The Practical Economist

Filter
  • YOU ASKED - August 25, 2014

    Q:  I think that, in my heart, I agree with you, that the Stock Market is overvalued at this point.  And, in concept, I understand what you mean when you talk about how to restructure my portfolio.  But I'm not sure how to do it.  How much out of the Market should I be?  And how do I decide what I should stay invested in?

    A:  First off, there's a limit to how perfectly we can advise you in this context.  Every individual investor's profile is different.  Really.  Some of the variables are age, current and expected future income, stability of that income, other wealth you may have, your lifestyle, your investment sophistication...these are just some of the variables.  However, assuming you are neither looking to be a professional trader nor dependent on your investment portfolio to eat for the week, we'll try to sound out what we've been saying.

    We think that you probably understand that our intention is to make you understand that the risk of trading is now very high.  So, the question is what stocks we think fall into that category.  In a nutshell, it would be any company for which the primary reason you're investing in it is a profit you expect to make in the short- to medium-term based on specific projects or events that are going to occur in that timeframe.  And that covers an awful lot of ground, including some very well known names that are widely traded.

    Let's be clear: we are not projecting a Black Swan event or any kind of market crash.  What we have been saying is two things:  (1) stocks are now not returning enough reward for the risk they pose, thus the expected return, in our view, is negative and (2) the short- to medium-term outlook for corporate earnings is meager.  Our view: all of this will catch up with investors in the next month or two.  Why are investors in denial?  It's that pesky low level of interest rates that has everyone reaching for yield.  

    What do you want to be invested in?  In the simplest language we can use, you want to be invested in companies that you are 99% certain will be thriving companies 25 years from now.  To put it slightly more specifically, you should be thinking in terms of companies that have some kind of strong competitive advantage and will likely be favored by consumers and/or government entities...this is if you are looking at specific names.  We also favor investing in appropriate index funds.  We are not going to recommend any particular fund name or investing style...but you should be thinking somewhat broadly in terms of diversification and long in terms of timeframe.  

  • COMMENTARY - August 18, 2014

    Keeping it Real

    Nary a week passes in which a Federal Reserve Board Member utters comments to the Business Press about the timetable for raising short-term interest rates.

    Now, we empathize with the Board Member who argues for higher short-term interest rates because that Member believes that, as a structural matter, rates should never have been pushed down as far as they have been.

    But we watch with a skeptical eye the Board Member who argues for higher rates because of improved economic activity.

    The first thing to keep in mind is that the primary mandate of the Fed is to maintain price stability.  And guess what?  Inflation is tame...and becoming tamer, so to speak.  Our forecast for rising inflation at the moment is almost non-existent...at least for the moment.

    So that raises the question of the economic picture. 

    Now, it's 100% true that the picture is significantly different than it was three years ago.  It's also true that the interest-rate lever is used primarily to manipulate economic activity.  And, as we've often said, that disconnect is still highlighted.

    Yes, it's true that Industrial Production has continued to grow...but it is growing, most months, at a modest pace, not remotely at a pace that would be expected based on where rates actually are, which is just above 0%.

    So, ask yourself this question every week that you see a Fed Board Member spout off about the probability of rates being raised in the near term: has the economy shown enough acceleration to justify such rate raising?

    Believe it or not, some people just like to get their names in the paper.

    Shocking indeed.

  • EDITOR'S LETTER - August 18, 2014

    Note that we will be on vacation next week, September 1. 

    Editor's Letter

    When we set out to create The Practical Economist one of the decisions we consciously made was the model we wanted with regard to tone and advisement.  We knew we wanted the tone to be sober and undramatic.  Our feeling was that drama and color detract from credibility.  They also tend to be a problem when there really is drama afoot.  Unfortunately, communication in general has become so watered-down, that the word, "literally" is known to be commonly used to mean "figuratively."

    You will never see that use of language here.

    And it stands us in good stead for this fortnight's Letter.

    There is absolutely no legitimate call for a contraction or, recession, if you like.  At least there is no legitimate call based on what we know at the present time.  However--

    Last week, we administered a mild physic, if you will...a cautionary warning.  We tried to impress upon you, Gentle Reader, of the red herrings in the Equity Market.

    If you didn't take last week's caution to heart, it's time to pay attention.

    There are several reasons why, at the start of this cycle in which we forecasted to result in much slower economic growth and diminished corporate profits, a stock market crash is not likely to occur, absent a Black Swan...and why the Market should not be expected to make a straight line south.

    As with many such things, you have been afforded, a timeframe--a window--in which to straighten up your investments and fasten your seatbelts, precisely because of those mitigating factors, which include, most significantly, the fact of persistently ultra-low interest rates.

    The good news is that there is that window.  The bad news?  That window is finite and relatively short-term.  Our feeling: that window will be closing very soon.  When?  We don't have a crystal ball, but our best guess is that it's no later than the first week in September...but, the clock is ticking.  In other words, you need a really good excuse to not get your affairs in order almost immediately.

    So, now, for those of you who may not have been reading very closely, let's recap where we stand on the Domestic Equity Market:

    1.  Based on nominal yield and inflation, the Market is now mildly overvalued.

    2.  Based on the variables that inform our forecast of a slowing economy, our forecast for corporate profits is extremely mediocre.

    (In other words, you should be shocked if third-quarter earnings, in general, beat estimates.)

    These two things together are not a recipe for even a stationary market.

    Now, in a closely-related vein, we want to direct your attention to something you've probably started to hear talk of...and that's the idea that banks are on the threshold of expanding lending.

    Don't believe it.

    There is little doubt in our mind that credit conditions are faltering.  This view is based primarily on the gap in rates that the corporate bond market is demanding relative to the yield on 10-year government debt.  That's right: the ratio of the yield on corporate bonds to government bonds is growing...and that's a strong and important sign.  And the Bond Market knows it: this week, the yield on the 10-year government bond finished below 2.4%.  That's a move of something like half a percent in half a year...in the wrong direction.  Were the market perceiving that economic conditions were picking up, that yield would be moving in the opposite direction with the outcome that yields on government bonds would be more in line with corporate bonds.  Why are investors willing to accept such lower rates on government bonds and demanding higher rates on corporate bonds?

    We'll spell it out for you: they're anything but sanguine about the prospects for strong growth and extremely concerned about corporate profits, i.e. the ability of the private sector to repay debt.

    Oh, there are other data-based reasons to subscribing to the belief that a slowdown is afoot, but...as we've often said: bond traders are the smartest people on Earth.  And they're locking in 10 year money at rates that are below 2.4% and lower than last week.

    Really let that sink in.

    Our last cautionary word on this subject: you know the difference between investing and trading.  You probably have a portion of your portfolio dedicated to those long-term holdings that are meant to be long-term.  These core positions are exactly that.  You don't alter your positions in your core over economic fundamentals.

    But--if you're abdicating responsibility with regard to your other holdings with the thought that you're afraid to miss out on future potential upside because you're afraid of feeling like a fool, it's time you took a timeout.  Chasing yield because you think everyone else is going to chase yield?

    There are few worse ways to cast your investment decision.  

  • ECONOMIC & MARKET ANALYSIS - August 25, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.6%.

    S&P 500 Index - The Index finished at 1988.40, up 1.7% from last week.

    US Dollar Index - The Index finished at 82.34, up 1.1% from last week.

    Gold - Gold finished at 1282.02, down 1.3% from last week.

    Commodities - Spot Prices finished at 394.31, down 0.2% from last week. 

    Industrial Production - The 12-month rolling average rose at a 4.1% rate in July.

    Capacity Utilization - The 12-month rolling average rose at a 1.8% rate in July.

    Consumer Prices - Prices rose at an annual rate of 2.1% in July.

    There are some subtle red herrings and contradictions in this week's tea leaves.  So, let's review the critical data points first:

    1.  Spot prices of commodities fell slightly.

    2.  The Dollar rose fairly substantially.

    3.  Gold fell fairly substantially.

    Let's dissect things.  First, yes, the Equity Market rose nicely, but...here's what you need to know: the Market, while at a new high, is only 10 points higher than it was the week ending July 18.  If you've been reading lately, you know our view: the Market is going to move around, mostly sideways, but slightly--only slightly northerly--for some weeks.  This Market is not sitting on a strong foundation, but those ultra-low interest rates continue to have an accelerating effect, however modest.  However, it's hard to call a 10-point move in one month an acceleration, isn't it?  The greater point is precisely that it has only moved 10 points in one month.  Consider things this way: if you annualize that rate, that would translate to an increase of 120 points over the course of 12 months.  Does that sound like a confident market to you?  As we have written in the Editor's Letter, your timeframe for adjusting to the risk level of the Equity Market is getting narrower.

