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  • ECONOMIC & MARKET ANALYSIS - July 28, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.3%.

    S&P 500 Index - The Index finished at 1978.34, essentially unchanged from last week.

    US Dollar Index - The Index finished at 81.03, up 0.6% from last week.

    Gold - Gold finished down 1296.85, down 1.2%% from last week.

    Commodities - Spot Prices were essentially unchanged at 404.88

    Retail Sales - In June, the 12-month rolling average rose 0.4%.

    Consumer Prices - In June, the 12-month rolling average rose 2.0% on an annualized basis.

    Durable Goods - In June, the 12-month rolling average of all orders rose 0.2%.

    New Single-Family Home Sales -  In June, the 12-month rolling average of the value of new homes fell 5.4%.

    Sometimes it's just best to be blunt: on balance, this week is slightly better than respectable, but that's about as far as it goes...these numbers aren't remotely expansionary.

    The data surrounding sales of new single-family homes correlates surprising well with the economy as a whole, and this is the third consecutive month that the total value (price x volume) has dropped.  Interestingly, the issue is in volume more than in average sales price, which has remained fairly stable.  We think that prices will soften very shortly...it's simply a matter of time and a lagging effect as inventories build.  The ratio of inventories to sales has risen now for seven consecutive months.  All of this is part of the slowdown in housing that we said would come and is happening as you read this.

    The good news?  That's actually as bad as the data gets this week.

    Retail spending is a critical component to the economy.  What we got this week was nothing but a ho-hum result...an annualized increase of 4.9%.  That is neither very strong nor very weak.  It dovetails precisely with modest growth.

    If there is a surprise, at least relative to where we think things had been headed until two weeks ago, it's that Inflation remains roughly stable...and the data fits with our altered outlook in which we recently stated that the near-term outlook on Inflation is tame.  Why is this a surprise at all, then?  It's true that, at 2.0%, it's running higher than anytime since May 2012, but...this also makes sense.  The primary reason we did have a forecast for rising Inflation is also the reason that Inflation is ticking up slightly right now.  But our tea leaves say that that "tick up" is going to flatten out very shortly, what with commodity prices that have declined and a stable Dollar.

    Now...hold onto your hats.  It's true that we said the worst of the week's data was dispensed with first, but...if Orders for Durable Goods edged up in June, that's all they did: edge up...slightly.  They rose at a 2.4% annualized rate, and that's the smallest increase since April 2013 (except for February of this year).  We hope that every reader, by now, understands the nature of this indicator.  Orders for Durable Goods is one of the richest economic indicators we have.  For one thing, it's a measure of spending, so on one level, it's measuring how people feel right now.  For another, durable goods are typically items that have larger ticket prices, so the impact on the economy is greater.  And, because these are higher-priced items, it's customary for some portion of these orders (often a large percentage) to be paid for with credit...which has an expansionary effect on the economy.

    We pay close attention to Orders for Durable Goods, as should you.  At 2.4%, you're looking at a growth rate that is just a little more than a whisper above no growth...simply maintenance of the status quo.  A word of clarification, however.  Industrial Output is a more accurate measure of current economic standing, but...it doesn't measure short- to-medium-term direction, as well.  That's where the effect of credit usage comes in.

    If you ever stop reading The Practical Economist, but want one single indicator to grossly simplify for you where things are headed, this is the one indicator you should look at.

    On balance, therefore, it was a respectable week, but no more than that.

    Interestingly, if we look to how the Market left things, we get the same impression.  The Dollar rose...a modest 0.6%.  Generally, it's normal to expect to see the Equity Market react to a move in the Dollar.  If things are stagnating, a falling Dollar could easily give a boost to the Market...and, a rising Dollar could easily signal confidence that the economy is strengthening.  What do you make of a rising Dollar but an unchanged Equity Market?  Exactly--the Market doesn't know what's happening either.

    We have already said that we think the outlook for the near-term is an economic slowdown.  We think that we're--right now--on the threshold of that slowdown...we think you'll be feeling the slowdown as soon as the first week in September.

    What will that mean for the financial markets?  We think that, for the first time in a long time, there will actually be a real effect.  In a nutshell: corporate profits will remain in the black, but...based on a slowing in significant economic patterns, the margin of success in beating estimates will reduce quite a bit.  Expect the results of third-quarter earnings reports to be very different from those of the second quarter.  Our advice: be very, very cautious about speculating too heavily into prospective earnings.

    And tighten your seat belts.

    More on our projected slowdown in coming weeks.

     

  • INVESTMENT OUTLOOK - July 21, 2014

    Investment Environment

    Last time we updated this column we said that Monetary Policy continues to make the march to riskier asset classes inexorable.  We went on: If there's a time to begin meditating on the kind of conditions that make a Financial Collapse or Crash a probability, this is it. 

    In a recent Editor's Letter, we said, with pretty strong emphasis, that, in some markets, especially in the United States, it's difficult to imagine anything other than a continued northerly climb in stock prices.  This is primarily because of the interest-rate environment that is giving incentive to growth-oriented investors, to look for some kind of yield.  But it's also because the landscape for rising corporate profits is at least stable.  That's right: we said "stable."  It's very difficult, nay, impossible to forecast an earnings environment in which companies will figuratively blow the lights out on expected earnings forecasts.  Our forecast is one of moderate growth in beating forecasts.  But, combined with that ultra-low interest rate environment, that will be enough. 

    We like to believe that we're adult enough to know when to admit that the crystal ball is cloudy.  Here are the twin issues we should all be concerned with:

    1.  If Monetary Policy is indirectly giving a strong incentive to investors to prefer equities over bonds, why are bonds so persistently high-priced?

    2.  If bond traders believe that Inflation will remain very subdued (which they are demonstrating by keeping 10 year yields so low), how sanguine should domestic investors be about the equity market?

    Here's another way to recast our opening statement: the prospect for upside from the Equity Market, at this point, is limited.  If you're the type of person who develops a pain in your belly when your neighbor makes 2% on his money in the next two months while you make only 0.5%, equity investing is probably not for you, but at a minimum, we'd understand your emotional interest in being aggressive with your investments. 

    But, with the prospect for corporate earnings modest, you have to ask yourself if the market is returning adequate yield for the class's risk and whether the likelihood of earnings pressure is greater or less than the likelihood of beating earnings estimates. 

    We think you know the answer.  Our advice: very slowly revert to positions that are your long-term strategic positions.

    Having said all that, we'd take a long look at some international markets, particularly Hungary, Norway, Poland, the Czech Republic, and China.  Why?  All have combinations, in our view, of high prospects for corporate earnings and high divided yields, on average.  Markets to stay away from in particular: Russia, Turkey, India, Thailand, Brazil, Chile, Mexico, and South Africa...for the inverse reason.  Higher long-term rates, insufficient monetary stimulus, high inflation...these are some of the key reasons these markets will not fare as well.   

    Bonds: Why anyone would plunge into bonds when Inflation is low and interest rates are so low is simply beyond anything we could ever explain...and, of course, as we all know, many bond investors have exited that market for Equities.  Ironically--but not surprisingly--adjusted for risk, short-term bonds have been one of the best-performing asset classes in the past year.  However, nominal yields have been very low and the asset class very risky in general given how highly valued bonds already are.  This is not to say that Inflation cannot drop and that Interest Rates cannot drop, but...the probability is weighted much more heavily in favor of both rising Inflation and rising Interest Rates.  Especially given a high-risk outlook for Inflation, we cannot encourage Bonds as a major investment class at this time. 

    We'd said it before, though: based on the high level of return from Brazilian Government Bonds, we think they deserve a long look.  It doesn't hurt that real interest rates are also fairly high, combined with what we think will be a stable monetary policy, making the outlook for price appreciation good.

    Currencies: When you think about currencies, there are three things you should think about.  One is how fiscally credible the country issuing it is.  The second is the rate differential in short-term rates.  Higher short-term rates in the target country help to translate to stronger carry-trade demand.  And the last, related to that second, is the likely direction in which short-term rates will move in the target country.  The latter two can offset a country that has low fiscal credibility, but that doesn't happen often.  Right now there are four cases in which it applies and in which we are pretty strongly bullish on the target currencies.  These are Turkey, India, Brazil, and South Africa.  In all cases not only are short-term rates already high, we are betting solidly on monetary tightening (i.e. even higher rates) based on environments in which inflationary pressures are overtaking economic pressures.

    But there are also cases where some target countries have fiscal credibility profiles that are enhancing their currencies' desirability.  Chief among these right now are Hong Kong and Thailand, and...Denmark to a lesser degree.  

    Currency investing is not for everyone.  It involves significantly more risk than investing in a broad market of equities, for example.  But for those who have a taste for the exotic and can handle the risk, take a long look at our recommendations. 

    Real Estate: Our belief is that the chief drivers of Real Estate are low interest rates, rising Inflation, and rising Income.

    Our prognostication that the recovery in Real Estate would slow has come to pass.  However, if our perspective is correct--that Inflation will pick up significant speed later this year--we think it will pose an interesting opportunity for the Housing Sector. 

    Not for organic reasons of improved economics or credit, but instead for rising Inflation, we think Housing could be facing a real run-up next year.  We'll have a better sense within a few months.

    Commodities: It's interesting...many commodities enjoyed a nice run-up in prices over the previous six months...contributing to what we began to fear would be a sustained rise in consumer prices.  The fact is that, over the past several weeks, commodities have demonstrated some mild softness, but yet, there are three classes, Cocoa, Coffee, and Nickel, that we think are overpriced based on projected stocks and projected demand.  Everything else?  There's no reason to expect a strong decline, but neither is there anything to support taking a bullish position.

  • EDITOR'S LETTER - July 21, 2014

    Editor's Letter

    We'd like to believe that at least most of the time, we err on the side of being gracious.  That is definitely not always the case and we're about to demonstrate, if not, our surly side, our "we told you" side.

    If you read the updated scorecards over the past two weeks, and if you paid close attention, you took away a few key points.  One is that, as we told you several months ago, the summer would feel relatively comfortable...that the pace of growth was due to pick up, not at what any rational and measured mind would call an expansionary pace, but enough to make people feel better about where they stood.

    It would be very hard to argue that such did not come to pass.  If you look back at our most significant economic indicators over the past month, they're almost uniformly more positive, if not robust, but more positive than we'd become accustomed to last year.

    But--if you have read the scorecard, you also read us say that you should not expect that pace of growth to continue...not that anything like a significant slowdown (never mind contraction) would be on the horizon, but that the pace of growth would temper going into the fall.  We are committed to that perspective.

    And late this week, the Thomson Reuters/University of Michigan survey reported that its measure of Consumer Sentiment...yes, declined from the previous month. 

    We hope that rational people understand that nothing is ever stationary.  And nothing is more of a moving target than the economy.  If you've been having a free-spending summer, you may want to check your ways.

    There's something else we want to touch on briefly this week.  For months we have been sounding an alert that nascent inflation may be more of a threat than anyone thinks.

    Well, the first alert to us that such may not be the case came while talking with a non-finance oriented colleague.  To say she pays zero active attention to financial markets is an accurate statement.  And she stated that she'd heard that Inflation may be picking up.  This conversation was about six weeks ago.

    Now, if there's one axiom we live by, it's this: When everyone says that something's going to happen, something else will happen.

    That was our first clue that our fear about rising Inflation may be off the mark.  We'd be more than silly if we didn't alter our perspective so accommodate changing facts. 

    And here are some facts: first, the Dollar, while having exhibited some minor weakness recently, is holding somewhat strongly; commodity prices, which had been up moderately, have come down significantly; and lastly, our touchstone--the trend in long-term rates, by which bond traders tell us the direction in which Inflation is headed, has moderated and is holding steady.

