Bob’s Journal for 6/17/21

The Fed’s Digital Dollar Plan and What It Means

Sometime in July, the Federal Reserve plans to issue a paper outlining its thoughts on a digital dollar and related issues.

The project is stimulating a lot of rumors and forecasts about what will happen to the dollar. If the Federal Reserve does decide to launch a digital dollar, it will not erase, recall or take other actions regarding the current paper currency.

The digital and paper dollars would exist and be used simultaneously. There are three major reasons the Fed is considering a digital dollar.

One motivation is that other countries, especially China, are experimenting with digital currencies.

The dollar currently is the world’s reserve currency and needs to maintain that status. Without reserve currency status, the U.S. Treasury likely would have difficulty selling as many bonds as it does now and would have to pay higher interest rates on the bonds.

China wants to have the world’s reserve currency, and that is a reason it took the lead in experimenting with a digital currency. China’s actions likely accelerated the Fed’s study of a digital dollar.

A second motivation is the growth of private sector digital currencies. While the Fed probably isn’t too concerned about Bitcoin and most other digital currencies, it is concerned that established businesses, such as Facebook, announced plans to consider developing their own digital currencies.

The Fed doesn’t want a major portion of the economy moving outside the banking system into private digital currencies. That would reduce the Fed’s ability to measure and affect the economy.

The third reason the Fed is considering a digital dollar is to enable “unbanked Americans” to join the financial system. Many lower-income people do not have bank accounts because they can’t maintain the minimum balances that avoid fees.

Advocates in Congress and elsewhere say that a digital dollar established by the Fed and the U.S. Treasury could be structured to provide free banking services to this group of Americans.

It is likely that a digital currency also would cause other Americans to use that instead of traditional banking.

That’s why major associations of banks and their lobbyists already are opposing a digital dollar. If people deposit their money in digital dollar accounts, those deposits wouldn’t count as bank capital. That would reduce the amount of loans the banks could make. Digital dollar accounts probably would reduce other opportunities for traditional banks to make money.

The launch of a digital dollar isn’t imminent. The Fed currently is exploring the feasibility of establishing a digital fiat currency that has the features of today’s dollar with the technological benefits of the private digital currencies.

Even if the Fed decides it is a good idea and is feasible, an act of Congress likely would be required to move forward.

Finding ESG Stocks

A growing number of investors want their investments to do more than make profits. They want to engage in what used to be called socially responsible investing.

Socially responsible investing now is called ESG investing, short for environmental-, social-, and government-related investing. A company that rates well on ESG factors generally is one that pollutes less and treats its workers well.

Unfortunately, ESG investing means different things to different people.

A recent study by The Wall Street Journal found that it’s tough to determine which companies are better at meeting ESG standards and how well high-ESG stocks perform compared to other stocks.

There are three main providers of ESG data on publicly traded companies. The companies use different data sources to determine a company’s relevant practices and policies. The companies also weight the data differently when developing ratings and rankings for companies.

The result is the same company can receive very different ESG ratings from the three providers.

Of course, a rating firm’s view of what are good ESG practices could be very different from yours.

An argument frequently made in favor of ESG investing is that stocks with high ESG ratings earn higher returns than other stocks.

But the Journal’s study found that wasn’t the case. For example, so far in 2021, stocks of companies with poor ESG ratings have done the best.

The data firms and advocates of ESG investing say the study looked at too short a time and that ESG stocks do better over the long term. Critics counter that ESG stocks seem to do better because a higher percentage of them are technology companies.

The difficulty for ESG investors today is defining which qualities they want in companies they own and finding the stocks that match the definition.

Social Security Redesigns the Benefit Statement

The Social Security Administration (SSA) is redesigning the benefit statement it has been issuing for decades to those who currently aren’t receiving benefits.

The SSA is testing the new design with a portion of online account users before rolling it out to all users.

The major change is the statement now estimates the monthly benefits that would be received if benefits begin at any year from ages 62 to 70. The traditional statement gives estimates only for benefits that begin at 62, full retirement age, and 70. A bar chart is used to show the different benefit levels.