    Now, let's peek at that Dollar.  The easy answer is to conclude that the pretty massive one-week move in the Dollar is attributable to global political tensions.  We agree, but only to a limited extent.  The key is remembering that the key theme in domestic financial markets this past week was the direction in which Fed Reserve policy would move.  Our belief is that investors are not near to being persuaded that the Fed does not have monetary tightening on its agenda in the near future, especially in light of some pretty strong economic data.  (That's what investors told you this week.  Frankly, we think investors are getting it wrong.)   

    Why do we not believe that global tensions are driving the Dollar?  While the Dollar has been the safe haven for many decades, our view is that that is changing.  Remember: investors love the Yen more than the Dollar.  And they also love the Euro.  And they love the Franc, to a great extent, as well.  Once upon a time, Gold was the primary safe haven.  That began changing in the 1980's when the Dollar took over that position.  And things began to change again, shortly later.  Try to imagine a stable world environment without the Euro.  It's hard, isn't it?  Remember: the Euro Zone is the single-largest economic zone, by currency, in the world.  And Japan?  The world's most transparent political system?  There's a reason investors drive Japanese government bonds to interest rate levels so low that, by comparison, the yields on US bonds make the US seem like a third-world country.

    Mark our words: Gold has reclaimed its primary spot as the primary safe haven for investors.  When you think about Gold, you should think about supply and demand based on market demand for industrial use, yes, but you should think even more about the dilution of the money supply and yes, global political tensions.

    As for why Commodities did not move as much as you might have thought they would, the critical point here is that the bottom has almost fallen out of the commodity market in the last two months.  It's very hard to see anything like a substantial move downward in commodity prices in the medium-term given how low spot prices have fallen.  Here's a point you're not being told by the Business Press: spot prices are down something like 30% from their high in the aftermath of the Financial Crisis.  Armed with that knowledge, how much lower do you think commodities prices can go?  (An investment opportunity, perhaps?  We'll address that shortly in the Investment Outlook.)

    Now what about that strong economic data this week?  Remember that when the subject is the direction of Fed monetary policy, the Fed is weighting much more heavily data about future economic direction than present strength.  The data we got this week is largely data that is of the present, rather than indicative of future direction.  But the present indicators have plenty to tell us.

    First, there's no denying that Industrial Output, in July, came out pretty strongly.  No, it's not a level we consider expansionary--or, rather, it's at the lower threshold of what we consider expansionary.  You need to see more upward and consistent velocity to talk about expansion, but the result was still very good.  That, alone, is easily enough for investors to legitimately speculate about a tightening in monetary policy.

    And then there's Capacity Utilization, a very important variable when we're taking about monetary policy.  Higher levels of factory utilization are strongly associated with rising Inflation.  Consistent with recent trends, utilization, in July rose, indeed, at an annualized rate of 1.8%, and that's the fastest rate since June 2012.  The level at which utilization now rests is the highest it's been since November 2008.  So yes, we are now solidly at the lower threshold of a level of utilization that is inflationary.  Again, another reason for investors to speculate that the Fed has rising interest rates on its mind.

    And, the latest Inflation data doesn't seem to help.  In July, Inflation came in just a tad below 2.1%.  Is that a tame level within the Fed's target?  Yes.  But it also represents a level that is the result of several months of increases, so what gives?

    Our view?  Monetary tightening is not remotely on the Fed's figurative mind.  Why?

    It's true that Inflation has been trending up...and it's true that Industrial Output has trended up, as well.  On the one hand, these are vaguely suggestive of rising inflation.  On the other hand, rising inflation, hand in glove with rising industrial production is much more easily accommodated that rising inflation without a commensurate rise in output.  However, all of this is actually beside the point.

    We are extremely sanguine about the outlook for very tame inflation in the medium term.  The most recent uptick in Inflation is not a bit surprising.  For the previous six months up until about six weeks ago, we had nothing but steady growth in commodities prices.  Thus, you should probably expect continuing rises in consumer prices for a month or two.  But, the case for a very moderate inflation outlook is strong: 

    1.  Continuing and growing global political tensions combined with renewed problems in Europe and Japan, which will suppress the Yen and the Euro slightly relative to the Dollar will all have the effect of pushing the Dollar up and driving down the prices of imports

    2.  Commodity prices fell very fast in the past month

    3.  There are some early signals that the economy is about embark on a slowdown

    All of the above is precisely why we believe the Fed when it announces that no rate rises are on the horizon. 

