The Practical Economist

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  • ECONOMIC & MARKET ANALYSIS - March 30, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.5%.

    S&P 500 Index - The Index finished at 2061.02, down 2.2% from last week.

    US Dollar Index - The Index finished at 97.38, down 0.4% from last week.

    GoldGold finished at 1195.75, up 1.1% from last week.

    Commodities - Spot Prices finished at 323.15, down 0.2% from last week. 

    Government Bond Index - The Index finished at 2126.34, unchanged from 1.0% from last week.

    Consumer Prices  - Inflation rose, in February, at an annualized rate of 0.2%.

    Durable Goods Orders - Orders rose at an annualized rate of 0.1% in February.

    New Single-Family Home Sales - The value of new homes sold in February rose 15.5%. 

    At the moment, it would be difficult to pinpoint any economic indicator that's more volatile than Inflation.  Spurred mostly by the energy market, unpredictability is definitely the name of the game.  And that was on display in a big way in February during which time prices rose a scant 0.2%.  That's the smallest figure since November 2009, and it's largely a result of the precipitous falloff in energy prices. 

    Now you may recall that we said that you shouldn't bank on a declining outlook for prices looking forward.  And so, if we look at Core Inflation (stripping out Food and Energy), in fact, even though Inflation was running at an annualized rate of 1.6% in February, below the Fed's target, it is the highest increase in four months.

    So we have the prospect there of rising Inflation.  We also have now the fact of a significant slowing in new orders for durable goods, one of the most telling signs of economic direction.  If we exclude transportation-related products, new orders rose 1.9%.  Not only is that a low figure, it's the lowest in 13 months.  And if we look at all orders, new orders rose just 0.1% and that's the lowest increase in 23 months.

    A splash of good news?  The total value of new single-family homes sold in February rose a strong 21.5%.  What drove that figure?  It was not rising prices nearly as much as it was volume of sales, which rose a very strong 15.5%.  We have said in the past that sales of new single-family homes is a fairly good secondary economic indicator, but that holds true mostly when the market is showing activity in both sales price strength as well as volume strength.  In other words, it may not mean as much as you want it to mean.

    And what did the Market think?  Commodities, the Dollar, and the Stock Market all fell, while Gold rose.  What's that a picture of?  It's a picture of a group of investors that collectively are fearful of a slowdown that will likely result in ongoing or further monetary easing (hence the positive performance by Gold).  

    In recent months, some of our most important measures of current conditions have shown strong improvement month after month.  The signal difficulty is making a case for those indicators continuing to strengthen.  The next update of the Domestic Scorecard will likely have a major forecast announcement.

  • ECONOMIC & MARKET ANALYSIS - March 23, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.7%.

    S&P 500 Index - The Index finished at 2108.10, up 2.7% from last week.

    US Dollar Index - The Index finished at 97.80, down 2.4% from last week.

    GoldGold finished at 1183.10, up 2.7% from last week.

    Commodities - Spot Prices finished at 323.73, up 2.0% from last week. 

    Government Bond Index - The Index finished at 2125.80, up 1.0% from last week.

    Industrial Output  - Production rose, in February, at an annualized rate of 3.9%.

    Capacity Utilization - Factory Utilization rose at a 0.9% rate in February to a level of 79.21. 

    We hope all of our readers know that the to the economic engine the past year has been Industrial Production.  (This is not an insignificant thing to know as many people have an incorrect understanding that the U.S. economy is simply a "service" economy and that all other segments are not meaningful.)  In this area, the economy has made fairly big gains.  And data released this week shows that, in February, Output continued to rise at a fast clip, 3.9%.  That's a very healthy rate of increase.  It is, also, the slowest rate of increase in nine months.

    In tandem with Industrial Output, data for Capacity Utilization is released.  Now, the key virtue of studying the level of Capacity Utilization is to provide very strong insight into inflationary pressure.  It is, arguably, the single-most important factor if you're trying to handicap the direction of Fed policy with regard to short-term interest rates.  If you don't think that the Fed Chair hunkers down with this data when it comes out and studies it very closely, you are very mistaken.

    In February, the Index rose to a level of 79.21.  This is a level that we associate with generating healthy economic activity, but...while it begins to approach a level that's inflationary, that is actually the point.  It's still only approaching that level; it's not there, and in fact, the Index rose at the slowest rate in 18 months.  In other words, especially combined with the Dollar's strong performance recently and low commodity prices, the Fed is remotely concerned about strongly rising Inflation, at least through the first three-quarters of this year.

    In line with the results for Industrial Production, the Market finished the week...interestingly.  When analyzing the Market's action for the week, it's the direction of key indicators and their relationship to each other that tell the story.  And there are only so many patterns.  Some patterns occur very infrequently because the factors that result in a particular sentiment are abnormal in those combinations.   This is one of those weeks.  If we have to summarize the Market's sentiment very briefly, we'd say that the Market is showing signs of being skittish. 

    Investors sent the Government Bond Price Index higher.  When do investors send bond prices higher?  Generally they do this when they think that the value of cash streams from current investments will retain their value or grow in value because pressure on interest rates is to the downside.  Thus, rising bond prices would make more sense if commodities fell, if the US Dollar index fell...in other words, if investors had a sound reason to expect that pressure on inflation were to the downside.  But commodities rose, and the Dollar fell.  So, what are investors saying?  

    Here's one way to look at it:  the Federal Reserve made a public announcement about its posture toward raising the Fed Funds rate this week.  It seemed to commit itself more strongly to the idea that a tightening is in the cards.

    Now, when the Fed sticks to language about raising short-term rates, but the US Dollar falls, and bond investors snap up more government bonds, the best things we can say is: watch out!  There's a combination you don't expect to see.

    There's not much rationale to smart investors wanting to load up more on securities that yield a constant rate of interest if the economy is improving and if rates are expected to rise.

    In other words, bond investors don't buy it.

    If you wanted to grade the week, based on the economic data and the Market's sentiment, you'd have to give it no higher than a C, and that's only because the economic data continues to come in very respectably.

  • EDITOR'S LETTER - March 16, 2015

    Editor's Letter

    It's not very difficult to argue that the period of the last nine months has been the most economically robust--and most relatively comfortable for most people--since the onset of the economic recovery in the wake of the Financial Crisis that began in September 2008.

    In the most recent edition of this column, we attempted to remind of the distinction between pace of growth and the health of the economic foundation.  Of course, the economy is like many things in life: the truth about it appears to be relative to where a person is situated. We hope that we have intellectual integrity to look at the subject objectively and comprehensively. 

    Let's talk for a minute about what's going right...about what's showing us that the economy is progressing at a nice pace, and why the Fed is able to actually talk about raising short-term interest rates.

    It's actually not that hard to comprehend. 

    1.  Industrial Output rose year-over-year by 4.5% in January.

    2.  Core Inflation (stripping out food and energy) rose 1.6% in January year-over-year.

    3.  The number of "Net Newly Employed" rose by over 400,000 from November through January.  (You have to go back to a timeframe twice as large during 2012 to a time when we added that many jobs.)

    4.  The Deficit in January fell to -17% from a high of -70% in May 2010. 

    These are all signs that the economy has not only improved quite a bit but is continuing to recover at a healthy pace.

    So, what's the problem?

    Let's start with point #4, the Deficit.  Now, the first thing to know is that we define the Deficit differently than the measure most commonly used in the Business Press.  Instead of measuring the outstanding amount of the budget deficit against GDP, we measure something we think is far more accurate, the percentage that the deficit is of government revenue. 

    Now, that improvement in the Deficit is terrific.  However, first of all, it's important to know that as nicely as the economy has been improving, the Deficit hasn't changed all that much in the past year.  A year ago, it was hovering around -20%.  And here's the bigger point: to put -17% in perspective, you have to go back to August 2008 to a time when the Deficit was that "low."  And for those who don't remember, August was just month before the Financial Crisis set in.  Here's another perspective: during much of the previous four or five years of economic expansion, the Deficit was lower, but...it's important to keep in mind that during most of that period, the Federal Reserve kept interest rates unusually low because the economic footing wasn't as strong as most people thought it was.  And therein lies a clue to understanding our next point.

    It's absolutely true that Industrial Output is showing nice performance.  A year-over-year percentage increase of 4.5% is, by itself, nothing short of being very robust.  But everything is about context.  Short-term interest rates are hovering at about 0.25%.  Real interest rates have continued to hover below 0% even more than six years after the start of the Financial Crisis.  Economies that are strong tend to demonstrate positive economic activity in concert with real interest rates that hover in the range of 1% - 3%.   In other words, a year-over-year increase in Industrial Output of 2.5% coupled with real interest rates that were hovering around 1.5% or 2.0% would be a far, far stronger indicator of foundational health than what we have.  With every passing month, the Fed's press releases are backing off raising rates...even as they're still near 0%.  This is not a sign of a healthy economy.

    And that brings us to Inflation.  Year-over-year, Core Consumer Prices rose 1.6% in January.  That's a mild rate of Inflation.  And if you couple it with the rate of growth in Industrial Production, it especially starts to look impressive.  But let's look where that low rate of Inflation is coming from.  It's not coming from the fact of rising real interest rates (which, again, would be a signal of an economy that's strengthening at its core),, but...it's coming primarily from a Dollar that's rising pretty fast on significant weakness in other major currencies, namely the Yen and the Euro.

