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  • EDITOR'S LETTER - September 29, 2014

    Editor's Letter

    The conventional business press is remarkably good at ignoring signs of things that are important and must be explained, but that cannot be easily explained.  Even though our crystal ball isn't foolproof, we feel that we need to bring to your attention a few economic indications that are very unusual.

    Here's what's going on...

    We have a situation in which the Dollar has been on a bit of a tear for roughly four weeks.  Why? Some of it is economic weakness around the globe, particularly in major economic blocs like Japan and Europe.  And some of it reflects a flight of funds in other currencies to a safe haven. 

    And, some of it reflects investors' belief that higher interest rates are on the horizon in the United States.

    It's not that you should discount the latter criterion.  It's just that it's one out of three.  Remember that.

    And as for that latter criterion, there's an important point to be made: Chair Yellen has been about as clear as she can that short-term interest rates are not going to remain at their present level forever.  There have been many mistaken impressions about the Fed Chair because she has appeared to be very balanced in terms of accommodating the general economy.  But make no mistake: Janet Yellen knows that while she has a dual mandate (and it's dual, in great part, because of her influence), she acknowledges and believes that the Fed's primary mandate is price stability, not economic or labor stability.  Janet Yellen is an economist, not a politician, not a government drone.  You can safely surmise that Yellen believes, as did her predecessor, that fiscal policy is going backwards.  If you think that Janet Yellen is going to let Congress and the President off the economic hook at the expense of the Fed's primary mandate, you're living in an alternate universe.

    Yellen's recent rhetoric makes it pretty clear that she thinks Inflation is nascent.  Now, if you're facing a rising Dollar and plummeting Commodities, why would someone who is balanced be committing herself to that perspective.  Think of it this way: to believe that Inflation will remove extremely tame, you have to believe three things.

    The first thing you must believe is that all of the factors that are driving the upward tear in the Dollar will continue.  That includes the idea that global growth will be significantly poor for an extended period, which, by definition, includes the belief that the strengthening Dollar won't have a stimulative effect on the economies of exporting economies.  It also includes the idea that, domestically, Capacity Utilization will drop.  (We have noted, previously that Capacity (or Factory) Utilization is now at a level that is flirting with a level that is challenging the nation's fixed assets and is on the threshold of being inflationary).  This is not a bet that the Fed Chair is going to make; the Fed Chair is not going to base an inflation forecast on a month's worth of trend in the Dollar or in Commodities.

    Thirdly, you would have to be either completely discounting the drive to the Dollar on account of global political tensions or believe that these tensions will not abate at all.

    We agree with the Fed Chair.  The risks to higher Inflation are much higher than the risks to lower Inflation.  We are not going to bet against rising capacity utilization, against the stimulation to other exporters that a rising Dollar will be, and also again the bet that there will be some ebb in political tensions.   

    The point being...: yes, it's possible that short-term interest hikes could be on the horizon.  Heck, our model suggests that a mild hike makes sense even now.  But let's be very, very clear: do not associate a one-to-one relationship between economic health/growth on the one hand and interest rate hikes on the other.  Again: the Fed's mandate is price stability, not economic growth.

    You have been warned.

  • INVESTMENT OUTLOOK - October 20, 2014

    Investment Outlook

    Unless you've been living under a rock, you've been aware of the anxiety with which the professional investing community has awaited the Fed's announcements about monetary policy.  Every time the Fed meets, it's the same drill: investors breathlessly wait to hear whether the Central Bank is going to raise short-term interest rates.

    Now, assuming you're someone who's been in the camp that has been continuing to believe in the Equity Market for short-term trading purposes, you're probably in the same anxious camp as these investors. 

    Here's the thing: if your decision to invest in a particular class is heavily swayed by the attractiveness of one class over another because of yield, you have a problem.

    During true "boom" times, investors don't fret over rising short-term interest rates.  During these times, rising rates are reinforcements of how strongly the economy is performing.  The two key points are:

    1.  If you need economic news to remain tepid so that equities look appealing as a haven for obtaining yield, you have a weak and vulnerable investment strategy.