    You will remember that, a few months back, Inflation had begun to rise...and that makes some sense in accordance with commodity prices that had risen and the 10-year government yield that had risen something like half a percent over the previous year.  But...it's impossible to forecast such a continuing trend in the face of new facts that tell us otherwise.

    In other words, we're going on the record that, through at least the third quarter and half of the fourth quarter at a minimum, Inflation is heavily likely to remain subdued and probably decline.

    This is good news, of course, for several investment classes...and is, likewise, good for private capital formation. 

    Of course, there are fewer formulaic combinations that augur for accelerating growth than Disinflation combined with rising Industrial Output...and, of course Consumer Spending.  It's those latter two that are pesky.

    Your hope: that Industrial Production and Consumer Spending, together, remain stable (or better, rise at a faster rate).

    If you're not sure where these will come out, read the first part of this column again...and the Scorecard.  It's all about what we call Excess Stimulus, the amount of stimulus that the economy receives as a result of monetary policy.  Facts are facts. 

    And the fact is that our measure of Excess Stimulus, though positive, has declined over the past two months.

    You have been warned. 

  • ECONOMIC & MARKET ANALYSIS - July 21, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.0%.

    S&P 500 Index - The Index finished at 1967.57, down 1.1% from last week.

    US Dollar Index - The Index finished at 80.19, down 0.1% from last week.

    Gold - Gold finished at 1343.53, up 1.8% from last week.

    Business Sales - In May, the 12-month rolling average rose 0.4%.

    Industrial Output - In June, the 12-month rolling average rose 0.3%.

    Capacity Utilization - In June, Capacity Utilization levels rose, on a 12-month rolling average basis, to 78.5.

    Business Sales falls into our secondary class of indicators.  It's not what we'd call a strong leading indicator and it's hardly a comprehensive indicator of the economy, but it does have value, as the direction in which sales are headed tells you something about Business Confidence.  Plus, since most business sales are paid for in credit to some extent, it does have some multiplicative effect.  In May...we got a result that's where you'd have expected it to come in.  At an increase of 0.4%, you're seeing some growth, on the strong side of modest, and only beginning to flirt with what we'd call "moderate" growth. 

    Capacity Utilization is one of the key factors we look to in gauging the direction of Inflation.  The good news is that Capacity Utilization is still under control.  At 78.5 on the Index, what we're seeing is a level that has been rising very slowly and continues to approach a level that would be inflationary.  For the last few months, the Index has been very stable, but it is up one point from 77.5 a year ago. 

    We also got a piece of data that falls into what you'd call the "royalty" category in terms of its prestige as an indicator of economic direction, and that's Industrial Output.  It's a decent result.  The 12-month rolling average rose 0.3%.  Nevertheless, keep in mind that Industrial Production grew at a stronger rate than this from July 2010 through April 2011, and that this month's figure is unchanged from last month.  Also, keep in mind that it's probable that the economy is still catching up with pent-up demand from the first two months of the year when adverse weather conditions put a damper on the economy.  

    In other words, we're not saying that the Industrial Production number isn't good; we're saying that you should take it with a gran of salt. 

    It's hard to argue with improvement, and why would we want to?  If you're thinking that this measure of improvement in Industrial Production is out of synch with our forecast, you need to go back and read.  If you remember, we said a couple of months back that the pace of growth would pick up a little.  And we meant it precisely the way we said it.  Betting that Industrial Production will continue to grow because it grew very recently is like betting that your daughter, at age 19 is going to continue to grow taller because she grew a lot the previous year. 

    We continue to hold that (1) growth will be restrained and (2) inflationary pressure are growing.  Don't take this relatively comfortable summer for granted.

  • ECONOMIC & MARKET ANALYSIS - July 14, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.1%.

    S&P 500 Index - The Index finished at 1967.57, down 1.1% from last week.

    US Dollar Index - The Index finished at 80.19, down 0.1% from last week.