    If all of this is not what you want to believe, we suggest you re-read this week's column...and bear the following in mind: the yield on the Government's 10-year bond finished the week at 2.4%.  Do you know the last time you had a coupling of a 4.1% annualized rate in Industrial Production with a 10-year bond yield at 2.4%? 

    Never.

    In the wake of an increase of 4.1% in industrial output, professional investors are committing to a 10-year investment at 2.4%.

    Think about that.

    We will be on vacation next week, September 1.

  • ECONOMIC & MARKET ANALYSIS - August 11, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.3%.

    S&P 500 Index - The Index finished at 1931.59, up 0.3% from last week.

    US Dollar Index - The Index finished at 81.39, up 0.1% from last week.

    Gold - Gold finished at 1313.38, up 1.0% from last week.

    Commodities - Spot Prices finished at 399.02, up 0.3% from last week. 

    Was it just last week we said that oftentimes the Market gets it right?  This is one of those weeks in which the Market did not get it right, although, to be perfectly fair, it's silly at best--and misleading at worst--to read too much into small moves the Market made in these investment classes. 

    What do the Market's tea leaves say this week?  What you're looking at is a pattern that spells a belief that interest rates will be heading north based on rising strength.

    Now, there are two things wrong with that assessment, though one depends on the other.  The first is that the pace of growth is not strengthening.  

    Many people took the wrong message away from the Business Press on the subject of the Labor report a week ago, Friday.  The Market has been largely trained to listen for two things with regard to the Labor report.  The first is where hiring comes in relative to expectations.  The second is a vaguely accepted notion of what level of job growth is considered expansionary.

    For our purposes, the only way to conclude that the economy is strengthening is that the pace of hiring is picking up over the previous period...or at least be able to detect such a trend over several months.  And, as we pointed out last week, that's not what happened.  Yes, job growth is respectable, but the pace of growth has slowed. 

    And that is a fact.

    If you accept that statement, then it's extremely foolish to think in terms of the Fed tightening monetary policy.

    Our forecast calls for extremely moderate growth in consumer prices.  Couple that with a slowing rate of economic growth, and we think it's extremely premature to talk about the Fed raising short-term interest rates, not just in the near term, but in the medium-term, i.e. 12 - 18 months into the future.

    The good news for you is that no major economic data came out this week, so there's not much you need to digest.

    The bad news is that, if you have not read our thoughts about the Domestic Stock Market, we urge you to read that section of the Investment Outlook.  For a number of reasons, the Market will definitely bounce around for the next few weeks, but we think that the forces that are keeping the Market relatively buoyant are going to be short-lived.  We're living in a fortunate timeframe: because these forces are being deceptive, you are being given sufficient time to organize and restructure your investments. 

    Because interest rates persist in being so low...because the world is being distracted by a bevy of regional conflicts...because investors are being deceived by misleading economic reports, you have a rare window.  We understand the mentality of "going with the trend."  We do not understand the mentality of falsely anticipating a trend that doesn't have a basis for coming about.

    A word to the wise is sufficient.

    We will expound at greater length in coming weeks.

    The Global Scorecard was updated this week.

  • EDITOR'S LETTER - August 4, 2014

    Editor's Letter

    We want to believe--and hope--that all of our readers have the capacity to exercise understanding of fine differences in how we characterize economic and investment considerations.

    We have a bias.  We admit it.  We are obsessed with tracking the economy.  Many people follow the investment markets, and most particularly the Equity Market with a powerful focus.  However their focus is usually on nominal price indexes and not much more.

    Did your equity portfolio suffer, last week, in the wide drop on global geopolitical tensions?

    If you're a regular reader, and have really been reading, you'll know that we've been cautioning you for months.  Of what have we been cautioning you? 

    We hope you can repeat it right now.

    We've been cautioning you, not to exit Equities as a class, but that (1) Equities, as a class, are not returning sufficient return for risk, at this point and (2) you should have been slowly positioning your portfolio to being heavily weighted in your long-term investment choices.

    We hope that's what you've been doing.  

