● The New Great Depression: Winners and Losers in a Post-Pandemic World
James Rickards
Quote by author via Global Finance
“I did not live through the Great Depression, but my parents did and they were affected for life,” says James Rickards, author of The New Great Depression: Winners and Losers in a Post Pandemic World. “This will be very similar.” A 2020 study published by the Federal Reserve of San Francisco looked at 650 years of pandemics and found that monetary policy, economic growth and other policies do not normalize for 30 to 40 years. “If 2019 is your base year to define normal,” Rickards says, “well, we’ll never see normal again. Ever.”

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In this issue:

• The small-cap equity rally continues
• Portfolio-strategy benchmarks take a hit
• Broad-based market losses weigh on managed-risk strategies

Small-cap stocks are pricing in a rosy 2021: There are still plenty of risks lurking, including uncertainty over what the incoming Biden administration will be able to accomplish. The President-elect on Thursday outlined an ambitious $1.9 trillion pandemic relief program that, if enacted, would go a long way in juicing the economy. Whether his policy prescription survives the tortured politics of the Beltway in the weeks ahead is an open question. For now, shares in the small-cap realm appear to be anticipating a rosy year ahead (or at least one that compares favorably vs. annus horribilis that just ended).

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Long-Term Stock Forecasting
Magnus Pedersen (Hvass Laboratories)
December 17, 2020
When plotting the relation between valuation ratios and long-term returns on individual stocks or entire stock-indices, we often see a particular pattern in the plot, where higher valuation ratios are strongly correlated with lower long-term stock-returns, and vice versa. Moreover the plots often show a particular curvature for this relation between valuation ratio and long-term stock-returns. The explanation turns out to be quite simple and follows directly from the mathematical definition of the annualized return. Furthermore, we can decompose the change in share-price into the change in valuation ratio such as the P/E or P/Sales ratio, and the change in the Earnings or Sales Per Share. This is intuitively obvious because the share-price simply equals the valuation ratio e.g. P/Sales multiplied by the Sales Per Share. Using this with the formula for annualized return, we get a fairly simple formula for estimating the future stock-returns, based on the current valuation ratio and our best guess for the future valuation ratio, and the future growth in e.g. Earnings or Sales Per Share, and the future Dividend Yield. This is the basis of the long-term forecasting model, for estimating the mean and standard deviation of future stock-returns. Although the forecasting model is “embarrassingly” obvious in hindsight, it has apparently never been formalized in any previous publications, which have merely studied the empirical relation between valuation ratios and long-term stock-returns, without giving a formal explanation why this relation exists, and how to use it properly for long-term forecasting. That is done in this paper and we will also show when and why the forecasting model does not work, using real-world data for both individual stocks as well as entire stock-indices such as the S&P 500, 400 and 600 for U.S. stocks, and various Exchange Traded Funds (ETF) for international stock-indices.

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* Biden outlines $1.9 trillion Covid-19 relief plan
* Today’s US retail sales data for December expected to post decline
* Economists expect US growth at 4.3% in 2021 via new survey
* Fed’s Powell says no rate hikes on the horizon for now
* New wave of Covid-19 outbreak in China threatens economic recovery
* UK double-dip recession lurks after GDP fell 2.6% in November
* Are renewable energy stocks in a bubble?
* Philly Fed’s ADS business cycle index falls sharply, signaling US recession risk
* US import prices rose more than expected in December
* US jobless claims surged last week to a 5-month high:

Looking for robust diversification opportunities in equity risk factors has turned up modest and sometimes disappointing results in recent years in broad-brush terms and it’s only gotten worse in the pandemic. The question is whether the worst has passed? Possibly, although the outlook remains cautious at best. Let’s dig into the numbers for some details.

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* Trump impeached for Second Time with support of 10 Republicans
* Will Senate convict and remove Trump? Senate leader is undecided
* Biden set to unveil plan for new Covid-19 relief package today
* Federal officials warn of new attacks by extremists
* China exports rose more than expected in December
* China reports first Covid-19 death since May
* ECB President Christine Lagarde calls for global regulation of bitcoin
* US headline consumer inflation rose 1.4% 2020:

Is the US economy at risk of a double-dip recession? The threat is rising, according to the latest update of the ADS Index, a real-time tracker of business conditions published by the Philadelphia Fed. This benchmark is a valuable metric for monitoring recession risk, but its attempt to be timely also leaves it vulnerable to noisy volatility. Nonetheless, the latest ADS slide in the current climate bears watching as the pandemic continues to roil America in the new year.

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* Growing list of Republicans will support today’s vote on impeaching Trump
* Pence rejects effort to oust Trump with 25th amendment
* US to require proof of negative Covid-19 tests for international visitors
* China’s Covid-19 cases rise the most in over five months
* Brazil data shows China coronavirus vaccine is 50.4% effective
* Global shortage of semiconductors squeezes auto production
* US job openings fell less than expected in November but still trending down
* US small business optimism index fell sharply in December:

The world is still battling a pandemic, the US government is in turmoil and there’s no shortage of other events lurking on the global stage that could cause trouble for asset markets. Should we add in rising interest rates to the list of worries?

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* House will vote today on removing Trump with 25th amendment
* House plans Trump impeachment vote for Wednesday
* Acting Homeland Security Secretary quits as FBI warns of armed protests
* Secretary of State Pompeo puts Cuba on terrorism sponsor list
* Atlanta Fed President sees possible rate hike coming sooner than expected
* China’s rebounding economy is strengthening its currency
* Double-dip recession risk is stalking Europe
* Bitcoin’s dramatic correction is healthy, say analysts
* Consumer year-ahead inflation expectations remain unchanged in December
* 10-year Treasury yield continues to tick higher, rising to 1.15%: