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The U.S. Household: Connecting the Dots
The state of the U.S. household is in one the best shapes it has been in throughout history; though depending on how you look at it, it may corroborate your skepticism or optimism. At a recent discussion, a key debt figure was triggering doubt about this optimism.
The 2018 Economic Playlist: Carry the Tune
Since the dawn of time music has played a pivotal role in the defining of the times and the progression made. We would like to utilize the artistic genius of these maestros to bring some context to the current pivotal point in the economy and capital markets.
The Relationship of Suds and Bubbles
The proliferation of news, information, opinion and fact (which all come across in the same way) has had an overwhelming effect on the common investor and the instructional as well. Attempting to delineate the crowded trade from the minority viewpoint is a far greater task currently. Though this increased dissemination of information is beyond the recognition of the investor’s psyche, it does have a more pronounced positive impact.
European Forecast: Clouds Lifting
We understand the general public’s concern with regard to Europe. Just when you get your hands around a cease fire in Ukraine, the “Greexit” hits the newsstands with hardline headlines. If this Greek drama ever ends - which is unlikely as we noted two weeks ago detailing Greece’s restructuring –-rescheduling or outright default on debt occurs over 45% of the time since 1800, one still has to deal with the constant threat of a deepening recession.
Deflation: Consternation Not Elation
Deflation has been around ever since there was an excess supply of something or when demand had plummeted. The term “deflation” has now become mainstream in the general public’s lexicon, though the understanding of the declining economic growth that corresponds with it is often disregarded until it wreaks havoc on the consumer’s paycheck. When we see deflation permeating global economics, market movements and NFL games, the general public will become acutely aware of the other major impact from deflation, the increasing symbiotic nature of all the global economies.
Energy: Technology Disruption, but not to all
Disruptive Technologies are the gold vein every entrepreneur seeks, but rarely find. Clayton M. Christensen, the patriarch of observing disruptive technologies, noted in his seminal book The Innovators Dilemma in 1997 that each breakthrough can be categorized as either disruptive or sustaining.
Consumer Spending & Economic Recoveries: What They Mean Going Forward
As a follow-up to the discussion on the rollover of the duration of the unemployed, the byproduct of an accelerating improvement in the undercurrents of the job market is consumer spending. The measure of consumption has a primary correlation to wages and income workers receive. As such, the benign improvement in wages has an obvious correlation to the benign improvement in consumption. There is a strong secondary driver which we will discuss shortly.
Numbness to Numbers
Ive often pondered the continuing headlines over the lack of progress in the area of mathematics in the United States relative to our peers and think the issue may lie in one area. The rest of the world has adopted the metric system, while we are only peripherally aware of it. As such, when standardized scores are compared, maybe translating from the metric system is needed and we may score higher.
The High Tide in China
One axiom that has been used over the last couple decades is that high tide lifts all boats; meaning that a rise in economic or market conditions will lift every component of an economy or market to some degree. While true, we deal with relative measurements when discussing returns comparable to a benchmark. So, while the high tide does lift all boats, if the boat is tethered too tightly, you may be higher than being beached, but you also could still be underwater.
European challenges and outlook
The constant debate of leading and lagging indicators is one that spills over to the political components as well. The timing of demographic shifting, recent economic events, geopolitical tectonic shifts taking place globally and neo-creative monetary policy have all been pointing to voter sentiment evolving. We have seen this represented in Europe for some time and the recent European Parliament election saw more than sublime results.
Shale Reserves Are No Shell Game
Since the times of Ancient Greece, ?The Shell Game? has been a confidence trick used to convince bystanders into believing they have a legitimate shot at guessing correctly and doubling their bet. We are currently in one of the more transformational periods of energy consumption, distribution and discovery seen in some time. The technology of extracting once undiscovered pools of energy is reverberating throughout economies and potentially causing tectonic shifting of political structures.
The Impact of the Great Recession and Federal Reserve Accommodation on Households
The latest release of macro data came out today from the Fed Flow of Funds report generated by the Federal Reserve. We monitor this with great anticipation so as to measure possible direction changes or momentum of a current direction. There are a myriad of data points, however, a few select charts should continue to raise confidence in the direction of the economy and, at worst, a liquidity-driven backstop to maintain consumption at minimum agreeable levels.
Looking Back 40 Years, What Can We Learn About This Current Corporate Debt Market?
I recently wrote a blog post detailing the potential opportunity in municipals as it has historically rebounded after a negative total return. Accordingly, I have been asked if this pattern was representative in the investment grade corporate arena.
The Markets in a Tug of War in the Short Run
As the damage to sentiment that was brought about by the Washington Drama Club, a somewhat cautious number has come about. On October 21, 2013, the Wall Street Journal had an article detailing margin debt hitting new highs which counteracts some of the investor sentiment numbers that are detailed by several sources. To get a better understanding, we ran the margin debt as a percentage of corporate equities over the last 25 years.
Government Shutdown Could Lead to a Buying Opportunity
As we approach yet another self-induced the sky is falling and the other guy is to blame environment, recall that this situation is not uncommon. We have had 17 of these budget debt ceiling deadlines and yet we have unbelievably (said with extreme rolling of the eyes) been able to overcome our elected officials calls for the end of the world. The most recent time when the U.S. government shutdown was in November 1995 concluding in January 1996,when arguably the animosity and polarization was as pronounced as it is today.
Charting the U.S. Employment Situation
The continuing jobless claims relative to past measurements has been a chart we like to detail to show the more psychological impact of where we stand and the sentiment about the employment situation. As we have shown, the current level is just below the high points of past recessions (recessions denoted by gray rectangles). Although we are approaching the long-term average, currently 6.7% above the 30-year average, the negative sentiment is understandable.
Don't Confuse Market Hiccups for Economic Heart Attacks
The daily bombardment of moving toward an agreement on the fiscal cliff only to see a hesitation on the advancement is symptomatic of the tango that we have been bombarded with over the last several years. It does appear though that we are becoming a bit desensitized to the two-steps forward to two-steps back pattern we have been accustomed to in similar debt ceiling deadlines or budgetary standoffs. In looking at the markets move and comparing statements from the two parties involved, it does appear we are at least in the same ball field for negotiations.
Market Surge is Amplified by Low ExpectationsAs Expected
European fears have subsided a bit as the European Central Bank's (ECB) president continued to offer words of support for a more comprehensive solutionthough he appeared to dampen the statements with concessions about the ECB's ultimate subservient role to the governments.
Germany's Role in Saving the European Union
As the talk of supporting, realigning or destroying the European Union (EU) dominates headlines, it appears crucial to us to look at who benefits most from any of these scenarios. Most of the pressure has been on Germany, as it should since it is by far the biggest component of the EU and currently the most prosperous, though it appears so more on a relative basis.
What the Individual and Professional Investors are doing
The tug of war between individual investors and investment professionals is seeing two distinct paths. According to reports from the Investment Company Institute, equity outflows of mutual funds in April were at $18 billion, the most in nearly 28 years. On the other side, according to Bloomberg, the Commodity Futures Trading Commission showed the drastic reduction of bearishness by professional speculators as net short contracts have dropped over 80% since the high set last September. The question is, Who will be right and when?
Charting Crude
Crude and gasoline have been in the press a great deal recently. Headlines touting the potential recession being exacerbated by high prices of crude and gasoline have also been met with statements about the need to regulate the speculators who are the ones to blame. We have mentioned our view on this several times over the last few weeks. Last week we mentioned a chart pattern corresponding with a negative backdrop that could push crude down in the short run. Consider the move in the Crude over the last five days.
What to Do With the Daily Data Divulge?
Simply ignoring the immense amount of data would be foolhardy and we must use more corroborating data and scrutinizing the data among trends and the volatile monthly data. This has given rise to the more artistic aspect of viewing the markets than how we may have in the past. This is why ones prediction for the markets may differ completely from another while looking at the exact same data. As such, the importance of the rationale for why one may feel a certain way about the markets is as important as the actual conclusion.
The Economic Backstop: The Consumer
As we near the summer, if you listen close you might hear the anticipation of yet another macro shock to stall out the equity market gains. Over the last couple of years, the risk of a domestic double-dip recession, natural disasters, public political debates and European sovereign debt crises have all had the effect of stalling out positive momentum gained in the first quarter. Through April of last year, the S&P 500 showed a total return of 9.05%. However, by the end of September it was at negative 8.67% including dividends and thus rebounded to show total return of 2.11% by year end.
Are We Approaching a Second Banking Crisis?
So, even though we saw healthy growth and returns to investors over this time requiring patience during the credit crunch of 2008 when returns were negative the market has built up a large base of holders to offset the lack of primary dealers holding net positions. It still brings to bear whether these positions have been measured for duration risk in case of higher rates as we have discussed many times before; however, demand for yield and risk aversion has at least tempered the loss of primary dealers utilizing capital.
China and the Rising Cost of Oil
While the markets and economy continue its path upward with each trepid step more anxious than the previous, the anxiety about future crude prices has now hit the political circuit. However, one base analysis that has seemed to slip memory is the correlation of Chinas growth and its growing demand of oil and the price of oil itself. What makes this important is the recent dichotomy that we are seeing in the underlying economic growth of China and the price of crude oil.
The Strategic Times: What is the Yield Curve Saying and Should We be Listening?
Many prognosticators continue to discount the shape of the yield curve and what bits of wisdom one might see in its steepness or flatness. Though not a perfect indicator from the past, it does represent some interesting expectations from institutional investors that should not go unaddressed. Though these numbers may not appear meaningful to the average investor, the institutional investor sees this as highly significant as it pertains to investor appetite, economic impacts and hedging of interest rate swaps and currency expectations.
Greece Anxiety to the Rising Cost of Crude Oil
With the ever so slowly resolution for Greece becoming a reality, most markets are turning their anxiety to the rising price of crude. The international energy markets have been shaken by the realization that Iran and its 2.5% of the worlds oil production may soon cause another economic shock. Though this concerns Europe more than the other continents, it surely puts a strain on everybody needing oil to help sustain the positive growth in the global economy. As such, we have seen a steady and sharp rise in gasoline prices.
Oil Production Increase to Temper Crude Volatility?
An interesting article on the resurgence of production of oil in the United States details the rebound in the amount of oil produced daily in the United States. It relays the expectation by the U.S Energy Information Administration that output could pick up over half a million more barrels per day by 2020. That would put daily output at over 6 million barrels per day, well short of the estimated daily usage. However, it does show that the production gains of 1.3mm per day over the last four years were greater than the gains in Russia, China and Brazil combined (1.2mm total).
European Nations Stripped of Credit Rating
S&P announced they were cutting the credit rating of nine European countries and stripping Austria and France of their AAA credit rating. Reminiscent of the removing of the AAA status from the US nearly six months ago, all eyes are on what will happen to their debt markets and currency. The markets had long expected some sort of credit rating warning or downgrade with regard to the United States. So too is the reaction from the European downgrades on Friday. Consider what has occurred in the debt markets over in Europe and you can then compare it to the United States movement.
Markets Off to the Races in 2012
As we kick off the New Year, the markets are starting like Usain Bolt off the line. The European markets are up already for the year after two trading days with the German DAX index up 4.55% and the Euro Stoxx 50 up 3.17%. The U.S. markets are moving higher with gains of nearly 2% for the day. Though a few trading days dont translate to what will happen over the year, the combination of improved manufacturing data across the globe and a further comprehension of the dramatic comments made by the ECB (European Central Bank) President Draghi last week seems to be fueling the gains.
Dependence on the U.S. Consumer
China and Japan announced a joint effort to diversify themselves from the U.S. dollar by allowing direct trading of their currencies. The interesting aspect is the still high dependence upon the U.S. consumer. At its peak, the U.S. consumer was (with all in consumption, Medicare and Medicaid transfers and other expenditures added in) from Merrill Lynch at 18.9% of global consumption. If we simply use the total chained consumption metric, the consumer is 15.0% of current world GDP. The central point to the global economy is still primarily on the U.S. consumer.
Fiscal Pressures Could Lead to European Solution
As we and many have noted during the debt crisis in Europe, the ultimate end to the current dilemma requires a comprehensive and coordinated solution from all of its members. In an article over night from Bloomberg we read that, a measure of ECB leverage may grow from a record 30 times, raising the risk of a widening in sovereign bond spreads unless governments commit a detailed rescue plan for members. The two challenges we have seen from Europe is the conscious effort to do just enough to get by which doesnt instill confidence and inability to comprehend the severity of the situation.
European Credit Freeze Thawing?
Mario Draghi, President of the European Central Bank, said that banks may borrow money from the ECB to purchase sovereign bonds. This is a form of quantitative easing that circumvents the prohibitive inflexibility many other central banks around the world dont have to meddle with. Like any additional indirect action, its ultimate impact may be more subtle than a direct action but it does bring about some creative solutions where leadership has stalled. Other assistance could come from a discussion in increasing liquidity by nearly 200 billion Euros via the International Monetary Fund.
European Bond Markets Offer Glimmer of Hope
Not that we havent been whipsawed by the procrastination from European leaders before, but the last week and half of trading in the European bond markets are offering a glimmer of hope that there might be push to come to a resolution. At this point, there is no sense in calling for the end to their dilemma as all long-standing concerns usually require drawn out solutions. However, the confirmation today of more austerity measures from Italy coupled with generally better global economic numbers is causing a large rally in Spain and Italys sovereign debt.
Contrarian Perspective to Market Sentiment Fear
We have long taken the contrarian perspective to the fear that dominates market sentiments. Overnight we have now seen the recognition that Europe is unable to fully solve this on their own and needed mediation in the form of a Federal Reserve lowering of the overnight swap rates to release the pressure cooker on European liquidity. Though we have witnessed many interventions this year, this one is pronounced in what it says in a very subtle manner.if you could ever call an intervention like this as subtle.
Investor Anxiety Sights on Europe, Not Washington
As we approach the third Congressional deadline for Fiscal measures in 2011, the lack of investor anxiety is very telling. Just like the parable of the boy who cried wolf, most investors are still staring beyond Washington to Europe and the daily reactions to their evolving solutionor lack thereof to some. There are possibly two reasons for this: 1. The general public appears tired of the Armageddon finger pointing and isnt convinced the wolf is out there. 2. A pre-determined $1.2 trillion in cuts will automatically be put in effect if the gang of six cant come to an agreement.