    Gold - Gold finished at 1343.53, up 1.8% from last week.

    You get a really big week off: for one, this is our "off" week for updating the Editor's Letter.  For another, there were no releases of major economic data this past week.  So, this gives us a little luxury to contemplate what the week-ending market tea leaves are telling us.

    The pattern we have before us is a very specific pattern that denotes, with great predictability, one specific thing: the Market is fearful that an economic slowdown is upon us, one that will result in monetary policy leaning in the direction of further accommodation, or at least sustained accommodation. 

    That is definitely what's afoot, and it's an assessment that we agree with to a degree.  If you read the updated Global Scorecard this week, you'll note that we do a little more than just hint that, even if we don't think contraction is on the horizon, we do think that the balance of the year is likely to be about a slowdown in growth.  But there will be more on that in weeks to come. 

    However, that nice uptick in Gold can't be entirely explained by the Market's fear of a slowdown.  It's too large, especially in relation to the Dollar's movement, which was essentially unchanged.   The answer is the obvious one: regional conflict and political instability.  There are some who will hold to their truth that the U.S. Dollar is the reserve currency of last resort.  We don't agree.  Gold still reacts to political tensions, particularly when these tensions affect either transportation of oil or partners of countries that traffic in oil.

    It's a drum we beat every so often: ignore the conventional wisdom you hear from the Business Press.  Gold still has a vaulted place in investors' hearts as a store of permanent value.  As we write in the Editor's Letter, if you have not yet gotten around to reading our essay on Gold in "Hot Topics," take a few minutes.  We're pretty sure you'll find enough, at least, to provoke and make you think differently about the fiat currency system.

  • EDITOR'S LETTER - JULY 7, 2014

    Editor's Letter

    We were sorely tempted to take this week off...but, we were tinkering with our Scorecard Model anyway, and it has already been two weeks since we last updated the Editor's Letter (if you've noticed, we only write a new Letter fortnightly), so...we felt motivated to write a little something.

    There are some significant points about the U.S. economy that are stated briefly in the updated Domestic Scorecard this week.  Two weeks from now, we will elaborate further on them in this column.

    This week we want to address something that's beginning to give us concern.  If you're a casual consumer of layperson-oriented business news, you have not likely been able to avoid hearing that the domestic equity market is hitting a new high practically every week.  And the way it's portrayed, that news is usually given with a subtle subtext of warning...: that the market, hitting new highs, is reaching a vulnerable state.

    Well, let's do some housekeeping with regard to rhetoric. 

    Any investment on which you've made a profit on paper is, by definition, vulnerable to loss.  It wouldn't be vulnerable if you hadn't made that profit and if you had cashed it in.  In other words, the fact of its vulnerability signifies that you've had a positive experience. 

    The real question to be asked--and that the conventional business press doesn't ask--is the extent to which an investment class is increasingly vulnerable due to the many factors that affect that investment.  In other words, to what extent are the factors that generated that profit beginning to diminish?  And to what extent are there exogenous factors that could kill that profit?

    Before we continue in that vein, let us put you in mind of something else.  The bond market?  It's hitting new highs almost as frequently as the equity market.

    What do you make of this?

    Before you try to answer that, it's important to remember two things.

    One of the reasons the stock market has performed as well as it has is that many bond investors had begun to "reach for yield," putting their investment dollars in the stock market, a function of how low bond yields have been for several years.  It's one of the reasons that the stock market has performed in excess of how corporate profits have performed.

    The other is that you don't normally get bond yields as low as they are now (the 10-year government bond yield hovering between 2.5% and 2.65%) unless a recession is on the horizon. 

    Taking these two things into account, we have to conclude two things. The first is that there are far more investors who are not reaching for yield than we have been led to believe (in other words a great deal of the run-up in stock prices comes from equity investors who are simply plowing more money into the market, eschewing other classes for that yield).