    There are so many ways to measure the health of the Stock Market...and here's one we like to pull out, when appropriate...: volume of mergers & acquisitions activity.

    Why is M&A activity useful to look at?  Many observers like to say that increases in M&A activity is a sign of the health of the market.  It's true that it makes sense that there'd be an increase in M&A activity when stock prices are soaring?  Why?  Higher valuations create an opportunity for companies to buy others.

    However, that also means that companies that are doing acquiring are doing so because they're starting to reach the outer limits of what their margins can achieve on their own.

    In other words: M&A activity is a sign of market weakness. 

    As for your own stock portfolio, if you're one of those people who, unfortunately, got stuck with trading-type names in your portfolio, but...you were smart enough not to panic in the sell-off, we think your better tactic at the moment is to sit and wait until the Market calms down.  It's highly unlikely that there won't be a temporary (at least) calming to geopolitical tensions...and the Market will respond kindly. 

    In the meantime, and in preparation for not getting caught next time, we urge you to do some serious self-questioning about your investment strategy.  There is a number of questions we use to vet someone's bias; here's one at the top, and it's appropriate to ask yourself as often as every week: are you invested in the Market at the moment because it's returning adequate return for risk or are you invested in the Market because it has recently done well and you're afraid to miss out on what your neighbor might earn?

    Think about it long and hard...and be honest with yourself.

  • SCORECARDS - August 4, 2014

    Current Scorecard - Domestic

    August 2014

    Quick View:

    Weighted Average:    4
    Current Month:        16

    Consumer Confidence

    Current Month:    13
    Last Month:         15
                                                        
          

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                 7

               13

                0

    Leading Indicators

                17

               26  

               21 

    Confirming Indicators

                15

               19  

                2

    Foundation

               -30

              -24 

              -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.  

    Last month, we drew your attention to the Confirming Indicators.  The point was that the figure is respectable, but not strong.  This month, not only are our Confirming Indicators not much stronger, but our Leading Indicators are showing a small decline...and this is in line with the caution we offered in terms of reading too much into the "comfortable" summer we've been having.

    What's changed since last month?  Well, there have been some positive changes, mainly in the current situation: we have had modest improvement in Orders for Durable Goods, Business Sales, and...Personal Income.  This is a nice picture of a well-rounded improvement.  There have been further cautions, however.  For one, the Housing Sector continued to improve, but...at a diminishing rate.  The increase in the Case-Shiller Price Index for previously-owned homes exhibited the smallest monthly increase in over a year (a year ago, April, to be exact).

    And, more importantly, the Labor situation is changing.  One of the key reasons for the economic pick-up this summer was a mildly healthy improvement in the Labor picture in the spring.  Guess what?  That pace of hiring has...slowed. 

    There's something else, too...we don't often talk about it, but it's a key component to the economy, and that's credit conditions.  And...very recently, yes, the credit environment has just slightly deteriorated.  Did your neighbor obtain a home mortgage two months ago?  We're betting that if you apply for a mortgage now, you'll have a more difficult time getting approved.  Tighter credit conditions are hardly a recipe for economic expansion.  To be sure, this variable is going to play a more important part in our economic forecasts going forward. 

    In a nutshell, we hope you didn't get too comfortable and over-extend yourself this summer.  Our recommendation: beat the rush and tighten your belts now.  

    Current Scorecard - Global

    August 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                8

                 7 

               N/A

    Leading Indicators

               17

               15 

               N/A  

    Confirming Indicators

                5

                 5

               N/A

    Foundation

               -4

               -5

               N/A

     
    Probably the most significant thing for you to know this month is that Europe, which had been in an improving mode, is again showing weakness.  Remember: the Euro Zone is the single largest economic zone in the world.  There can be no sustained global recovery without a sustained recovery in Europe, just as there can be no significant global downturn without a downturn in Europe. 

    And that sets up the rest of our summary very well.  It's only a minor trend down, but yes, our Leading Indicators are trending down, and that's especially important because they weren't not robust to start with. At a figure of 17, you're looking at nothing more than modest growth on an aggregate global basis.

    Looking at the components of our Leading Indicators figure, here's what you need to know:

    -  Global Inflation is creeping up...very, very modestly, but it is creeping up

    -  The recent upward trend in Employment is flattening out

    That latter point is very important in terms of making sure you understand it properly: it's not that unemployment is rising, it's that the pace of hiring has slowed greatly.