The SSA will adjust the format based on feedback from those who receive the new statement and plans to eventually make it available to all Social Security account holders.

The Data

Economists expected retail sales in May to decline, but the reported dip was greater than expected. Sales declined 1.3% in May compared to April’s total.

Excluding autos, retail sales fell 0.7%, and excluding autos and gas they declined 0.8%.

The good news is that April retail sales were revised substantially higher. Total retail sales increased 0.9% in April, up from the 0.0% reported initially. Similar revisions were made for sales excluding autos and excluding autos and gas.

A key question we do not have the answer to is the extent to which the decline in sales was due to supply shortages rather than consumer unwillingness to buy.

Retail sales are volatile from month to month, so it is best to look at the trend over three months or longer. Currently, this trend is positive.

The Consumer Price Index (CPI) increased by 0.6% in May and 5.0% over 12 months. Excluding food and energy, the CPI increased 0.7% in May and 3.8% over 12 months.

May was the third straight month the CPI increased 0.5% or more. That has happened only three other times since 1985.

The Producer Price Index (PPI) increased 0.8% in May, which follows a 0.6% increase in April. Over 12 months, the PPI is 6.6% higher. That is the largest 12-month increase in the PPI ever.

Excluding food and energy, the PPI increased 0.7% in May and 4.8% over 12 months.

As many economists point out, the 12-month increases are exaggerated because prices declined in the early months of the pandemic in 2020. So, the baselines to measure the 12-month price increases are low.

But the recent month-to-month increases also are strong and aren’t starting from the extremely low baselines. In addition, the CPI tends to understate housing price increases. So, it doesn’t capture the inflation facing those who are seeking to buy homes.

New unemployment claims reached another pandemic low of 376,000 in the latest week, recording the sixth consecutive week of declines. The new claims were 9,000 lower than the previous week.

Continuing claims numbered almost 3.5 million, down about 258,000 from the previous week.

The number of Americans receiving some form of unemployment compensation was essentially unchanged at 15.3 million.

Consumer Sentiment in the first part of June, as measured by the University of Michigan, increased to 86.5 from 82.9 at the end of May. The expectations component increased significantly.

But inflationary expectations were high in the survey. Spontaneous references to market prices for homes, vehicles, and household durables were at their highest level since the record for the survey in November 1974.

Because of the inflation concerns, sentiment for buying vehicles and homes reached the lowest levels since 1982.

Manufacturing growth in the New York area remains strong but the growth is slowing. The Empire State Manufacturing Index for June was 17.4, which is down from 24.3 in April.

Industrial Production increased 0.8% in May. But April’s increase was revised substantially lower, to 0.1% from the initially reported 0.7%.

Housing starts increased 3.6% in May, and April’s number of starts was revised higher. Over 12 months, starts have increased 50.3%.

Single-family home starts increased 4.2% in May.

But building permits issued declined for both all housing and for single-family homes.

Home builders are gradually becoming less optimistic. The Housing Market Index from the National Association of Home Builders (NAHB) declined to 81 in June from 83 in May. That’s a 10-month low.

The home builders remain concerned about higher prices for and reduced availability of building supplies. Higher prices and delays in building reduce the number of potential buyers. The good news is that lumber prices seem to have peaked in late May. Lumber futures prices this week were more than 40% below their peaks.

The Markets

The S&P 500 rose 0.52% for the week ended with Tuesday’s close. The Dow Jones Industrial Average declined 0.85%. The Russell 2000 lost 0.94%. The All-Country World Index (excluding U.S. stocks) added 0.35%, while emerging market equities fell 0.25%.

Long-term treasuries gained 0.43% for the week. Investment-grade bonds increased 0.60%. Treasury Inflation-Protected Securities (TIPS) added 0.38%. High-yield bonds gained 0.19%.

As for our currency update, the U.S. dollar rose 0.50%.

Energy-based commodities lost 0.06%. Broader-based commodities fell 1.79%. Gold declined 1.83%.

Bob’s News & Updates

My latest book is “Where’s My Money: Secrets to Getting the Most out of Your Social Security.” It tells you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on Amazon.com or Regnery.com.

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