    The other is your clue to Inflation.  We have consistently held to the belief that bond traders know more about medium- to long-term inflationary prospects than most people.  So, what do you make of the fact that investors are continuing to pummel bond yields?  Does that nullify our concern that nascent inflation could be on the horizon?

    Not necessarily  Bond yields are low, yes, and they have been stubbornly low, but--they are at least half a percent above where they were two years ago.  The fact is that the prospect for nascent inflation is still just that: nascent.  We believe the groundwork is being set for higher inflation, but...with rhetoric out of the Fed pointing to a policy of unchanged short-term rates for the time-being, we firmly believe that bond traders will wait until they are certain that higher inflation is on the horizon.

    And--here's the point: if you wait until bond traders have reacted to that prospect, you will already be too late.

    We hope and trust that we will be able to point, when that moment comes, to that prospect before it materializes...because if/when it happens, it will affect the equity market as well, because, well...ceteris paribus, rising inflation hits corporate profits, too.

    And that leads us very neatly to where we want to conclude this discussion.  The question of whether the equity market is returning adequate reward for risk is still a valid question--we argue that if it is, it is doing so just barely.  But, based on what our Model is telling us about our Leading Indicators, especially Net Stimulus and based on the fact of ultra-low interest rates pushing risk-friendly investors to the stock market...it's very, very difficult to see the domestic stock market as more than normal in its vulnerability right now.

    It's the primary reason we have not advised against it.  We think that we're still in the midst of an inexorable northerly stock price climb for the market, in general.

    As for that vulnerability, Black Swans eventually do show up from time to time.  We will come back to this topic in greater depth, but...if we had to stake a guess as to from what quarter the next Black Swan will come, we'd wager in a big way that will come either from a military conflict that will hurt consumer confidence and earnings or a serious erosion in credit conditions, coming most likely from inadequate risk-management measures by the large banks.

    At the moment, while we think there is some risk of the latter, it is relatively small for now.  The greater risk, given the State of the World, is a military conflict.  How do you choose, between continued conventional investing and preparing for a global crisis?  The answer is that you don't.

    The fuller answer is that you should always be taking profits from your investments after they've done you the service you expected them to perform.    By definition, that means that long-term investments are never done delivering until you adopt a view that says they have no future despite where we are in the business cycle.  

    Trying to classify the major ways we think you can successfully mitigate risk against a soundly-constructed portfolio is beyond the scope of how much we wanted to write this week.  Because that's the point: depending on how your portfolio is constructed there are different types of risk in play and therefore a number of different ways to migitate that risk.

    But when we think of the major risk mitigant to exogenous factors that make consumer and investor confidence erode, there's only one true standby: Gold.

    If you haven't yet read our essay on Gold under "Hot Topics" off the Home Page, this might be a good time.  We hope you agree that's a palate cleanser to be exploited every time another person abdicates their own reasoning and says, "You can't eat Gold."

    Ever try eating a dollar bill?

    See you in two weeks when we elaborate on the current state of the U.S. economy.

  • ECONOMIC & MARKET ANALYSIS - July 7, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell rose 0.2%.

    S&P 500 Index - The Index finished at 1985.44, up 1.2% from last week.

    US Dollar Index - The Index finished at 80.27, up 0.3% from last week.

    Gold - Gold finished at 1319.39, down 0.2% from last week.

    Employment - The Employment Rate remained unchanged at 58.7% in June.

    Case-Shiller House Price Index - In April, on a 12-month rolling basis, prices rose 0.9%.

    Money Stock - The 12-month rolling average of M1, the nation's stock of money in transaction accounts grew 0.8% in May.

    Lending - The 12-month rolling average of Lending by all domestically-chartered banks rose 0.3% in May.

    As we have said, there are only so many patterns to how the Market behaves.  Almost all of these patterns, if read correctly, have a message about what the Market thinks.  This week's result is one of the cloudier of the patterns.  What we think is happening here: the Market perceives that, slightly strengthening economic data points to faster tapering in monetary easing.  Is it correct?  Nobody knows, but, our bet is that such a wager is premature.