    2.  Your decision to be invested in equities as a trading strategy should primarily be about corporate earnings.

    In a nutshell, if you needed proof that the Equity Market is vulnerable, the proof is the fact that investors have become reliant on the fact of ridiculously low short-term interest rates to make that class continue to look desirable.

    The fact is that rising interest rates are an eventuality.  It's not a question of whether, but when.  Our suspicion is that many people have got Janet Yellen all wrong.  Chair Yellen is committed to monetary policy that supports the economy, but...you're a fool if you think she's going to abandon her primary mandate, which is price stability.

    For the very immediate term, Inflation is not much of a concern.  The Dollar has been on a bit of a tear the past month, and commodity prices are in the proverbial basement.  But, do you really want to bet that that's going to continue or that a month's strengthening in the Dollar is going to have a lasting effect?

    In a word, Chair Yellen is not going to do Congress and the President's work for them, i.e. she is not going to sacrifice price stability and monetary policy for what fiscal policy isn't doing.  She just isn't. 

    So, how can you take advantage of this?

    Floating-Rate Notes of Investment-Grade Companies

    That's right: our strongest medium-term investment recommendation until at least such time as real interest rates begin to approach a level of normalcy, say around 1.5%, is to take a moderate position in a security that invests in buying the floating-rate notes of investment-grade companies.

    What are these?  AT&T is an example of an investment-grade company.  Some of its borrowing is done based on an interest rate that floats with an index, say, Treasury Bills.  Yes, it's true that rising rates put pressure on earnings.  Though, do you really believe that AT&T, faced with a situation of rising interest rates on its borrowing, even if the general economy doesn't pick up in a commensurate way, is going to default on its debt?

    If you do, you probably don't belong in Equities anyway, and should probably be stockpiling Gold.

    But, you get the point, and a word to the wise is, hopefully sufficient.

    We think this sub-class of securities is going to be one of the best performing over the next 24 months.

    This is also a good time to reinforce a message we placed in our Editor's Letter a few weeks back.  Right now, we're living in a window of unusual opportunity.  True opportunities, in terms of market pricing, don't come along that often.  In this context "opportunity" refers to what we believe is high probability for above-average yield over the long-term, not merely short-term trading profits.  And that opportunity lies in commodities, most specifically oil and natural gas.  Across the board, in aggregate, Commodities are unusually low-priced.  If you like, you can take the position that you believe that this is a function of weak demand and/or that it's related to the development of new, alternative sources of energy that are going to replace oil and natural gas completely in the next couple of years. 

    That is not a credible position.  By definition, "opportunity" is a scenario in which most people don't see the probability for profit.  As Warren Buffett is alleged to have said, you should be greedy when people are fearful.

    A word to the wise is sufficient  How long will this window last?  No one knows.  Our guess is that the window is short-term.  Not that we expect prices to rise fast in the medium-term, but we do think that it's not likely that prices will move much lower.  To do so, you have to be betting that demand will continue to fall relative to supply and that the Dollar will continue to strengthen.

    You'll make that bet without us.

  • ECONOMIC & MARKET ANALYSIS - September 29, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.4%.

    S&P 500 Index - The Index finished at 1982.85, down 1.4 from last week.

    US Dollar Index - The Index finished at 85.64, up 1.1% from last week.

    Gold - Gold finished at 1219.22, down 0.7% from last week.

    Commodities - Spot Prices finished at 376.73, down 0.3% from last week. 

    Sales of New Single-Family Homes - The value of new sales rose at an annualized rate of 10.4% in August.

    It's funny about this little indicator, New Single-Family Home Sales.  On its face, it wouldn't be unreasonable to discount it.  After all, it's only a housing measure, and one that's about only new housing and only single-family housing at that, but...it correlates surprisingly well with general economic direction.

    It's particularly important this month because, while sales had been increasing at a diminishing pace--consistent with our forecast of a slowdown--there are preliminary indications--very preliminary--that the slowdown that's upon us may be short-lived.  Yes, you read that correctly.  That would be convenient because...that annualized rate of increase of 10.40% in August is the highest we've had since January, and it exhibits strength in both sides of the equation, both in prices and volume.

