Pontlitz Asset Advisors

An editorial on Capitalism vs. Socialism in light of today's NYC election that will have wide-sweeping effects on America. This is written by Brian Wesbury, Chief Economist at First Trust Advisors:

"Capitalism vs Socialism"

"History is absolutely clear – Capitalism is the best system ever developed (actually evolved by human experiment) to boost living standards. At the same time, Socialism has a seriously lousy record. In the most recent attempt, Venezuela has gone from one of the wealthiest countries in South America, to one of the poorest. In spite of the very clear record of capitalism’s success, many want to “bite the invisible hand” that feeds us. On Tuesday, it appears that New Yorkers – who live arguably at the historic center of American capitalism – will elect an avowed “democratic socialist” as mayor, who wants to use the visible hand of government to direct resources.

"It’s not like capitalism hasn’t faced intellectual challenges before. Historically, they tend to fall into three categories. First, capitalism leads to excess and then collapse – citing the Great Depression and the Subprime Panic of 2008 as example. Second, it ignores environmental costs (“externalities”) which may hurt the earth, like “climate change.” Third, it causes inequality – houses are unaffordable, while billionaires proliferate.

"We don’t have the space to deal with each of these in depth. But it is well documented that the Great Depression was caused by a series of government mistakes, most important lousy Federal Reserve policy, which caused deflation and bank failures. It wasn’t capitalism’s fault.

"Again in 2008 subprime problems were caused by overly loose monetary policy between 2001 and 2006, which boosted riskier mortgages and drove up home prices. In the meantime, government-sponsored enterprises stoked lending to meet political goals. Then when the losses appeared, mark-to-market accounting made the multiples worse by forcing banks to price and sell assets in an illiquid market at less than their actual cash-flowing value.

"Ending overly restrictive mark-to-market accounting would have fixed the crisis immediately, but instead the Bush Administration supported TARP and Quantitative Easing. At the time we said that they were the biggest mistakes Republicans had made since Herbert Hoover raised taxes and signed the Smoot-Hawley Tariff Act into law (even though we had been running trade surpluses). Bailing out banks while foreclosures spread made it appear that capitalism was really about socializing losses and benefiting greedy bankers.

"What about externalities? Just last week, Bill Gates made news when he said the risks from climate change are exaggerated, resources have been misspent, and humanity is not going to be wiped out.

"Which leaves us with the final argument against capitalism – inequality. This is the basis of Zohran Mamdani’s campaign for Mayor of New York City. He says billionaires shouldn’t exist and housing is unaffordable, and this has gained traction among many voters, especially younger generations.

"What is so frustrating about this argument today is that the policies the US government has followed since 2008 are directly responsible for a surge in inequality. George Bush the Younger defended TARP by saying he had to violate free market principles to save the free market. We said at the time that that made no sense. He was just undermining those principles in the marketplace of ideas. It gave intellectual carte-blanche to those who openly oppose capitalism to do so more brazenly.

"Quantitative easing was a huge mistake (both during the 2008 Panic and COVID). The US money supply has tripled in just eighteen years. The result is higher inflation, not just for consumer goods, but for housing and asset prices as well. What this means is that those with assets (stocks and homes) gained ground; those without assets lost ground.

"We can think of no set of economic policies, other than the pure corruption we often see in third-world countries, that has caused more inequality. In other words, it was not capitalism, but government policy mistakes that caused the recent surge in inequality. Fixing it with more government interference in the markets will only compound the problems.

"None of this can be blamed on one political party or the other. However, it can be blamed on politicians, who for almost 100 years have invented one new government program and policy after another. While the US has the characteristics of a capitalist system, government (at all levels) plus the cost of regulation exceeds 50% of GDP.

"So, forgive us when we hear capitalism doesn’t work. That’s not an argument that holds much water anymore. Unfortunately, the failure of government seems to be leading people to vote for even more of it. If the country as a whole goes in this direction, debt, deficits, inflation and inequality will all become even bigger problems than they are today."

-Brian S. Wesbury, Chief Economist

Quincy Krosby, Chief Global Srategist our firm (LPL Financial) speaking about the market outlook on CNBC now 💹

Likely a 2007-2008 type housing crash isn't happening anytime soon, at least not due to forbearances...

4 Reasons Why the End of Forbearance Will Not Lead to a Wave of Foreclosures - PHP Houses With forbearance plans about to come to an end, many are concerned the housing market will experience a wave of foreclosures like what happened after the housing bubble 15 years ago. Here are four reasons why that won’t happen.

Today's data and some commentary by First Trust regarding the current housing market:

"New Single-Family Home Sales Fell 6.6% in June"

"New single-family home sales fell 6.6% in June to a 0.676 million annual rate, well below the consensus expected 0.796 million. Sales are down 19.4% from a year ago.

"Sales in June fell in the Northeast, South, and West, but rose in the Midwest.

"The months' supply of new homes (how long it would take to sell all the homes in inventory) rose to 6.3 in June from 5.5 in May. The gain was due to a slower pace of sales and a 23,000 unit increase in inventories.

"The median price of new homes sold was $361,800 in June, up 6.1% from a year ago. The average price of new homes sold was $428,700, up 12.2% versus last year.

"Implications: New home sales continued to disappoint in June, posting a third consecutive monthly decline to come in below even the most pessimistic forecast by any economics group. New homes were sold at a torrid pace in the second half of 2020 into very early this year but have since declined substantially. Why have sales dropped? We think for two main intertwined reasons: a lack of supply of completed homes plus rapid price appreciation versus pre-COVID levels. Look for builders to ramp up construction in the year ahead, particularly once excess jobless benefits are finished, and for that added supply to facilitate more sales while slowing the pace of new home price appreciation. That said, buyers are still stuck dealing with very few options when it comes to completed homes. It's true that overall inventories have been rising recently and now sit at the highest level since 2008. This has pushed up the months' supply (how long it would take to sell current inventory at today's sales pace) to 6.3 from record low readings of 3.5 in late 2020. However, almost all of this inventory gain continues to come from homes where construction has either not yet started or is still under way. Doing a similar calculation with just completed homes on the market shows a months' supply of only 0.6, near record lows going back to 1999. The good news is that the inventory of completed homes rose in June for the second month in a row after nearly a year straight of declines, and while it's too early to say if this represents a new trend, there are reasons to be optimistic. As we pointed out in our recent report on housing starts, builders have plenty of projects in the pipeline to meet demand and keep construction activity running on all cylinders for the foreseeable future. As more homes become available, we expect demand will remain strong and help boost sales later in 2021 and beyond. Also, keep in mind that while sales are now back below where they were pre-COVID, there has been an extreme amount of volatility in sales since then. A good way to cut through that volatility and get a better picture of the health of the housing market is to look at a 12-month moving average. Using that measure sales remain near the fastest pace since 2007 despite recent declines, as the nearby chart shows."

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 7/26/2021

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