    Of course the marquee data for the week was the Labor Report.  And the result was...not bad.  The good news is that the number of newly net employed rose 2.9%.  Keep in mind that our statistic is derived from calculating those truly newly employed and adjusting for those who have left the labor force.  That figure is fairly strong. It's a continuation of a trend that largely led us to our declaration that the summer months would feel relatively comfortable.  However, two points:  (1) gains in employment, at the moment, are offsetting losses over the winter--they are not truly strong gains on a net basis (2) the Employment Rate is still close to being in the basement, reflecting a Labor Picture that, while strengthening, is still in a very weak condition.

    Month-over-month, prices of previously-owned homes rose a nice 0.8% (remember that Case-Shiller is one of the very few indicators that we report on a basis that makes month-over-month comparisons accurate and fair).  This is a nice increase, but...consistent with being the tail-end of that slowdown we said would occur, it's the smallest increase since March 2013.  If you read the updated Domestic Scorecard, you'll note that we think that the Housing sector will experience a renewed growth shortly.

    If Fed Chair Janet Yellen is phlegmatic about the likelihood of rising inflation, much of her analysis is a credit, if you can call it that, to the sluggishness in growth in Lending.  In May, lending by both domestically-chartered and all banks rose 0.3%.  Two points to be made about this:  (1) This increase is a small uptick over recent result and (2) This rate of growth is modest.  In fact, the most interesting fact about this month's numbers is that the total in lending is exactly the same as that in domestic banks.  This is a new development (banks based overseas have had a pattern of lending at a higher rate in this country) and it gives concern that foreign-based banks are beginning to encounter obstacles to lending.

    Of course all of this is consistent with our oft-stated prognosis for the foreseeable future, which is a level of growth that will hover between modest and moderate, but with no ammunition for rapid and sustained expansion.

    Grading the week?  We're giving it a B.

  • SCORECARDS - July 7, 2014

    Current Scorecard - Domestic

    July 2014

    Quick View:

    Weighted Average:    1
    Current Month:        18

    Consumer Confidence

    Current Month:    19
    Last Month:         21
                                                        
          

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                10

               11

                7

    Leading Indicators

                27

               27  

               38 

    Confirming Indicators

                11

               10  

               -2

    Foundation

               -30

              -27 

              -48 



    A reminder of the relatively new feature at the top.  The Quick View tells you quickly where we are.  The Weighted Average tells you the directionality over the past year, rather than how strong the economy actually is.  The best way to think of that figure is as a sense of how things likely feel right now, which will be a reflection, not just of what's happening now, but an accumulation of the past year's experience. The second figure tells you our forecast for how the economy is trending.  We think it's a good way for you to get a quick sense of what's going on.

    We have also added a new feature, Consumer Confidence.  It's our attempt to measure, not how Consumers feel, or even what their expectations are, but how likely they are to spend based on objective criteria.  

    There are three things of note we want to bring to your attention with this month's Domestic Scorecard.  The first is that our Leading Indicators are safely into positive territory.  In other words, regardless of the tactics to which the general press resorts to in order to create drama and sell copy, barring a Black Swan, it is essentially impossible to forecast anything like a contraction in the medium-term. 

    The second point is that you should be paying attention to that figure for Confirming Indicators.  It's simply not very strong.  In other words, pay attention to the difference between the strong likelihood of continued growth versus the level of growth that we have.  The economy is--still--fundamentally ill.  And the signal demonstration of that is that continued enormous disconnect between stimulus and output.  The Fed still has the proverbial pedal to the metal, and yet growth in things like consumer spending and industrial output is just moderate.  What this means: the economy is highly vulnerable to a Black Swan, were it to come about. 

    The third thing to know is that you should not overstate in your mind the improvement we're having this summer.  You'll remember that, a couple of months ago, we forecast that the summer would feel relatively comfortable; that was being driven in great part to the Labor situation.  Here's the important thing to know: it's not that the employment situation picked up significantly; it's that it got significantly less bad.  That's a big difference.  Further, it got significantly less bad with regard to the pace of hiring.  The overall state of the Labor market is still poor.  At 58.7%, the Employment Rate is just 0.5 percentage points above the low it hit in the wake of the Financial Crisis. 

