's-- I don't know, it's a complicated issue. When Ed and I were on yesterday, we reported that on news of or not news, but on reports that Biden was going to go through with this, the S&P 500 plummeted the most in a 10-minute window right as the news reported, but obviously, the markets don't seem to be that worried today because NASDAQ is up, S&P 500 is up, Russell's up, even the Dow is up so yeah, I don't really know what to think, Ash.
ED HARRISON: Well, let me grab the ball there and say that I think it's interesting that it's clear when you look at the proposal that what's happening is it's a fairness game. There are two aspects to it politically. One is the rate. 39.6% on the one side then the other side, which was 37% for people with incomes of $400,000 or more going to 39.6%. Basically, what Biden's going to sell this as is 39.6% over here, 39.6% over here, it's fair. I think that that's a good sell, and I would agree with that.
The second political issue is the level, the rate, 39.6%. That's the real problem is that's a large rate. When you add in local taxes, when you add in state taxes, you're looking at a massive tax grab, and a lot of people will blanch as a result of that.