    In other words, there's no call for a contraction, simply for a slowing.

    However, you combine rising inflation with slowing growth in hiring, and that doesn't equal an auspicious outlook.  In other words, a forecast of slow growth could easily change, in two months' time, to a forecast of stagnation or even, yes, contraction.

    At the bottom of all of this is that enormous disconnect we have between monetary stimulus and output/effect.  We are of the position that the root cause is backward fiscal policy, and specifically, regressive tax policy, i.e. a tax policy that discourages capital formation.  And this is true in both Europe and the United States.  In Japan, the story is a little different.  Even though the Bank of Japan has had success in pushing the Yen down for the purpose of driving up exports, the Yen is still highly valued and therefore having a dampening effect on economic growth.  Is it Japan's fault that the Yen is so persistently high?

    You bet.  Japan has the world's most transparent political system, and so, it is persistently "punished" by investors who love the Yen. 

    Yes, this translates to economic challenges, but...there are worse things that having to contend with export sales difficulty because the world has enormous respect for your political system. 

    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.

     

  • ECONOMIC & MARKET ANALYSIS - August 4, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.2%.

    S&P 500 Index - The Index finished at 1925.15, down 0.3% from last week.

    US Dollar Index - The Index finished at 81.30, up 0.3% from last week.

    Gold - Gold finished at 1296.65, unchanged from last week.

    Commodities - Spot Prices dropped to 397.94, a decline of 1.0%.

    Case-Shiller House Price Index - In May, the 12-month rolling average rose 10.0% on an annualized basis.

    Lending - In June, the 12-month rolling average in lending from all banks in the U.S. rose at a 4.4% annualized rate, based on the 12-month rolling average.

    Labor - The Employment Rate remained unchanged at 58.7%.

    You see that increase of 10% in Case-Shiller?  That's nice, but...it's the smallest increase since April 2013, and that's a perfect illustration of the slowdown in housing growth we said would come about. 

    Now, it's not so much that Lending is a leading indicator so much as a corroborating indicator, but it is useful to look at.   Does that 4.4% annualized increase sound good?  It is the highest increase since November 2012, but it is also on the low side.  The good news?  Lending, both to consumers and against real estate came in very similarly.

    The big data for the week is, of course, the Labor data. 

    Now, this is an area where small changes can spell significant short-term effects on the economy.  That's one of the key reasons we told you that the summer would feel relatively comfortable when we saw a mild pickup in hiring a few months back. 

    The first thing to remind ourselves is that, regardless of month-to-month changes that boost or lower the number of people employed, the Employment Rate has been sticking stubbornly to a rate of 58.7%.  We must remind ourselves that that's a very low figure and a strong indication of how unhealthy the Labor picture is. 

    The other piece is, of course, actual small changes in hiring.    

    In July what we had was a definite slowing in the pace of hiring.  In fact, the pace of what we call Net Newly Employed dropped 88%.  What that means: the number of newly employed workers dropped by that percentage.  It does not mean that the economy lost jobs in July; it means that it added jobs at a significantly slower rate than in June.

    Here's another way to look at it.  In June, 189,000 more people were employed than the month before, while 8,000 people left the Labor Force (i.e. 8,000 people either retired or ceased looking for work).  But, in July (a month later) 179,000 more people became employed (10,000 fewer than the month before) while 32,000 people joined the Labor Force.

    Do the arithmetic: that's more people looking for work and fewer people gaining employment in July.

    (For the purpose of housekeeping, please keep in mind that the figures we talk about are 12-month rolling averages.)

    See the point?  It dovetails extremely well with our forecast in the short-term for a strong slowing in the pace of economic growth.

    Couple the Labor picture with a continuing slowdown in the pace of growth in housing prices and...it's a decent week, nay, a good week, but not a strong week. 

    As for the Market's "take" on the week, we have on our hands a classic case of a fairly strong message from the Market:  that message?  It's not good.   Equities dropped, partially on jitters emanating from regional tensions and conflicts, but also lukewarm economic data.  The Dollar rose modestly, most definitely on those global tensions, and Commodities fell to their lowest level since past November. 

    Particular investment classes don't always "get" the economic environment right.  But, over time, and looking at  the Market as a whole, the Market rarely gets it wrong for long.

    Grading the week?  B.