    It is not the major point to take away, but you should also be keeping your eye on Inflation.  The Inflation rate is well within the Fed's target, but...as we predicted, the rate of Inflation is picking up speed...and pretty fast, too.  If the pace of growth in Inflation continues unchecked, the economic picture by mid-autumn could be significantly different. 

    One word about the Housing market is in order.  We accurately predicted that there would be a fairly large slowdown in the recovery of the Housing market starting in the late fall.  We now think that growth in the Housing sector is set to begin growing at a faster rate again, but not at the rate we had in the 2012-2013 timeframe.  Please keep that in mind.

    Current Scorecard - Global

    July 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                6

               N/A 

               N/A

    Leading Indicators

               14

               N/A  

               N/A  

    Confirming Indicators

                1

               N/A  

               N/A

    Foundation

                3 

               N/A

               N/A

     
    Last month, the key takeaway from the Global Scorecard was that there aren't really a lot of strong stimuli for an accelerating economic outlook.  Further, to point up how weak the European situation is, we emphasized that the European Central Bank is now providing a disincentive to member banks to keep excess reserves...it is charging them for these reserves.  In other words, it's taking near-extreme measures to encourage lending.  This is in the face of a bank balance sheet situation that is far from robust. 

    Our Leading Indicators are positive, yes, but they're in a range we consider to be indicating modest growth in the short- to medium-term. 

    More to the point, our Leading Indicators have slipped 6 points from a month ago and 9 points from two months ago. 

    The absolute figure is paramount in terms of indicating whether the direction is positive and the strength of that direction.  But, the direction of the figure relative to where it's been in the recent past is our single-strongest indicator as to the direction in which growth is heading. 

    In other words, we are strongly forecasting that the period of fall into early winter will be characterized by continuing modest growth, but at a slower pace.

    More specifically, what you should be alert to--because it's already happening--is slowing levels of industrial output coupled with rising inflation.  Yes, Inflation is already rising and Inflationary Pressures are rising, as well.

    Here's the caveat to all this: it's impossible to overstate how important the Euro Zone is to the global economy.  Remember: the Euro Zone as an economic unit is larger than the United States.  There will be no sustained global recovery and expansion without recovery and expansion in Europe, but...there will also be no sustained contraction without contraction in Europe.

    There are few things you can count on more: European leaders will do what's necessary to bring about a healthier economic picture in Europe.  If there is any concern to be had here, it's the increased risk to the financial system to be brought about by the European Central Bank encouraging banks to lend at an increasing rate.  Remember: the financial system and the economic landscape are not the same thing.  And yes, a rickety financial system does pose a risk to the economic landscape.  So, if we're sanguine about a Europe that improves its economic picture, that does not necessarily mean that system risk will remain neutral. In other words, the seeds from which economic growth will come could very well also engender greater risk and stimulus for the next economic downturn. 

    Understanding the Scorecards

    Domestic Scorecard

    The Scorecard is our concise means for measuring the current level of strength in the economy, where the economy is headed, and how sustainable expansion is.

    The components:

    1. Overall Grade is a consolidated measure of how strong the economy is now, where the economy is headed, and the risk factors that pose a threat.
    2. Leading Indicators provide a reading on the primary drivers of the economy.  
    3. Confirming Indicators are a good read on how things are at the moment.  
    4. Risk Factors measure significant threats to economic expansion.

    The grades: 

    The grades are not unlike school grades.  The scale goes from -100 to +100.  Anything within a range of -16 to +16 roughly indicates a maintenance of the status quo, though, with higher or lower figures indicating the direction in which the economy is trending.   

    Global Scorecard

    Our Global Scorecard uses the same numerical scale as the Domestic Scorecard.  It includes the United States.