    Lastly, let's talk about the Labor picture.  The good news is that very fast clip at which the economy has been adding jobs.  But how strong is the labor picture really?  If you measure it by the Unemployment Rate, you don't get the complete picture.  Keep in mind that people who are no longer being counted as looking for work don't figure into the Government's measure of Unemployment.  Such a phenomenon artificially inflates how healthy the labor picture looks.

    Our measure of Labor health is the Employment Rate, the percentage of all people in the economy who are working.  In roughly normal times, that figure hovers around 62.0%.  Note that it drifts higher than that in very robust times.  Sixty two percent is merely a figure we associate with "normal" rates of economic and health and growth.  Now, the Employment Rate has improved over the past several years...by 0.9 percentage points.  That's it.  Just 0.9 percentage points.  The low point in the wake of the Financial Crisis was 58.2%.  And the Employment Rate now hovers at 59.1%.  In other words, there's a significant number of people who are not working who normally are working.

    We consider these points to be important and fundamental to understanding the potential vulnerabilities in the system.  If more than six years after the onset of the Financial Crisis, interest rates cannot confidently be raised above 0.25%, what does that tell you about how to put the present economic picture into perspective?

    At a minimum, it should tell you that the system's mechanisms and levers are inefficient at best.  And it should also tell you that the disconnect between monetary policy and effect is so great that the economy is vulnerable to systemic and political shocks.

    We think this understanding is so important that, instead of our usual practice of updating the Editor's Letter every fortnight, we want to give everyone an opportunity to see it and will leave it up for at least an additional week.   

  • ECONOMIC & MARKET ANALYSIS - March 16, 2015

    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 2053.40, down 0.9% from last week.

    US Dollar Index - The Index finished at 100.18, up 2.5% from last week.

    GoldGold finished at 1152.00, down 2.0% from last week.

    Commodities - Spot Prices finished at 317.33, down 2.8% from last week. 

    Government Bond Index - The Index finished at 2105.15, up 0.7% from last week.

    Retail Spending  - Retail Spending rose at an annualized rate of 1.9% in February

    Business Sales - Business Sales rose 0.4% in January. 

    You know those dark clouds that we said were starting to gather?  Well, this week, we get some unfortunate support in that direction.

    To start with, Business Sales, a crucial input to Business Investment did rise in January, but it did so by a paltry 0.4%.  This is the slowest increase since August 2013. 

    And, in February, Retail Sales rose also, but by 1.9%, which is not only weak, but is the weakest rate of increase in 10 months. 

    In terms of the Market, the most interesting thing about the week was that the Dollar crossed the parity line of 100.0 for the first time in a very long time.  Now, lest you conclude that that's due to strength at home, you should note that commodities, in aggregate, fell, and that the stock market did the same.  Your conclusions?  (1) The Market is worried about weakness elsewhere in the world (2) That worry about weakness elsewhere in the world is putting upward pressure on the dollar and (3) The Market is concerned about the effect that a rising Dollar will have on the exports of American companies.

    A higher Dollar on a lower stock market and lower commodities?  That's not a recipe for optimism.

  • SCORECARDS - March 16, 2015

    Current Scorecard - Domestic

    March 2015

    Current Scorecard:   51                                                            

    Full Scorecard:

                                                                                       Current                  Four                   12
                                                                                        Month               Mos. Ago          Mos. Ago

     OVERALL              33
                27 
                  -8
     LEADING & CONFIRMING SCORE              51             45
                   4
     Leading Indicators              41             34
                 -14
     Confirming Indicators              61             56
                  23 
     Foundation             -40             -47               -56



    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.

    The great news is that the economy continues to chug along at a nice pace.  If the economy seems to be more robust than it actually is, that's due to extremely low inflation and inflationary pressure.  That inflation has trended down has lent added power to both income and spending.

    Please know that we are all but 100% persuaded that the dark clouds that we see gathering will begin to make themselves manifest no later than the May Scorecard.  But for now let's enjoy the springtime.

    There's a lot of good to enjoy.

    The Labor picture continues to be auspicious, with the economy adding jobs every month at a very healthy clip. 

    Housing continues to make gains.

    Business Investment continues to be modestly strong.

    There has been talk in some quarters of the inhibiting influence that the stronger Dollar could have on the export sector.  We're not too concerned about it.  While it's true that probably half of the run-up in the Dollar stems from weakness in the Yen and the Euro, it's also true that half of the strength in the Dollar comes from a misplaced belief that the Federal Reserve is set to raise short-term interest rates.  For one thing, inflationary pressure is very low.  And for another, if we're correct about economic softening on the horizon, the last thing that's likely to be on the Fed's collective mind will be raising short-term interest rates.  And so, unless Europe and Japan continue to fail at an accelerating rate, we believe the Dollar's strength will moderate.

    We all-but-firmly believe that the latter half of the year will prove problematic, so...our advice to all is to think long and hard about tightening your belt now.  If we're right, the middle part of this year will provide an object lesson to those who don't understand that past performance means nothing for the future.

    Current Scorecard - Global

    March 2015

    Full Scorecard:

                                                     Current                  Last                    Four
                                                     Month                 Month                Mos. Ago

    OVERALL GRADE

                    1

                    2

                     4

    Leading Indicators

               -3

                1

                 9

    Confirming Indicators

                5

                6

                 5

    Foundation

               -2

               -3

                -5

     
    The Global Scorecard has some things in common with the Domestic Scorecard.  The key thing they don't have in common is the Current Situation.  The U.S. has enjoyed a figurative springtime these past few months...a springtime that has eluded the rest of the world.  Japan and Europe continue to struggle in significant ways, notably around core business and economic activity and around related measures such as Employment.

    Other countries run the gamut from being somewhat stable (such as Great Britain) to wavering (China) and a whole host of countries that are somewhere in between.

    Let's start with some good news:  Inflation continues to be subdued across the globe.

    The rest of the picture goes down from there.  Labor conditions have been somewhat improved, but the pace of growth there is showing signs of slowing.  The picture in Industrial Output is similar.

    The big concern is...credit conditions.  We're seeing a very rapid deterioration.  What we think you should expect to hear more about in coming months is the extent to which major banking systems are not sufficiently capitalized; that lending is coming under pressure; and that the fiscal health of major sovereign entities starts to experience a slide.

    There's a number ways in to understanding the credit situation.  Here are a few notable ones:

    1.  Investors are accepting negative yields for five-year government bonds in Finland, Germany, and Sweden.

    2.  The yield on the 10 year U.S. Government Bond has all but stalled.

    3.  Fiscal budget deficits have come down significantly since the onset of the Financial Crisis, but they are now essentially stalling.

    The medium-term prognosis for the global economic situation?  Not very auspicious.
       

    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.

     

  • SCORECARDS - April 13, 2015

    Current Scorecard - Domestic

    April 2015

    Current Scorecard:   23                                                            

    Full Scorecard:

                                                                                       Current                  Last                      Six
                                                                                        Month                 Month              Mos. Ago

     OVERALL              13
                20 
                18
     LEADING & CONFIRMING SCORE              24             34
                34
     Leading Indicators                1             12
                19
     Confirming Indicators              31             49
                49
     Foundation             -32             -41
                47



    If you take nothing else away from this month's Scorecard,  you should take away this: Leading Indicators have dropped 8 points in one month, and 18 points from two months ago.

    We create a weighted average of where the Leading Indicators have been and where they're headed.  The best way to understand what it is is to understand it as a measure of change in the pace of growth.  In March, that figure was 44.  Now, in April?  It's fallen to 20.  That figure is now lower than any time since June of last year. What it's telling you is that you should be expecting a very sharp drop-off in the pace of growth in the next four - six weeks. 

    Yes, this is the formal forecast we've been tepidly promising you.  We have no call to issue a forecast of a true economic contraction, but we think that the economic landscape, over the next six months will feel like a contraction, given the extent of decline in the pace of growth. 

    Let's talk about some good news for a moment.  While growth in some confirming indicators, such as Industrial Output and Employment, has fallen quite a bit, rates of growth are still somewhat respectable.

    The chief strong point?  Inflationary pressure.  It's very low and will likely remain in that condition for a considerable period. 

    What's driving our predicted slowdown in growth?  First, let's continue to remember that subdued inflation will mitigate the drop-off in economic growth, to some extent, though if anything happens to disturb that, that could have considerably negative repercussions.

    There has been a considerable slowdown in Business Investment, and that's having a noticeable effect on output and on hiring.  In addition, there has been enough of a deterioration in credit conditions that it's very, very difficult to see a continued expansion at anywhere near the pace we've experienced the past nine months.   Lastly, we have already begun to experience a sharp slowdown in hiring, and that's already having an effect on spending, which, in terms of GDP, is roughly 70% of the economy. 

    And yes, all of this is already being felt in the Housing sector where price gains have slowed to a pace we haven't seen in over two years. 

    It's hard to characterize any time frame as robust in which the Fed Funds rate hovered at near 0%.  But everything is relative.  We hope you enjoyed the last nine months and that you're ready to tighten your belts.

    Current Scorecard - Global

    April 2015

    Full Scorecard:

                                                     Current                  Last                    Four
                                                     Month                 Month                Mos. Ago

    OVERALL GRADE

                   -2

                    3

                    13

    Leading Indicators

               -3

                1

                20

    Confirming Indicators

                5

                5

                 5

    Foundation

              -13

              -13

               -15

     
    We've had a situation over the past several months in which the rest of the globe wasn't in close to perfect synchronicity with the United States.  Now, however, not only are things beginning to slow down in the U.S., they're continuing to slow down even more all over the globe.  This is reflected in the Scorecard, as you can see.