    And that, in fact makes a little sense.  No, we are not issuing a new forecast quite yet, but there are preliminary indications that we may be on a trend of moderate growth for the time-being.  The language is important: the growth rate will not be what it was during the summer...just a moderate rate of growth probably consistent with where indications for September are coming in.  Remember: it's not that indications this month are denotative of a decline, it's that they're showing a drop in the rate of growth, that's all.

    As for the Market, that's a slightly different story, as the Market is looking at not just the domestic picture, but the global one, as well.  And the global picture is fuzzy at the very least.  This week, the Market responded not unlike the way it has in recent weeks: stocks were down, the Dollar was up, and commodities were down.  This is a picture of a Market that has strong concerns about global slowdown, particularly in Japan and Europe, as well as with political stability, which would hardly surprise anyone.

    It will probably be not until our Domestic Scorecard in early November that we will be able to talk with confidence about the economic trend through the winter, but you're not far from wrong if you think we won't issue a forecast until we're pretty confident about it.  

  • ECONOMIC & MARKET ANALYSIS - September 22, 2014

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2010.40, up 1.3% from last week.

    US Dollar Index - The Index finished at 84.74, up 0.6% from last week.

    Gold - Gold finished at 1227.73, down 0.8% from last week.

    Commodities - Spot Prices finished at 377.68, down 1.4% from last week. 

    Industrial Production - The 12-month rolling average rose at an annualized 4.1% rate in August.

    Capacity Utilization - The 12-month rolling average of the Index rose at an annualized 1.7% rate in August. 

    Consumer Prices - Prices rose at a 1.9% annualized rate in August.  

    Let's take a look at the picture the data is painting.  Essentially, this is a strong picture.  An annualized rate of increase of 4.1% in Industrial Output is about as good as it can reasonably be expected to get; this is the highest rate since July 2012, in fact.  Even more importantly, the trend is strongly up.  This result is a change of roughly 1.0 percentage point since last month; that's roughly 33% higher than last month.  And that is a very solid result.

    Next, we couple that strong result in industrial activity with a 1.9% rate of increase in Consumer Prices, which is slightly lower than the previous two months.  Rising industrial output coupled with declining inflation?  That is the textbook definition of positive, strong growth.

    Of course, all of this is for August...all part of the timeframe that we affirmed would be part of what we said would be a "comfortable" timeframe.  This data is what we characterize as "confirming," denotative of the present situation, not indicative of forward-looking trajectory. 

    In this context, we have to talk about Inflation.  One of the key reasons the results this month were so strong is that Consumer Prices continue to come in tamely.  And, as long as commodities prices continue to be subdued, it's difficult to make a forecast for rising inflation.  Consider this, though: commodities prices are subdued partly due to an economic slowdown, and...also in great part to a steadily rising Dollar, a consequence of particular weakness in Japan and Europe.  Moderation in commodities prices because the Dollar is rising because economic activity is picking up (thus leading investors to expect tighter monetary policy) would be excellent.  That is not what we have.  In other words, a great deal of the reason Inflation is tame is not something to be happy about.

    Now, it's good to remember that any change in the economic pictures in Europe or Japan could spell a quick and unpleasant change for U.S. consumers.  And that's where we need to talk about Capacity (or Factory) Utilization, always a reliable indicator of inflationary pressure.  The Index rose at an annualized rate of 1.7% in August.  That's the fastest rate of increase since July 2012.  And the Index now sits at 78.69 higher than any time since October 2008.  In other words, pressure on the fixed infrastructure is growing, and that's spelling rising inflationary pressure.  It's hard to make a case for rising inflation based on Capacity Utilization alone, but...with any obstacle to continued stability in the Dollar or any growth in demand for commodities, the specter of Inflation will be just around the corner. 

    Do not discount this point. If Japan or Europe gets its figurative act together, or if any other event results in less confidence in the Dollar, Inflation will be right around the corner.

    As for what the Market is saying...it's a picture of mild confusion.  One thing is certain: the Dollar rose, but not so much on a belief that the economy is strengthening, but on the Fed's announcement about monetary policy.  On the one hand, the Fed committed itself to an unchanged interest rate level for a lengthy period.  On the other, it also committed itself to ending its bond-buying program.  To some extent, this can be viewed as monetary tightening.  True, there is no change in the Fed Funds rate, but the Fed is taking action that will constrict monetary growth.  

    And despite this, the Fed is committed itself to language that suggests the present level of short-term interest rates will continue for a "considerable" period.  Is that language that sounds consistent with expectations of strong expansion?

    We think not. 

  • EDITOR'S LETTER - September 15, 2014

    Editor's Letter

    As you may have noticed, rather than update this column on a rigid schedule, we exercise discretion with regard to how long a particular week's Letter stays up.  It's rarely more than two weeks.  And we thought it would have too unsustainably unattractive to leave our self-congratulatory column, last week, up for more than one week. 

    But, there's a topic we touched on in last week's column that we think deserves a little attention.  We refer to the idea that there's a set of data that a person must reconcile in order to be able to speak credibly about future economic direction. 

    While there are quite a few such data points, the set that absolutely requires reconciliation is relatively small.  We're going to give you the lion's share, today, of the set we consider critical, for those of you who like to keep score at home.  In no particular order:

    1.  The ratio of the level of the US Dollar to the rate of growth in US Industrial Production

    2.  The ratio of the Fed Funds rate to the rate of growth in US Industrial Production

    3.  The trend in Industrial Production  

    4.  The trend in Housing

    5.  The trend in Durable Goods Orders

    6.  The ratio of the level of the US Dollar to Inflation

    7.  The level of equity prices relative to earnings expectations

    8.  The ratio of equity prices to bond prices

    9.  The ratio of commodities' spot prices to Inflation

    10. The trend in the 10-year Government bond relative to inflationary pressures

    Is this everything?  Of course not, but it's basically 80% of it.  Every single one of these is a critical link to the comprehensive economic picture.  If you cannot explain even one of them, you do not have a sound handle on what's going on.  You will never see us issue a forecast without having explained to ourselves each of these. 

    And a word of further clarification is in order.  When we say 'reconcile,' what we mean is two things.  In the cases of ratios, you must be able to understand why the ratio is performing the way it is.  Anything in the reason behind that ratio that strikes discord with your economic forecast renders the forecast immediately unsound.

    But there's something else.  In the cases where the matter has to do with simply trends by themselves, the point is that you must be able to explain why the trend is performing the way it is.  And, if that trend is at odds with your forecast, you have a problem. On a very obvious level, if your forecast is for an accelerating rate of growth, but the most recent trend in Industrial Output is down, you have a disconnect that must be reconciled.  And, to return to the example last week, trying to paint a picture of an expanding economy when the trend in the yield of the 10-year Government bond is, for example, declining, is a challenge at a minimum, and the difference simply must be explained.

    If you hear your commuting friend or work colleague spout off about the direction in which the economy absolutely must go based on a single and--to him--compelling data point, the first thing you should do is direct your mind to this list.  And, if you're feeling mildly challenging, ask your friend what her opinion is on a particular data point that might be at odds with his forecast. 

    In coming weeks, our intention is to talk about some of these key indicators, what they're telling us, and why they're flashing signs of things that are neither obviously evident nor being discussed in the popular press.

  • ECONOMIC & MARKET ANALYSIS - September 15, 2014

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1985.54, down 1.1% from last week.

    US Dollar Index - The Index finished at 84.24, up 0.6% from last week.

    Gold - Gold finished at 1237.75, down 2.5% from last week.

    Commodities - Spot Prices finished at 382.95, down 2.4% from last week. 

    Retail Sales - The 12-month rolling average rose at an annualized 4.1% rate in August.

    Business Sales and Inventories - The 12-month rolling average of all sales and inventories rose at an annualized 1.4% rate in July.  

    This week we have data for two stalwart measures of current economic conditions.  And they're coming in just about exactly where you'd expect: quite respectably.

    First, Retail Sales: we have a respectable annualized rate of growth of 4.1% in August.  This is a nice figure.  The challenge comes in understanding that it's an indicator of current conditions, that it's not necessarily a harbinger of what will be in the medium-term.  To put the size of this result into context, it's only a little greater than half of what we expect to see in a figure that would be suggestive of expansion.  Also: it's the smallest increase since April.  This is, of course, completely consistent with our forecast for a slower rate of growth for the fall.

    Now, a quick note of housekeeping.  We have revised how we use Business Sales data in our model.  We now include the sum of both sales and inventories together.  Why?  After extensive study and review, our conclusion that the sum correlates with and explains economic trends better than either, alone.  Consider:  while it's true that expanding inventories in the face of lagging sales might imply sluggish demand, it also denotes actual spending on inventories.  And spending is, by definition, expansionary.   

    So, in July, the 12-month rolling annualized rate of growth came in at 1.4%.  That's a decent figure.  However--what you need to know is that June (the previous month) was the seventh consecutive month of growth in the rate of increase.  That figure of 1.4% in July?  It's actually a wee bit smaller than the rate in June.  Again, a result that is consistent with our forecast. 

    Let's talk about the Market for a moment.  This week was not unlike last week.  It's a picture of a Market that is showing increasing concern about global growth, particularly in Japan and Europe, as well as a bit of concern in the political arena.   It's delightful to see the Dollar rise like this when the prospects for economic growth are pointing north.  It's a little more sobering when the Market pushes Equities down 1.1%.  If there is a silver lining at all, it's that if the Dollar stays at this level for any sustained period of time, Inflation will remain quite subdued. 

    Consider: we have Equities still near all-time highs, bond yields near all-time highs, commodities at multi-year lows, no hint of growth in Europe or Japan, and indications that growth is slowing here, at home...: it's going to be a very interesting winter.

  • SCORECARDS - September 8, 2014

    Current Scorecard - Domestic

    September 2014

    Quick View:

    Weighted Average:  18
    Current Month:        31

    Consumer Confidence

    Current Month:     8
    Last Month:         15
                                                        
          

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                21

               10

               -5

    Leading Indicators

                17

               13  

              -11 

    Confirming Indicators

                41

               18  

               22

    Foundation

                -4

              -11 

              -14 



    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.  

    Well!  In our defense, so to speak, we did tell you to expect a comfortable summer.  However, even we, we'll admit, are a bit surprised at just how comfortable it became.  Look at that Weighted Average figure.  That's the highest been, well, basically ever.  Remember what the Weighted Average is: it's a measure of contrast over a year's time in how things probably feel to the average consumer.  That figure of 18 is pretty large, and...we'd say accurate, as well.  Even we're surprised at how high the Confirming Indicators came in.  It has been, truly, a comfortable summer.

    Now, are you ready for a drop of cool water?  Look at Consumer Confidence: it has dropped from 15 to 8.  And that tells you everything you need to know.  Yes, it's true that our Leading Indicators are pointing in a positive direction.  It's also true that they're not showing any inclination to rise from where they are.

    A great many people right now are basking in the moment and trying to predict a continued expansion.  We caution you to exercise an abundance of caution.  If times have been good to you, this is a good moment to keep that nest egg intact and pay down debt.  Don't bet on the same rate of expansion.

    In point of fact, it's not that a large number of our leading indicators have changed much.  It's that (1) most of them are showing no continued rise and (2) a couple of them are flashing minor warning signs.  Let's talk about the latter. 

    First, while you probably continue to hear that the Equity Market continues to hit new highs, it's also true that for a couple of months, the Market danced around and yes, actually declined.  Do not underestimate the impact of a Market that shows a decline over a period of a couple of months.  The fact that at this moment it's reaching new highs is irrelevant.  That slowdown will make itself felt.

    The second point is  hard to accept as a truth when talked about in contrast to what the Business Press has been peddling: gains in job hiring are slowing.  Read that again.  We're not saying that there has been a trend in net job loss, but that the pace of new hiring is slowing.  Remember: a great deal of the reason for the economic upturn late spring into summer was directly attributable to a pick-up in the pace of hiring.  You cannot have it both ways, meaning that if a higher pace of hiring leads to greater economic activity, a slower pace of hiring likewise translates into an economic slowing.

    As we often say, a word to the wise is sufficient.

    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.

  • EDITOR'S LETTER - September 8, 2014

    Editor's Letter

    We are simply going to be very unattractive this week.

    We were going to do more work on defending why we think the economy is set for a slowdown and why credit conditions are getting shakier and so on, but...when the Labor data came out last Friday and rattled everyone's cages, well....we decided it was time for a mild pat on our own back.  And, to do it after a week's vacation?  No, we're not very nice, are we?

    Earlier this week, we tuned in to an interview segment on a well-known television business show in which a guest was being asked about the yield on 10-year Treasury Bonds.  The guest shocked us by her response.  She had the nerve (?) or stupidity (?) to say that she couldn't explain why the 10-year bond yield was so low.

    Now, come on.  How do you have comfort in going on a national television show to talk about the economy and admit that you can't explain why the 10-year bond yield is so low?  In any economic forecast, the 10-year Treasury Bond has an important place...it would be like saying that you completed a jigsaw puzzle, but left out a whole corner of the puzzle.  You simply can't pick and choose the data points like that.  Reasonable people can disagree on the set of data that informs economic direction, but...we're not sure you'll find many credible forecasters or commentators who leave out the role of the 10-Year Treasury Bond out.

    Now, we know what you care primarily about when it comes to the economy:  credit conditions, the labor picture, inflation, interest rate direction, general economic conditions, and...of course, the stock market.

    We think we've made a pretty good case for why we feel how we do about the stock market, so we won't be beating you over the head on that too much over the next month, although one last word is in order: if you didn't read our most recent Editor's Letter, do so....now.  Remember: the Dollar has been on a mild tear...but it's not because of the U.S. economy.

    In coming weeks, we're going to spend enough time on these other topics to get both you and ourselves very comfortable.  The key point: trends have no obligation to continue.  In other words, yes, economic conditions reserve the right to fluctuate.  You have to keep that in mind.  When we make statements about these economic topics that interest you, remember that, while we have confidence in those statements and forecasts, there is nothing inherently long-term about any of them.  Forecasts need to change....as data...changes.  And yes, you'd be surprised how fast the data can change. 

    If you're a regular reader, you're hopefully not too surprised by the splash of cold water we got with this most recent labor report.  We couldn't ask for better timing...did we not tell you to expect a comfortable summer, but....no more than that?

    By the way, the Domestic Scorecard was updated this week.

    Stick with The Practical Economist.

  • ECONOMIC & MARKET ANALYSIS - September 8, 2014

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2007.71, up 0.2% from last week.

    US Dollar Index - The Index finished at 83.74, up 1.2% from last week.

    Gold - Gold finished at 1269.80, down 1.6% from last week.

    Commodities - Spot Prices finished at 392.52, down 1.4% from last week. 

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

    Single-Family Home Sales - The value of new homes sold rose 9.2% on an annualized basis n July.

    Durable Goods Orders - New orders rose in July at a 12.3% annualized rate.

    Case-Shiller Housing Index - The Index rose at an annual rate of 8.9% in June.

    Commercial Lending - Total Lending by domestically-chartered banks rose at a 4.0% annualized rate in July.

    Labor - In August, the number of people employed rose at a 1.5% annualized rate.

    We have consistently said that while it is not only not intuitive, sales of new one-family homes are actually surprisingly well correlated with the economy.  So, that 9.2% growth rate is nothing to look down on.  What's particularly good about the data this month is that both prices and volume of sales both rose.  That's a nicely strong result, and very consistent with the general trend of things.

    And, speaking of the general trend of things, there are few indicators that so broadly tell us about the economy than Durable Goods Orders, which came in very, very strong.  Regular readers know how important this indicator is.  Total orders increased 12.3% on an annualized basis, and that's a pretty outstanding result.  What's interesting and critical to know is that if you remove orders related to transportation goods, the increase falls to nearly half: 6.5%.  And no, the spending did not come from the government sector.  Remember that point as we move through the week's data points.

    Now, the housing sector--specifically, previously-owned homes, which make up the lion's share of the housing sector showed up nicely, as well, with growth of a 8.9% annualized rate.  The problem?  It's the smallest increase since February of this year.