European Respite Allows Fundamental Scrutiny of Economy
An interesting week of economic data has allowed the slight respite from the European soap opera to push a more fundamental scrutiny of the economy. The two-day heavy release reveals quite a few of positive surprises, even if they are slight. In Q1 we grew at 0.4%, the Q2 at 1.3% and the non-revised number for the Q3 is at 2.5%. This growth is in light of the acceleration of the European situation that started in July and should have impacted the domestic GDP growth rate. However, we saw just the opposite due to the relative strength of the Euro compared to the U.S. dollar.
Equity Market Correlation Could Signal a Divergence
One thing lost in the market moves is correlation between the volatility in the equity and Treasury markets. Standing alone, one notices that the Treasury volatility index from BofA/ML has spiked up since the initial potential downgrade by S&Ps in April. This coincided with a spike in the Equity volatility though it has tempered a bit lately. When we look at traditional analysis, one would expect both volatilities to be somewhat divergent, yet now we stand at the third highest correlation over the last 10 years.
The Markets & Worlds Economy: Three Major Events
In the last 24 hours, there have been three key developments that should catch investors attention. The Greek Referendum vote has been canceled in light of the ultimatum that Germany and France has put forth to Prime Minister George Papandreou. It appeared to us that this referendum vote was initiated by political pressures to maintain his position of power which he ultimately denied. This little turn of events is just one of the many on the road that lies ahead.
Household Net Worth Influence & GDP Expectations
After recently discussing the Economy and its metrics for a select group of clients, we forwarded the concept that at some point market indicators are as relevant as economic indicators. Since we are living in an age when economic metrics are difficult to trust at their outset, most look at the revised number. We like to combine economic metrics with the multitude of market indicators to affirm a trend or potential reversal of a trend. As such, reading the market and economic tea leaves has become more artistic than scientific; though long-term success still requires both.
Be Mindful of the Markets History
When markets are not able to determine efficient use of capital and transfer excesses to underutilized areas, concern arises. We often hear about the rise of Socialism in the United States, and though compared to more free-market periods from years ago, there may be some accuracy to it; the relative capitalism benchmark versus other economies is still profoundly different. As evidenced by the situation in Europe it should serve as a warning sign for elected leaders setting more protectionist policies in light of our pursuit for free market forces.
A discrepancy in earnings affecting corporate, commodity and debt
There is a rising disconnect in the marketplace between perceptions and forecasts. It is occurring predominantly in the corporate earnings sector; however, we notice it in the commodity markets and the debt markets. For the last couple of months we have noticed a rising discrepancy between the top down earning analysts as compared to the bottom up analysts and CEO forecasts. We would typically side with the bottom up analysts as a general rule. However due to some interesting dynamics, we are leaning even more to the side of the bottom up estimates.
Cash is King
The equity markets look to be suffering from a little sleep apnea. It appears restful until a sudden gyration is induced by a pause in breathing leading to a lack of oxygen. The markets catch their breath only to be shocked again by the combination of lack of comprehension from elected leaders both domestic and abroad and the rising concern the economic soft patch may be quick sand. To illustrate a little more of why we see the soft patch versus the economic quick sand, consider the last 13 years with regard to the equity markets and cash flow.
What to Make of Todays Market Moves?
The 10-year Treasury has hit an important threshold while equity markets across the globe are off 4-5%. The 10year Treasury hit an intra day low yield today of 1.97%, which was last seen on 12/30/08. This is important in that it is a historical low yield and invites the question whether a secular double bottom might just be taking place. It also begs the question whether this flight to quality is another knee jerk reaction to a stumbling of political processes; or is it an environment where historically low interest rates are semi permanent? Could the answer be yes to all of them?
What does the Downgrade of U.S. Debt Mean?
The downgrade potential was not mitigated with the overly dramatic yet not surprising game that Congress and the President partook in. Losing the AAA status has some fundamental and some theoretical impacts. The obvious facet is the increase in interest costs for the U.S. government and every interest based instrument. Estimates for increased interest expense have ranged from 25 billion annually to as high as 100 billion annually. Any measuring is sure to have flaws when one considers past rating cuts and the significance and uniqueness of the Treasury market.
Is Todays Selloff a Sign of Market Capitulation?
The paralysis that has dominated the markets has only been enhanced by the recent market movements. For those who have a longer-term time frame and are underweight risk assets in general, current levels still appear attractive. The one characteristic that has been missing from the benign sell-off in the second quarter was a market capitulation. Yesterday actually had a feeling of that; however, it may require more of the flushing of the system before that occurs. Calling a bottom would be foolish. Being a successful investor, buying low and selling high, has always been easier said than done.
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