    If we look at the current situation, we see that consumer prices have been under control...in some cases too much under control as some central banks fight a leaning toward deflation.  Industrial output and general economic activity?  It's been modest, no more.  And the labor situation, globally, continues to be less than satisfactory.

    On a leading basis, the situation isn't better.  While the trend in Labor has been good, even if the overall picture has been poor, that improvement in the labor situation is starting to decline.  And the same is true of general economic activity.  Satisfactory now, in a modest way, it's down quite a bit from even six months ago.

    And yes, the credit picture--our chief bellwether--is flashing warning sign, and not just because the forecast for the U.S. is not particularly rosy.  One way to understand the prospective economic picture: it's one thing for investors to pile into long-term sovereign bonds with low yields because they're certain that central bank bond-buying will send the prices of those bonds northward.  It's another thing when investors send the yield of 10-year bond for Switzerland into not low-yield territory, but negative territory.

    We hope that we will be in a position to issue a warning ten minutes before we think the financial system is about to enter a dire period or actual collapse...while this is not that, we think you are being flashed a strong alert that the global economic outlook for the medium-term is weak, at best, to poor, at the worst.
       

    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.

     

  • SCORECARDS - May 11, 2015

    Current Scorecard - Domestic

    May 2015

    Current Scorecard:   26                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

     OVERALL              14
                22 
                31
     LEADING & CONFIRMING SCORE              26             37
                50
     Leading Indicators                4             14
                31
     Confirming Indicators              48             59
                70
     Foundation             -31             -38
               -44



    If you take nothing else away from this month's Scorecard,  you should take away this: the Leading Indicators figure has dropped 27 points in the past three months, and 10 points from last month.

    It'd be easy to say we vacillated for too long on declaring the updated forecast for a significant economic softening.  But, turning out to have been correct later does not justify poor methodology on the front end.  We had a lot of arrows pointing in that direction, but we didn't want to draw that conclusion until we were essentially certain.  Talk is cheap, and that's part of the point of what we're trying to do, backing away from the business of creating noise.

    We said that the coming softening will feel like a contraction, and we need to reinforce that.  We're studying and studying, and we feel sure that the economic picture will continue to deteriorate for quite a few months to come.  Initially we thought it was the summer that would feel figuratively ugly; now we think it will be the late fall that will feel that way.  Back into the arithmetic.  Even assuming things level out in late fall, that means a period of roughly six months of continuing deterioration.

    In other words, it's going to be a rough balance to the year.

    We'd like to offer you something bright to start things off.  Unfortunately, in terms of leading factors, the only brightness in the picture is that Inflation is likely to tick up a little in the coming six months.  That's a good thing, you ask?  Yes, for three reasons:  (1) Inflation continues to be fairly tame, and a little pick-up there will help soften consumer and business debt (2) A little pick-up in Inflation will probably boost business investment and (3) As the economy softens, the Fed is more likely to be worried about Deflation than Inflation, so a little inflationary uptick won't be terrible.

    We make that last statement because it reflects reality, but we think the reality may end up different: we think there's a strong possibility that the Fed may be facing a bifurcated economy in which prices continue to rise even as the overall economy softens.  If that happens, everything will change.

    If there are any bright spots, it's that Industrial Output continues to come in moderately good.  Housing is also priced fairly relative to income, though it's not underpriced.  And Income and Spending continue to come in respectably, though not very strong. 

    That doesn't sound too bad, right?

    Well, here's the rub....

    1.   Even as we believe that pressure on the Dollar will likely be to the downside, which is good for the U.S. economy, for at least the next couple of months, we are still feeling the impact of that spike in the Dollar in January and that's hurting exports as well as investment from abroad.

    2.  Even as the economy continues to add jobs, it's now adding jobs at a significantly diminishing rate. 

    3.  Construction Spending, one of the principal cornerstones of private domestic investment, one of the key propellers of the economy, has begun to decline.

    4.  Orders for Durable Goods have begun to decline.

    We especially cannot overstate the import of these latter three variables as inputs to the economy.  It is, very simply, not just not a good picture, it's a picture of an economy that's about to move past the precipice of softening. 

    If there's any kind of silver lining, for now, it's this: if you've been reading closely, you're probably aware that we've been saying that the Budget Deficit has been flat-lining for roughly a year, that is, it has not continued to make progress in being reduced.  However, even as we are sticking to our prediction that Gold will be the standout investment for the year, due in great part to our belief that the Deficit will come under pressure this year, we believe that the Deficit will improve gently over the next quarter.  That's good news for now.  Based on our predictions for the economy for the balance of the year, however, we are quite phlegmatic on that subject.  For the medium-term, we think there will be plenty of red ink, but...for the near term, you should expect a Deficit that continues to shrink and that will be good news for the interest rates that borrowers demand of the U.S. Government...and taxpayers, indirectly.

    For those who are wondering to themselves what percent confidence we put in our forecast, you should know that we don't issue a forecast unless we have a very high degree of confidence in it.  In other words, our confidence level in a forecast should be construed to be around the 95% level, roughly, with the balance leaving room for events and developments that are not knowable or predictable, such as regional or other political conflicts.

     

    Current Scorecard - Global

    May 2015

    Current Scorecard:  1

    Full Scorecard:

                                                     Current                  Last                    Four
                                                     Month                 Month                Mos. Ago

    OVERALL GRADE

                   -1

                    1

                    6

    Leading Indicators

               -1

                1

               17

    Confirming Indicators

                3

                5

                 5

    Foundation

               -8

               -8

               -12

     
    Well, it's not a great situation we're facing on a global level.  It's not all bad news, though.  Although Industrial Output, worldwide, as started to fall, levels of production are still above water, so to speak, though not by much.  And the Employment picture has been fairly good, as well.  But, truth be told, what's making these figures look better than they are is the low and stable inflation environment, which is amplifying the power of these other variables. 

    But--the reality that's rapidly developing is that the combined effect of monetary and fiscal policies is not sufficient to stimulate economic activity.  We are now extremely close to that "breaking point" at which economic policy, as represented by central banks' monetary policy and sovereign entities' various spending and taxation policies are having the effect of draining money stock from their economies.

    And that is reflected in seeing reduced business investment and spending.

    We are not officially issuing a forecast of a global economic downturn...not yet.  But the data appears to be teetering at that precipice.

    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.

     

     
  • SCORECARDS - June 15, 2015

    Current Scorecard - Domestic

    June 2015

    Current Scorecard:   20                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              11
                15 
                23
     LEADING & CONFIRMING SCORE              20             26
                37
     Leading Indicators                5             10
                18
    Confirming Indicators              35             43
                59
     Foundation             -28             -32
               -36



    We'd love to report hat we were wrong, but...with every passing month, our Scorecard is pointing to an economic picture that's less rosy.

    Truth be told, we'd like very much to see a change in the economic weather, but we'd be dismayed in our own forecasting if a positive change came about fast.  We just don't see it.  And it's in these numbers.  They're down just a little bit from last month, just as last month was down from the month before that.

    We are not remotely backing off our forecast that an economic softening--a significant one--is in the cards.  And--if we're wrong, we're going to go down in a blaze of flames because it does appear that no one else is calling it.  (But, we won't be wrong.)

    We said that the coming softening will feel like a contraction, and we need to reinforce that.  We're studying and studying, and we feel sure that the economic picture will continue to deteriorate for quite a few months to come.  Initially we thought it was the summer that would feel figuratively ugly; now we think it will be the late fall that will feel that way.  You can back into the arithmetic yourself.   Even assuming things level out by late fall (an assumption we are not committed to), that means a period of roughly six months of continuing deterioration.

    Just one quick word of housekeeping: how should you apply the Scorecard to understanding what's going to happen and when?  For that you want to look at the Leading Indicators.  What's going to happen is denoted by where the number is.  Any figure between -5 and +5 is an indicator of very rough stability, meaning no change from where we are at the moment.  Anything above that is an increasing indicator of growth, while anything below it tends toward contraction.  As for timing, you should consider the Leading Indicator good for a rough three-month time frame.  It is not an indicator of exactly where the economy will be next week; nor is it an indicator of where the economy will be a year from now.  Long-term forecasting--over more than three-to-six months in the future is beyond what we believe we can reliably forecast.

    Now, how about some mildly good news first?  Well, even though May's labor data came in the weakest it has in six months, it still came in moderately strong.  And the Employment Rate did tick up one percentage point.  

    And Inflation continues to be extremely tame.  That's certainly like a tax cut for consumers. 

    Even though Income has been increasing at a declining rate, especially with the low rate of Inflation, it's like a boost to Income.  That's obviously good.  But, with a declining rate in the growth of Industrial Output--which IS the case, it means that what you have developing is a situation of relatively more dollars chasing relatively fewer goods.  And, that's a problem.  It does mean that rising inflation is definitely on the horizon...combined with the extreme unlikelihood that prices of commodities (namely crude oil) has any further southward to go. 

    Of course, buried in that perspective on Inflation is some of the "bad" news.  Income and Output are, indeed, rising at a declining rate. 

    More importantly, business investment is rising at a declining rate.

    Consumer Spending is barely moderate.

    And Credit Markets, as led by Bond Traders, are quietly telling the Market to expect a lower rate of economic growth, as illustrated by yields they are demanding.

    And, of course, while Industrial Production continues to be positive, growth is occurring at an increasing disjoint relative to monetary policy.