    If you've been reading for a while, you may recall that we predicted, some months back, that a pick-up in lending was likely on the horizon?  Why?  Well, one of the reasons that lending was muted for the past couple of years was that banks were making a figurative killing by borrowing at near 0%, buying government bonds, and then selling those bonds back to the government.  But, as we hope you know, the Fed is cutting back on its bond-buying program.  So, what's a bank to do?  That's right: put a little more of its capital into lending  (This, not so coincidentally, is another reason why inflationary pressures are going to rise.)  And, to put the most recent result into perspective, that 4.0% annualized rate is the highest since February 2013.  Where would we put it, historically?  It's just about at the lower threshold of what we consider expansion.  Of course, the real question you want to be asking yourself is whether that pace of lending can be sustained.  We will address that in forthcoming weeks.

    Now let's talk about the Labor picture.  If you've been reading all along, you know that we made a forecast roughly two months back that the economic pick-up we expected to have over the summer would not continue.  And...we attributed much of that expected slowdown to the labor sector.  So, what do we have this month?  Well, how about some good news?  The Employment Rate rose a smidgen; it's up 0.1 percentage point to 58.8%, from 58.7%.  You want some more good news?  The number of people employed, in August, rose, on an annualized basis by 1.5%.  That's the highest rate of increase since December 2012

    Now, are you ready for a couple of "however's?"  First, what you need to know is that even though the Employment Rate ticked up, this level is not the highest it's been in the aftermath of the Financial Crisis.  No, it's actually one percentage point lower than the high we got in 2013.  Second, and this is more important: that 1.5% annualized increase in the number of people employed?  Yes, that's a very nice rate of growth, but, that rate of growth is now the smallest since February of this year.  Yes, you read that correctly.  In fact, in both July and August, the rates of growth are roughly half of the previous two months.

    It's an interesting picture, isn't it?  Let's look at the Market's behavior this week.  What we have is one of the patterns that are very easy to decipher.  Dollar strongly up, Equity Market up slightly, Commodities and Gold both down.  A strengthening Dollar is not a bad thing when investors are buying the Dollar because the economy is fundamentally strengthening.  Now, while some of the week's data came in strong, some came in with mixed subtext, and, with the Market rising just 0.2%, what you have is investors telling you that the Dollar's performance had little to do with investors' perception of a strengthening U.S. economy, but rather concerns about political instability, globally, and, more importantly, fears of further economic difficulties globally, most particularly in Europe and Japan.  Can you attribute that weakness in Commodities to the stronger Dollar?  To a very large extent, yes.  To a complete extent?  No.  Pay heed:  spot prices for commodities are now the lowest they've been in two years. 

    Now let's circle back to Durable Goods.  Just as we say there will be no sustained and accelerated expansion without the same in Housing, so there can be none without a commensurate pattern in Orders for Durable Goods.  Yes, it's true that the data came in strongly.  There are two points we need to make, however.  The first point is rather obvious: clearly the total spent on durable goods in July was so large that is an outlier.  Be shocked--not just surprised--if a result of that magnitude recurs.

    The second point is that you should be very surprised if even the "core" spending on durable goods rises anywhere near that 6.5% next month or any time again in the near future.  At a minimum, let's remember that, as we said it would, the summer has felt very comfortable for a large swath of the American people.  If, after two to three months of a comfortable economy, people aren't going to take the opportunity of catching up on deferred capital purchases, when would they?  It's well-known, for example, that the reason the figure for transportation orders was so high is because the airlines caught up with major capital spending.  Do you think that will continue?

    In a nutshell, while this past month's data raises the rate of growth a lot, you have to look forward.  If this month's figure came in at a level that could be argued to be sustainable, that would be something else entirely.

    Some common sense is part of what's required to be a practical economist. 

    An interesting week, is it not?  A lot of confirmation about the wonderfully comfortable summer, but some slightly uncomfortable sub-themes, even if they are not very surprising.

    Grading the week, simply on the basis of those sub-themes, even as strong as the data was on the surface, we cannot grade it higher than a B.