    It's going to be a bumpy few months.

    Current Scorecard - Global

    June 2015

    Current Scorecard:  -1

    Full Scorecard:

                                                           Current                        Last                         Four
                                                           Month                       Month                      Mos. Ago

    OVERALL GRADE

               -4

                -1

                3

    Leading Indicators

               -3

                1

               9

    ConfirmingIndicators

                1

                3

                 6

    Foundation

               -15

               -14

               -14

     
    Well now, if you go back and look at archived scorecards, you can see how the global picture has been changing; it's a gradual slide, basically.

    One thing that's true of any kind of analysis is that the clearer the picture presented by the data, the faster and easier it is to summarize.  And that's definitely the case at the moment.

    The current picture isn't great, but it's terrible.  Inflation is stable and low.  Industrial output is stable and growing.  And labor gains are continuing. 

    However, inflationary pressure are gently growing.  Growth in output is coming at a diminishing rate.  And those labor gains?  They're also coming in at a diminishing rate.

    But all of that doesn't even quite convey the picture: on balance, the sum of monetary and fiscal policies are proving inadequate to create even a neutral stimulus and, in fact, what we've seen is a severe change in the net stimulus over the past six months.  We are choosing that word--severe--advisedly.

    Add to that what we're seeing and expecting to see in business investment, based on what the credit markets are telling us, and the outlook for the near term is not auspicious. 

    We are now prepared to issue a formal forecast that mimics the one that we previously gave for the United States alone.  We are forecasting, for the global economy, in the three-to-six-month time frame a significant economic softening that will have the effect of feeling like a contraction.  Some regions will experience legitimate contractions.  In others, we believe, the point is that what we think will feel like a drastic change in activity will have the effect of a contraction, even if national economies do not technically contract.

    At the moment we are not prepared to forecast past six months.  But if the forwarding-looking data continues to deteriorate by a significant amount, we will be prepared to look further out.

    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.

     

     
  • SCORECARDS - July 13, 2015

    Current Scorecard - Domestic

    July 2015

    Current Scorecard:   21                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              12
                15 
                23
     LEADING & CONFIRMING SCORE              21             25
                36
     Leading Indicators                5             10
                17
    Confirming Indicators              37             41
                55
     Foundation             -23             -27
               -28



    Let's paint the picture as simply as it can be painted.

    It's true that there's still life in the economy. Our current Confirming Indicator is hovering at 37, but that's down something like 20 points from a few months ago.  And our Leading Indicator is 5, down something like 15 points from a few months ago.  In other words, it's hard to take comfort in that decent-sounding 37 when Confirming Indicators just keep dropping and when Leading Indicators are hovering in neutral territory.

    In other words, from what we can hear in the Business Press, the state of the economy is being grossly misrepresented.

    The Labor picture is, as you'll know if you've been keeping up with the weekly market analyses, pretty good in terms of trajectory, but...it's been continuing to improve at a diminishing pace.  That's the story with Income, as well.

    And Consumer Spending has fallen by a significant amount in recent months, as well.

    The Housing picture?  Same story yet again.  In fact, however, we're starting to see a budding problem:  while income and home prices both continue to grow and both are growing at diminishing rates, home prices continue to rise faster and...in our estimate, the ratio of home prices to income is now pressing the threshold at which prices start to look overvalued and that we have a price bubble in Housing.

    Of course, one of the reasons that economic activity is slowing as slowly as it is, is because Inflation has remained quite muted.  It's one of the reasons that the average layperson has not really been made to feel the effect of the falling rate of increase in industrial output.   But that, in itself, is a red herring.  Tame Inflation, absent rising interest rates, is hardly a touchstone of improving economic activity.

    Most significantly, however, new capital spending is declining at a very rapid rate, and in fact, is not merely growing at a diminishing rate, but is declining.  We point specifically to the fact that we have now had three consecutive months of declines in New Orders for Durable Goods at an accelerating pace.  Combined with our measuring a negative outlook in credit markets for the foreseeable future, the general economic outlook continues to be dour.  We have no upward revision to our economic forecast.

    It will be remembered that our formal forecast called for a "significant softening."  We were particular in our language.  In terms of a numerical measure, it would be very fair to translate that language exactly as it sounds...something short of a real contraction in the overall economy.  However, we are starting to see two developments: (1) leading indicators are deteriorating faster than they were and (2) looking to the future, we are unable to see any upward turn in the economy.   

    In other words, our model is causing us to consider a downward revision of our forecast.  Looking three to six months out, we do not see an improvement, but...we want to wait at least one more month before issuing a forecast that would place the U.S. in contractionary territory by sometime, this winter.

    We don't take making forecasts lightly.  While initial indications are that a real contraction is where we're headed, we don't have enough data to support that in a formal forecast. 

    But, you should know this: we wouldn't even be talking about it if we didn't think the probability was high.  Remember: this forecast for this softening that's upon us--we were having conversations with colleagues about it as early as a year ago, roughly nine months before we put it on paper.

    A word to the wise is sufficient, as they say.

    Current Scorecard - Global

    July 2015

    Current Scorecard:  -8

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL               -7
                 -4 
                 0
     LEADING & CONFIRMING SCORE               -5              -2
                 2
     Leading Indicators              -13              -7
                -1
    Confirming Indicators                2               3
                  5
     Foundation             -12             -11
               -10

                                
    Well now, if you go back and look at archived scorecards, you can see how the global picture has been changing; it's a gradual slide, basically.  And the slide is accelerating.

    One thing that's true of any kind of analysis is that the clearer the picture presented by the data, the faster and easier it is to summarize.  And that's definitely the case at the moment.

    One thing to keep in mind: it's a large globe, but the 80/20 rule applies, even excepting China from the picture.  The U.S., Japan, and Europe, together, account for more than 25% of the global picture.  And that makes it easy to take in the entire picture.  Conditions in Europe and Japan are far from rosy and conditions at home are deteriorating fast.

    We can't even make the statement that current conditions are satisfactory at this point.  Levels of industrial output have fallen rapidly the past several months, to the point that, on a net basis, it's barely positive.  In other words, the combined force of monetary and fiscal policy on a global basis is no longer sufficient.  One of the key corollaries to take away from that?  Given that monetary policy, worldwide is very accommodative but resulting in far from proportional effect, that's translating to a fresh though still small dilution in major currencies.  Keep that in mind as we look at changes in currency dynamics, budget deficits, and Gold over the next several months. 

    Of course there's a difference between leading and confirming indicators.  By definition, most people are not very good at measuring and understanding how leading indicators affect them.  They usually need to "feel" the effect to believe it.  Once that happens, of course, it's no longer a leading indicator.  Nevertheless, we need to talk about the leading indicators. 

    Briefly, it's a picture that mirrors the situation at home, but at a faster pace.  Our net leading indicator score is now solidly in negative territory.  What this means is that we expect that you will hear in the general business press that global economic indications have deteriorated significantly by mid-fall.  What, precisely, is going on?  Well, the most significant thing to know is that we're in the midst of a significant tapering off in demand.  The second thing to know is that capital investment/business formation is declining at steady pace, as well.  Lastly, general credit conditions have deteriorated sufficiently that they're now pointing to negative territory.

    Very briefly, the global situation is set to closely mirror the one at home.  Not only do we think you should expect to hear a marked change in tone in the business press by mid-fall, we think you should expect to hear fresh calls for stimulus. 

    This round of softening will be significant because of the ratio of economic effect to tools in use.  In other words, you should expect to see major dilution in the value of the major currencies, and fresh calls for reforms by central bankers.

    Understand: this will be the most significant softening since the Financial Crisis.  We think you should expect to hear much confusion and uncertainty in financial markets.

    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.

     

     
  • SCORECARDS - August 17, 2015

    Current Scorecard - Domestic

    August 2015

    Current Scorecard:   12                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL               5
                 7 
                20
     LEADING & CONFIRMING SCORE              12             16
                32
     Leading Indicators             -10              -5
                 9
    Confirming Indicators              34             37
                55
     Foundation             -25             -27
               -28



    If you've been reading and following along you know that our forecast calls for the economy to continue to soften...that, in our view, the forecast calls for what can be politely termed a significant weakening in the months to come.  The most significant point to be made here is that our Model, at this point, does not yet show a point at which the economy turns back up. 

    There's some life in the economy, though.  The most surprising point, so far, is that Employment has held up quite well.  The numbers have been mildly strong, but, as we've pointed out in the weekly updates, there have been signs of weakness in the numbers.  We think that that weakness is certain to grow in the next month or two. Even if you're among those who are discounting (at great peril) trends like declining orders for durable goods, the signal point for you is that, if the labor picture hasn't fallen apart, it isn't growing at an increasing rate, either.

    Another boon to consumers has been ultra-low inflation. 

    And Income, though not very strong, has been modestly good. 

    Perhaps the best indicator that connects the present to the future is Industrial Production.  It's holding mildly well, but the unfortunate news is that rates of production are down significantly and that's how they continue to trend.

    Looking forward further from the directionality in Industrial Output, we look to credit markets, which are telling us to expect continued weakness in demand.  And dovetailing extremely strongly into that view is that Capital Spending has essentially fallen off a proverbial cliff.

    We're not kidding about that last point.  When you think about the future, if you had but one economic indicator to rely on, you couldn't do much better than Capital Investment, and two things are true:  not only has investment been declining (not just rising at a diminishing rate, but actually declining), but the rates of decline have been significant.

    The bad news is that most consumers don't mentally adjust to hard times 'til those hard times are upon them.  You've been warned, however.  If you're skeptical, consider this:  our Confirming Indicators score has fallen 19 points in four months.  If you look at our Leading Indicators score four months ago it was just 9.  So, think about that for a while.  Four months ago, our Leading Indicators score was telling you to expect only the most moderate of improvement in the near future...that improvement would come at a diminishing pace.  And, in fact, our Confirming Indicators score fell 19 points.  Oh, and by the way, if you go back eight months (four months before our Leading Indicators score fell to 9, it was 40, an indication that that period of roughly six months back to four months back would be relatively good....and it was.

    Stick with The Practical Economist.

    Current Scorecard - Global

    August 2015

    Current Scorecard:  -8

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -11
                 -9 
                 -6
     LEADING & CONFIRMING SCORE                -8              -5
                 -2
     Leading Indicators              -16             -12
                -6
    Confirming Indicators                0               2
                 3
     Foundation             -13             -12
               -11

                                
    Part of being The Practical Economist, to our mind, means being less phlegmatic in communicating what you need to know.  So, let's see if we can communicate the picture this month quickly.

    First of all, what the current Confirming Indicator figure is telling you is that things have continued to deteriorate.  They're deteriorating fairly steadily, but slowly, and that's likely confusing a lot of people.  The other thing to say about it is that the condition of global activity is essentially neutral at this point.  In other words, growth, at this point is essentially stagnant, and we think that's going to be reflected, on a net global basis, when the third quarter GDP results come out.  To be a little more specific, we continue to see slight erosion in the global labor picture, and Industrial Output?  It's screeching to a halt.

    Now, what is the Leading Indicator telling you about where we're going?  Well, we're actually more generous than some think us.  A negative indicator down to a -10, absent a declining trend line is not indicative of any kind of growth, but between the range of -10 and +10, we're very reluctant to make dramatic and strong declarations of direction, other than to say you shouldn't expect much.  But when you have a figure of -16 and it has demonstrated a strong decline over six months?  It's telling you to expect exactly what we've been telling you to expect, and maybe worse.  

    The point is that the economic global outlook is not indicative of any growth and may be poised to result in a noticeable contraction.  We hope you understand that economic forecasting is as much an art as a science.  If and when you see that Leading Indicator fall to and stay at -25 for at least two consecutive months, you can pretty much bet the house on a very noticeable contraction.

    Looking forward, the chief problem is what the Credit Markets are telling us, combined with the net effect of monetary stimulus.

    Bond traders continue to trade the 10-year U.S. Government close to a level of 2.0%.  Not only is that a very low level of confidence in growth, but the yield that investors are requiring isn't moving.  That's not a good sign.  It's not so unnatural for traders to trade the yield down on bonds when inflationary pressures are mild as they are.  However, the problem is a big one: it's very difficult to make the case that we are not extremely close to the bottom in terms of disinflationary trends. 

    Everyone likes economic growth coupled with disinflation, but...do you know how often that happens?  This is where it's useful to be practical.  It basically does not happen.

    To put it all another way, to make a case that the economy is going to either stay stable or improve, you're going to want to a case that inflationary pressures are going to decline or that bond traders suddenly become so sanguine about economic activity that they trade the yield on that 10-year government bond up by, say 0.50% over the next four months. 

    In the case of the former, you have to either make the case that commodities prices continue to decline and/or that the Dollar makes substantial gains.  Given some recent healing in the Euro Zone and how far down the Yen has fallen this year, the latter is not a bet we're prepared to make.  And commodities, specifically oil?  Oil has fallen roughly 60% off its last most recent highs.  How much lower do you reasonably expect Oil to fall? 

    Understand: we are not saying that it's not impossible for the Dollar to demonstrate some strength and we're not saying it's impossible for Oil to fall more.  It's a question of degree.  Speaking of oil, here's one way to understand it: if you're reluctant to buy Oil as an investment, how much more should you be reluctant to sell Oil, when it has fallen 60%?  If you're smart, you're betting that Oil recovers some of that 60% rather than buying into the idea that Inflation continues to trend down on further and lasting drops in Oil.

    And bond yields?  Here's the critical point: the disconnect between short-term rates and industrial output, which has widened in the last couple of months, is the tangible demonstration of insufficient monetary stimulus.  And, as long as (1) monetary stimulus is insufficient and (2) that trend in disconnect declines, you'd be foolish to bet on any tangible improvement in net economic activity.

    Yes, we're practical, but, unfortunately some things do require explanation.

     

    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.

     

     
  • SCORECARDS - September 14, 2015

    Current Scorecard - Domestic

    September 2015

    Current Scorecard:   7                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL               0
                 4 
                11
     LEADING & CONFIRMING SCORE              7             12
                21
     Leading Indicators           -17            -10
                 2
    Confirming Indicators             31             34
                41
     Foundation            -27             -28
               -27


    If you're pressed for time, there are two points that need to be made.

    1.  Both the leading indicators and the confirming indicators continue to decline. This is the ninth consecutive month in which the Leading Indicator figure has fallen.  And it is the sixth consecutive month in which the Confirming Indicator figure has fallen. 

    2.  You will notice that Confirming Indicators are hovering in a range of up to 40 points above the Leading Indicators.  You will also remember that Confirming Indicators tell us where we are but that Leading Indicators tell us where we're going.  Thus, our Leading Indicators have been dropping at a steady pace.  And while Confirming Indicators are still modestly good, as predicted by the Leading Indicators they have been dropping at a steady rate, quite naturally lagging Leading Indicators.

    With regard to the latter point, you will note that this month's Confirming Indicator figure, though modestly good, represents a downward swing of nearly 30 points from six months ago.

    We hope that this settles, once and for all, doubts any readers might have had with regard to the accuracy of our Model.

    But further to understanding what the Model is saying, even though our Leading Indicators have been falling for months, that figure is now--finally?--in territory that should give cause for grave concern. 

    With our Leading Indicator figure at -17, the outlook for the near- to medium-term is not just not rosy, but is the opposite of what a modestly positive economy would be, that is, the outlook is now modestly negative, not simply a reflection of diminishing growth, but contraction. 

    The key points as to where the future lies is told in just a few lines.  First, the state of the credit market, which tells us a ton about the landscape, is modestly negative with no indication that it will perk up any time soon.  Our key metric for that indicator has demonstrated a negative swing of 38 points in just four months.  Please think about that for a moment.  So, even as many pundits have been trumpeting the continuing growth in the economy, this very important metric has been plummeting.

    Second, given the diminishing growth in industrial output with no corresponding pick-up in monetary stimulus, we have an increasingly diminishing amount of net stimulus to the economy.

    Third, and perhaps most immediately understandable and accessible to the lay person is the measure of capital spending on non-defense goods.  The most recent figure there shows an annualized drop of over 20%.  That is nothing short of being precipitous, and we think the medium-term effect will be sharp and painful...and no one but us is talking about it.

    Some high points?  There really aren't any, but there are some points to mitigate the bad news.  First, labor gains continue to come.  Though they're coming at a diminishing rate, they do continue to come, a bit more surprisingly good at this point than we expected, but don't get too excited: though the gains are good, as we said, they're coming at a diminishing pace.

    Second, probably a reflection of employment gains, growth in Income has held up, if not strongly, then respectably. Telling, though, is that Consumer Spending, like Employment, continues to grow, but at a much lower pace.

    Lastly, the decline in the growth of Industrial Output over the last six months is nothing short of stunning.  Yes, Output is still positive, but output levels are now roughly a third of what they were six months ago.  If the average consumer is not feeling the effect of that pull-back now, the consumer will feel it very shortly.

    Not a very bright picture.  As we hinted earlier, the real phlegmatic point is not that things have softened and are now creeping into negative territory, but that our Model is not showing any light at the end of the tunnel.  We are not (yet) seeing anything that points upward in the future.

    And this speaks to the larger problem.  We are likely to be shortly facing a slowdown the likes of which we have not seen since the onset of the Financial Crisis.  But short-term interest rates are essentially at 0%, so how will the Federal Reserve and other Treasury functions respond, if at all?  And how will the Market respond?

    It's going to be a very interesting fall and winter.

    Current Scorecard - Global

    September 2015

    Current Scorecard:  -8

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -11
                 -10 
                 -8
     LEADING & CONFIRMING SCORE               -13              -11
                 -8
     Leading Indicators              -21             -19
                -16
    Confirming Indicators               -4              -2
                  0
     Foundation               -7               -7
                 -6

                                
    The first thing to note and say about what the Scorecard is telling you is that the numbers just keep declining.  The second thing to say is that figures are now in negative enough territory that there's no longer any excuse to try to be sanguine about the medium-term.  We're not quibblers.  A difference of 10 points into either positive or negative territory is not something you can realistically make a big deal of.  But we're now past that, facing a Leading Indicator of -21.  How to translate that number into plain talk?  "The economy will slide at a rate and to a level that will demonstrate noticeable weakening in the coming months."

    The third thing to say, only partly reflected here, is that not only is the global economy poised to contract, we do not see any "daylight" in our Model yet.  We're confident about our Model, but its forward-looking predictive ability has validity only so far into the future, usually somewhere between six and nine months.  On the one hand this does not mean that a turnaround won't come toward the end of that time frame, but on the other hand, as of now, we see no turnaround prior to that.

    How about some specifics?

    The good news is that labor gains continue to come, but...they are now coming at a slower pace.  The good news for consumers, globally, is that Inflation continues to be very subdued, but too subdued.  Part of the difficulty is that ultra-low inflation is having the effect of curbing capital formation and business investment. 

    On a very simple level, one way to understand the global picture is that the gap between industrial activity and monetary policy is growing again.  On an even simpler level, one way to understand that is that monetary policy is not having the desired effect.  Another way to understand it is that monetary stimulus is insufficient to keep the economy growing at the same rate.

    What this means on another level is that the money supply is being diluted, as the rate of monetary growth hasn't declined, but industrial output has.

    Does that portend good things for Gold?  Probably, but we need to see that gap--that disconnect--between Industrial Production and Monetary Policy worsen a little more before we think Gold will benefit.

    The bottom line for us--where the rubber meets the road--as regular readers know is how the credit markets perform...what they tell us.  Remember: the credit markets are almost never wrong.  And when they are wrong, it's not for long.

    And that's where the biggest problem lies.  Globally, Bond Traders are continuing to send bond yields below levels they should be, after adjusting for probably inflation outlooks.  And that speaks volumes--or at least one pithy sentence--about the likely economic outlook in the near- to medium-term.  Bond Traders don't lock up money at rates that, adjusted for inflation, don't show upward movement unless...they have no reason to expect any growth.  

    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.

     

     
  • SCORECARDS - October 12, 2015

    Current Scorecard - Domestic

    October 2015

    Current Scorecard:   -2                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -3
                 3 
                13
     LEADING & CONFIRMING SCORE              -2             7
                19
     Leading Indicators           -15            -5
                 5
    Confirming Indicators             12             19
                33
     Foundation            -10             -11
               -10


    The good news?  Our Model certainly appears to have called the change in the economy.

    The bad news?  That change is upon us, and it's starting to bear out our forecast that it's not going to be good.

    We have been steadfast that the economy is on a steady downward trajectory.  If you're one of those people who think they can measure the future from indicators that largely measure the present, you've been in for a surprise...a nasty surprise that is still unfolding.

    We have been pretty up front about saying that the economy is headed for a significant softening.  Of late we've been modifying our language to characterize that softening as very likely to result in a contraction.  To put it very casually, we think that, from the economic standpoint, the winter is going to be "ugly."

    On a very simple level, the change in the Confirming Indicators tells you a lot.  See that current figure of 12?  Not only is that figure modest, what you need to know is that it has come down from 52 half a year ago.  That's pretty significant.

    The other thing you need to know is that our Leading Indicators are no longer flirting with contraction but are now pretty solidly in negative territory with that figure of -15.  As we've said before, as important as that is, it may be that the more significant thing to know is that our Model does not yet show a climb up out of this contraction that is upon us.

    In terms of nuts and bolts, what's going on?

    Well, for one thing, one of the things that benefited the economy the past year was an effective tax rate that had fallen.  That tax rate is now stable thus demonstrating that the economy is no longer receiving any boost from that.

    Next, we want you to know that Capital Spending, a key factor in business growth, has figuratively fallen off the cliff.  We are not exaggerating.  Capital Spending has plummeted.  Capital Spending is, in our view, the most significant input to economic growth.  And employment...job growth continues to be the theme, but equally, the theme has been of jog growth coming at a slower pace.  September's job report showed that, unaveraged, net jobs added were negative for the first time in many months.  And, of course, as we've said before, Industrial Output continues to grow at a rate that is roughly 1/3 that of February.

    Were you one of those people who discounted or dismissed our warnings six months back?  Does the economic landscape today seem identical or better, to you, to the landscape six months ago?

    Of course it doesn't.

    Current Scorecard - Global

    October 2015

    Current Scorecard:  -13

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -12
                 -11 
                 -10
     LEADING & CONFIRMING SCORE               -13              -12
                 -11
     Leading Indicators              -23             -21
                -19
    Confirming Indicators               -4              -3
                  -2
     Foundation               -6               -7
                 -7

                                
    The first thing to note and say about what the Scorecard is telling you this month is that, while yes, the numbers aren't declining fast, they haven't risen either, and yes, they have declined a smidgen.

    With our Leading Indicator score at -23, there's not a lot to say about the global picture that's inspiring.  We have said that, domestically, it's going to be an ugly winter.  It appears that that will be the situation globally, as well.  The key point is that we see no upward tick in the numbers at this point.

    Good news?  Well, the labor picture continues to improve world-wide, though, yes, at a diminishing rate.  Still, the labor picture, though not good, does continue to show improvement. 

    In terms of the current situation, as well, however, Industrial Output is not telling us anything positive.  For all intents and purposes, Industrial Production is essentially neutral, i.e. it is not growing.  That's bad.   As a result, the disconnect between economic activity and short-term interest rates is beginning to grow again, and it is starting to get close to a level that we consider the danger zone.  The danger zone?  What is that?  It's the point at which the economy shows moderate contraction but, barring the printing of money (as Europe is now doing), there is no room in monetary policy to spur growth.

    And truly the decline is broad.  The United Kingdom, Canada, Europe, Japan...it's all over.  Japan and Europe are already engaged in printing money.  Consider what the fallout might be, if in the midst of printing money, economies contract. 

    You have sound reason to raise serious questions about the soundness of the global financial system.

    Looking more forward, we have no reason to be sanguine that things will pick up.  Key leading indicators of stimulus of business investment aren't pointing in the right direction.  And the credit markets are in agreement.

    When things are cloudy, it takes a lot longer to explain a picture.  When things are pretty clear, it's faster and easier to explain.  The forecast for at least six months out, is, simply, poor, and is pointing to global contraction.

    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.

     

     
  • SCORECARDS - November 23, 2015

    Current Scorecard - Domestic

    November 2015

    Current Scorecard:   -7                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -9            -4 
                  4
     LEADING & CONFIRMING SCORE              -7              0
                10
     Leading Indicators           -30           -23
                  -7
    Confirming Indicators             17             23
                27
     Foundation            -17             -20
               -21


    Are you one of the few that are still skeptical about the direction the economy's taking?

    Our Leading Indicators are now in solid negative territory.  While it's true that they have been trending downward for some time, they have only been in strong negative territory for a couple of month.  Add in the fact that our Model is predictive out only as much as three to six months, and it's not hard to predict with security that tangible evidence of the contraction will be felt and acknowledged in the January - March time frame.  Previously, we said that the winter would be "ugly."  We're modifying that statement, pushing it out to later winter/early spring.  The key point here is that the Model continues to point downward; it is not yet showing us when the economy will even begin to turn around.

    If there a good side to the way things are trending?  Only that when things are this clear, it's easy to be brief but still accurate about describing them.  If you want to know why the economy is contracting, it's easily articulated.  For one, while Tax Policy is not having a serious negative effect, the effect at this point is neutral.  This is in contrast to roughly 18 months ago when, for a period of at least a year, effective personal tax rates were a couple of percentage points lower than they are today.  Do not underestimate that point when you talk about our consider the relative economic strength we had earlier this year.

    Second, we cannot escape one of the most compelling of our leading indicators:  capital spending.  Non-Defense Capital Spending is, arguably, the single most important indicator you want to know.  And, Spending has fallen off a figurative cliff.  On an annualized basis, in October, Non-Defense Capital Spending declined more than 40%.  Forty percent.  

    Third, as regular readers know, we look closely at what credit markets tell us.  And at the moment, they're telling us that bond traders are wild for tying up money in fixed-income instruments.  That's not an expansionary sign.

    Last, and this will take us into some current conditions, but...the ratio of short-term interest rates to industrial output has dipped to a point that current monetary policy is not sufficient to stoke industrial production at near-normal levels.  What that means is that, in normal times, if interest rates were a bit higher, rather than talking about raising rates, we'd be talking about slicing them.

    So...and Industrial Production.  What's going on there?  Well, for one, in October, the annualized rate of Industrial Production fell to the lowest rate of output since February 2010. 

    And the Labor picture?  It's true that the economy has added a good number of jobs this year, but the key point is that the monthly rise in new jobs has continued to come at a diminishing rate, even as more workers are leaving the Labor Force.  In other words, it's a very mixed picture. 

    Want some more to worry about?  It took a long while but at long last, nationally, home prices are now beginning to flirt with entering a bubble, i.e. being too high relative to income.  That's a situation we haven't had in over five years.

    If there's any modicum of good news, it's that Inflation continues to be tame.  But that's for the wrong reasons.  To some great extent it's because of low energy prices, and to some extent it's because the Dollar is exhibiting some strength relative to emerging market economies, but here's the problem:  in this case, that low level of inflation is coupled with a declining rate of capacity utilization, i.e. it appears to be demonstrating declining demand.  In addition, Core Inflation is actually not that low, flirting with 2%.  With any dip in the value of the Dollar, what will happen to Inflation?  In any event, you can't build an expanding economy on the back of low inflation.

    It's going to be an ugly winter.

    Current Scorecard - Global

    November 2015

    Current Scorecard:  -14

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -13
                 -12 
                 -11
     LEADING & CONFIRMING SCORE               -14              -13
                 -11
     Leading Indicators              -25             -23
                -20
    Confirming Indicators               -4              -3
                  -2
     Foundation               -7               -7
                  -8

                                
    The first thing to note and say about what the Scorecard is telling you this month is that, while yes, the numbers aren't declining fast, they haven't risen either.

    Is the Global picture as bad as the Domestic one?  No, but it's not significantly better, either.  We think of our Leading Indicators as having two significant thresholds...one being around either a positive or negative 12 and one around positive or negative 25.  We are now crossing the second significant threshold of negative 25 and if there's one thing that you should take away from that, it's that the global economy is now poised to not just flirt with contraction, but to actually contract. 

    If the analysis behind it is not very sexy or dynamic, it's also very easy to understand as it's remarkably similar to the domestic picture.  Simply, it's all about an inhospitable environment for Capital, or Business, Formation.  This is reflected in what the Credit Markets are telling us, especially in what credit markets are demanding in bond yields in context of where inflationary concerns are (which are low). 

    If there is any good news it's that, globally, labor markets have continued to improve.  But, it's not enough.  On an aggregate basis, Industrial Output is now basically flat and while low inflation is helping consumers make ends meet, it's also suppressing economic activity.

    The key point: monetary policy is now insufficient, globally (as well as domestically) to provide a positive net stimulus to the economy.  Our prediction: we think that, in the coming months (particularly by early February or March of 2016) you will increasingly hear spokespeople for major global economies talk about the need for increased economic and monetary stimulus. 

    What does that mean?  It means that, putting the U.S. to one side for the moment, we have no confidence that bond-buying in Japan and the Euro Zone will come to an end in the first half of 2016.  The important point there is not to prognosticate on what will happen in investment markets but the wake-up call to central bankers and policy makers who have, for too long, neglected the contribution of Fiscal Policy to their economies. 

    Chair Bernanke and Chair Yellen in the United States have both gone on the record as decrying the direction in which Fiscal Policy has taken.  We do not believe that Chair Yellen, given the direction in which the U.S. economy is turning, will choose to rebuke the Executive and Legislative Branches in this regard by moving to raise interest rates.  But we do believe that global policy makers will, for the first time, start to pay attention to the role Fiscal Policy makes.  We think that what they say in the first half of 2016 will provide strong clues as to the future viability of major currencies as well as political affiliations and blocs in the long-term.

    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.

     

     
  • SCORECARDS - December 14, 2015

    Current Scorecard - Domestic

    December 2015

    Current Scorecard:   -7                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -9            -6 
                  2
     LEADING & CONFIRMING SCORE             -7            -2
                  7
     Leading Indicators           -30           -23
               -16
    Confirming Indicators             15             19
                22
     Foundation            -17             -20
               -21


    It doe seem that there are some people who are clueless that the economy is sliding...slowly, but steadily.  So, we're going to kick off this month's Scorecard by looking at some very basic data points that should drive the point home.

    Let's look at the labor market. In November, the Number of Net Newly Employed individuals was 32,000.  (For those who are unfamiliar, Net Newly Employed is our metric of those who are freshly employed adjusted for those who have left the labor market).  That's a respectable figure, but it's not strongly expansionary.  To put it in perspective, that figure is one third of the result two months earlier and nearly a quarter of what it was a quarter earlier from that, in April.  In other words, the labor market continues to strengthen, yes...but at a diminishing rate.

    How about Industrial Production?  The most recent data (in November) showed growth of 1.5%.  That contrasts with growth of 2.6% six months ago and 4.3% ago.  That's not an encouraging trend.

    Lastly, Inflation is very low, and when Inflation is low that has the effect of making Industrial Output results more powerful.  But here's the point: Inflation is essentially unchanged since March. 

    Is it a picture of disaster?  No, but it's not a picture of a hale and hearty economy.

    Our analysis for the medium-term time frame is brief, but we think powerful.  To start with, the economy is getting no help from Tax Policy; effective tax rates, which, a year ago had declined from  the year before (largely a function of effective tax strategies employed by individuals) have been stable all year.  Second, with no change in short-term interest rates, diminishing levels of industrial output are making it abundantly clear that all things taken together are not providing sufficient stimulus to the economy.  Lastly, spending on non-defense capital goods--perhaps our most potent leading indicator, is in woeful condition.  In November, Capital Spending declined for the tenth consecutive month.  In case that alone doesn't seem alarming to you, keep in mind that while the decline six months ago, was 6.0%, in November it plummeted to 30.6%.

    It would be difficult to have much respect for our Model and our analytical efforts if we waited for the concrete results of economic change to proclaim where things are.

    There are some corollary indicators--ones that are derived from others--that can confirm or contradict, and in this vein, we cannot urge too much for you to read the current Editor's Letter at least twice. 

    Not only are bond prices extremely high, commodity prices are "too" low, that is, they are too low relative to bond prices.  This is, to our mind, a very significant warning indication.  Bond prices tell you a lot about what bond traders think about the economy and inflation.  Yes, it's true that higher bond prices should correlate with lower commodity prices, but...in the present state, they are simply far too high for that ratio to be considered in equilibrium.  When the data is not in equilibrium, that is very troubling.

    We cannot say it too often: we have some troubling months ahead.

    Stick with The Practical Economist.

    Current Scorecard - Global

    December 2015

    Current Scorecard:  -16

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -14
                 -14 
                 -13
     LEADING & CONFIRMING SCORE               -16              -16
                 -14
     Leading Indicators              -24             -22
                -19
    Confirming Indicators               -9              -10
                  -9
     Foundation               -8               -5
                  -6

                                
    The first thing to note and say about what the Scorecard is showing you is that time delay in the impact of the Leading Indicators.  If you want you can cant about how relatively un-negative the Confirming Indicators are, especially compared to the Leading Indicators.  The first point there is, of course, that that is the whole point of Leading Indicators.  They tell you where you're going--or where you'll likely be--in a timeframe of six to nine months.

    The second point is, of course, that while the figures for the Confirming Indicators aren't strongly negative, they are, in fact, negative.  In other words, regardless of what you think you're reading in the Press, globally, growth is essentially at a standstill.

    Is the Global picture as bad as the Domestic one?  No, but it's not significantly better, either.  We think of our Leading Indicators as having two significant thresholds...one being around either a positive or negative 12 and one around positive or negative 25.  We are now crossing the second significant threshold of negative 25 and if there's one thing that you should take away from that, it's that the global economy is now poised to not just flirt with contraction, but to actually contract. 

    If the analysis behind it is not very sexy or dynamic, it's also very easy to understand as it's remarkably similar to the domestic picture.  Simply, it's all about an inhospitable environment for Capital, or Business, Formation.  This is reflected in what the Credit Markets are telling us, especially in what credit markets are demanding in bond yields in context of where inflationary concerns are (which are low). 

    If there is any good news it's that, globally, labor markets have continued to improve.  But, it's not enough.  On an aggregate basis, Industrial Output is now basically flat and while low inflation is helping consumers make ends meet, it's also suppressing economic activity.

    The key point: monetary policy is now insufficient, globally (as well as domestically) to provide a positive net stimulus to the economy.  Our prediction: we think that, in the coming months (particularly by early February or March of 2016) you will increasingly hear spokespeople for major global economies talk about the need for increased economic and monetary stimulus. 

    What does that mean?  It means that, putting the U.S. to one side for the moment, we have no confidence that bond-buying in Japan and the Euro Zone will come to an end in the first half of 2016.  The important point there is not to prognosticate on what will happen in investment markets but the wake-up call to central bankers and policy makers who have, for too long, neglected the contribution of Fiscal Policy to their economies. 

    Chair Bernanke and Chair Yellen in the United States have both gone on the record as decrying the direction in which Fiscal Policy has taken.  We do not believe that Chair Yellen, given the direction in which the U.S. economy is turning, will choose to rebuke the Executive and Legislative Branches in this regard by moving to raise interest rates.  But we do believe that global policy makers will, for the first time, start to pay attention to the role Fiscal Policy makes.  We think that what they say in the first half of 2016 will provide strong clues as to the future viability of major currencies as well as political affiliations and blocs in the long-term.

    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.

     

     
  • SCORECARDS - January 18, 2016

    Current Scorecard - Domestic

    January 2016

    Current Scorecard:   -7                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -9            -8 
                  -2
     LEADING & CONFIRMING SCORE             -7            -6
                   2
     Leading Indicators           -25           -27
               -16
    Confirming Indicators             10             15
                22
     Foundation            -15             -17
               -21


    Good news?  The rate of decline appears to be diminishing, according to the Scorecard Model.  That isn't exactly good news, of course, but it can appear so given how steadily the figures have been declining for several months.

    Once again, we want to address ourselves to those who think there's a disconnect between what the Scorecard is saying and what reality is. 

    To start, let's remember that the Leading Indicators point to economic conditions that we expect three to six months in the future.  That does mean, that there will be times when the Model is pointing as far as six months in the future.  Thus, if you see a drop into negative territory, for the first time in November, it's quite possible that the tangible fallout from what the Model is predicting might not occur until as late as May, though in most cases it will be tangibly evident by the March time frame at the latest.

    The second point is that, if you think the fallout from softening conditions haven't already begun to be manifest, you are not paying attention, and you are specifically not paying attention to the Confirming Indicators, which though still in positive territory, have declined over six months, by at least 15 points.  The Confirming Indicator score at present is 10.  That's a measure of economic activity at the moment, and it really isn't strong at all.  If you believe that the economy continues to "hum along," we challenge you to challenge us to a piece of data that supports that view.

    So, what's going on?

    When you think about the most key of the key pillars of economic stimuli you should think about Monetary Policy and Fiscal Policy.  With regard to Monetary Policy, there's not much more the Federal Reserve can or should be doing, given how low interest rates are.  As both Chairs Bernanke and Yellen have said, Fiscal Policy is not right, specifically "Fiscal Policy is going in the opposite direction of Monetary Policy."  That is a direct quote.  And when you think about Fiscal Policy, you should think about the federal budget, but you should think primarily about Tax Policy.  Lower taxation = stimulus to business and capital formation and, as a consequence, spending on capital goods and so on.  (You may recall that Capital Spending has declined for something like eight consecutive months.)  At the moment, especially compared to Tax Policy last year and the year before, there is nothing beneficial about Tax Policy in terms of economic stimulus.

    The problem vis-a-vis the combined effect of Monetary and Fiscal Policies is demonstrated by how low Industrial Production is.  Given neutral Fiscal Policy and given where Monetary Policy is, Industrial Production should be soaring.  Instead, at present, it's barely positive at all.

    How about the Labor picture?  It's true that the U.S. economy has had net gains in jobs the past year.  It's also true that those gains have been coming at a diminishing rate, at least since early fall.

    If you're a regular reader, you know that one of our key measures of economic direction is the credit market.  And there the picture continues to flash negative signs.  The yield on the 10-year U.S. bond is our most key metric in this regard, and what the market is telling us is that investors are extremely phlegmatic about prospects for rising interest rates in the medium- to long-term.  Yes, it's true that suppressed yields can indicate prospects for suppressed inflation, but...our view on the math is that inflation and inflationary pressure is not sufficiently low to draw that interpretation.  In our view, we need to see a situation of deflation, not merely disinflation, at this point, with little to no downward change in interest rates, to view the data as saying that credit markets are foreseeing a pick-up in economic growth. 

    To take that point a little further, we do believe that the prospect for Deflation in the medium-term is far greater than the prospect for Inflation.  An optimistic view would hold that 10-year rates are already very low and couldn't possibly go lower and therefore, any further declines in consumer prices will have the effect of creating a positive disequilibrium with rates "too high" relative to consumer prices, thus creating a picture of growing economic growth.

    We believe that those who think bond rates have hit their low will be greatly disappointed.  We hesitate to set in stone a forecast for how low bond rates will fall, but keep in mind that rates have already fallen a good 15 basis points in the past month.  Our guess is that rates will fall at least an addition 45 basis points before a low is really reached and we're guessing that where rates settle at their low will not be high enough to spell a forecast of economic growth.

    Time will tell.  However, there are two points we want to drive home:

    1.  Except in very rare cases, Deflation is associated with contracting economic growth.

    2.  Bond Traders don't always get it right in the very near term (think three to six weeks), but they always get it right in the medium- to long-term.

    Those with long memories will remember that the early years of the 1980's were associated with Deflation for a short period.  A couple of points about that:

    1.  It was for a short period.

    2.  It was intentionally brought about by the Fed to stem raging Inflation.

    Don't count on that combination this time around.

    Current Scorecard - Global

    January 2016

    Current Scorecard:  -18

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -15
                 -14 
                 -13
     LEADING & CONFIRMING SCORE               -18              -17
                 -15
     Leading Indicators              -32             -31
                -27
    Confirming Indicators               -3              -3
                  -2
     Foundation               -5               -5
                  -5

                                
    In a nutshell the current situation is mildly poor, and the outlook is very poor.

    For the first time in years, the U.S., Great Britain, the Euro Zone, Japan, AND China all have budget deficits.  And not only do they have deficits, but they all have deficits that are too high for where we're supposed to be in the business cycle. 

    Absolutely nothing has changed over the past month in terms of the fundamental problem. 

    The short way of explaining it is that, globally, monetary and fiscal policies are not properly aligned to achieve a desirable outcome.  Of course, there isn't much call to criticize monetary policy anywhere, at least not in terms of being sufficiently accommodative.

    It's not a new theme, but nearly every major country is getting Fiscal Policy wrong. 

    Are you still listening to pundits that have been proclaiming that things are humming along, especially in the U.S.?  Are you also picking up data that's telling you that, even as you were being told this, these same pundits are are softening their language?  And that the hard data isn't cooperating?

    There's really nowhere to hide.  Current data, especially with regard to Industrial Output is mediocre and sliding.  And stimuli focused on bringing about Capital Formation simply isn't there, and yes, this is largely the fault of Fiscal Policies.  And when you think about Fiscal Policy you should be thinking about government spending and taxation.

    With our Leading Indicators this deep in negative territory, it's time to become very concerned about the mid- long-term outlook for the globe, economically.

    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.

     

     
  • SCORECARDS - February 15, 2016

    Current Scorecard - Domestic

    February 2016

    Current Scorecard:   -8                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -9            -9 
                  -5
     LEADING & CONFIRMING SCORE             -8            -7
                  -2
     Leading Indicators           -22           -25
               -22
    Confirming Indicators              7             10
                19
     Foundation            -12             -15
               -20


    There are two major points to take away from this month's Scorecard.  The first is that the Leading Indicators continue to point to negative territory. 

    The second is that the Confirming Indicators are, indeed, confirming what our Leading Indicators have been telling us for several months.  Our Confirming Indicators are not in negative territory....yet.  They have been, however, declining steadily with every passing month.  What's keeping the Confirming Indicators from falling off a cliff?  Namely, housing prices have been holding up.  Secondly, while Personal Income and Spending have not been anything near robust, we have not seen significant diminishment, either.

    However, the chief--and most important-- indicator of the present situation, Industrial Production, has fallen right in line with our Model.  If you look at Industrial Production in groups of changes over two to three months, results have been only modestly downward.  However, look at where Output is compared to a year ago.  It has virtually fallen off a cliff with a move of 50 points downward on our Scorecard.  The industrial sector is all but not moving at all at this point.

    That's the big picture, and if you have only 90 seconds, all you really need to know.

    It's worth pointing out something interesting, however.  While one of our chief leading indicators, credit conditions, continues to point negatively, it appears, at this moment, that it is pointing less negatively than it has been.  Do not be misled into reading that as a signal that economic conditions are about to improve.  It is very premature for that, especially given the lay of the land with respect to our other economic indicators, especially one of our other chief indicators:  Capital Spending.  Money put toward Capital Formation continues to decline. 

    And we don't think that's likely to change any time soon.  Why?  It is our strongly-held belief that, wartime spending aside, the chief input to Capital Formation is Tax Policy, and at the moment there is no help from that area, as present tax policy is not creating incentives in that direction.

    And yes, for those who like to traffic in longer-term theorizing, we still hold that (1) Deflation is the greater threat than Inflation and (2) the risk of Deflation is rising fast, a function of greatly diminishing demand.

    Current Scorecard - Global

    February 2016

    Current Scorecard:  0

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -1
                   0 
                   2
     LEADING & CONFIRMING SCORE                 0                2
                   3
     Leading Indicators                 4               7
                   9
    Confirming Indicators               -3              -2
                  -2
     Foundation               -5               -5
                  -5

                                
    In a nutshell the current situation is mildly poor, and the outlook is very poor.

    For the first time in years, the U.S., Great Britain, the Euro Zone, Japan, AND China all have budget deficits.  And not only do they have deficits, but they all have deficits that are too high for where we're supposed to be in the business cycle. 

    Absolutely nothing has changed over the past month in terms of the fundamental problem. 

    The short way of explaining it is that, globally, monetary and fiscal policies are not properly aligned to achieve a desirable outcome.  Of course, there isn't much call to criticize monetary policy anywhere, at least not in terms of being sufficiently accommodative.

    It's not a new theme, but nearly every major country is getting Fiscal Policy wrong. 

    There are two key points, this month, that are particularly worth making.

    The first is that, globally, changes in the labor picture have continued to improve.  The problem is that changes in employment are fooling most observers.  Declining unemployment coupled with growing inflationary pressure, and especially with growing output?  That's a great sign.  It's critical to remember that changes in unemployment are a LAGGING indicator.  You cannot align current conditions in output and inflation with labor.  It does not work because it doesn't accurately describe anything. 

    And that leads us to the second point.  Based on tepid economic activity and slumping demand, not only is the current picture looking worse, but it's hard not to see the employment picture worsen over the course of the next 12 months.

    If there's anything interesting to be gleaned from what the Model is telling us, it's something that's similar to what's happening in the U.S.: while we fully expect economic conditions to continue to deteriorate straight through the middle of the year, at this moment, it appears that conditions are probably going to stabilize a little at that time. 

    We are not, however, convinced that the numbers are telling the whole picture at this time.  Remember: anyone who tells you they have a model that can accurately project out more than six months is lying.  One of two things is true, we think.  Either inflationary pressure will grow without commensurate economic activity and output or major economic powers around the world will take significant steps to providing either more accommodate monetary policy or fiscal policy.  We are almost certain of that last sentence.  Which will it be?  We dare not opine at this moment.

    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.

     

     
  • SCORECARDS - March 14, 2016

    Current Scorecard - Domestic

    March 2016

    Current Scorecard:   -7                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -10            -11 
                  -9
     LEADING & CONFIRMING SCORE              -7             -8
                  -7
     Leading Indicators            -21            -22
                -27
    Confirming Indicators               6               7
                  14
     Foundation            -20             -23
                 -20


    It's becoming increasingly clear to us that many people have a near-total lack of understanding with regard to how steadily the economy has been deteriorating.  It's not hard to understand if a person's income has not been affected and the value of their investment portfolio hasn't been severely affected.

    It may be easy to understand why their understanding is as it is, but that does not make it less annoying.  These are the people who will conclude, after a stock market collapse, or after their income is cut, that the economy is in trouble.  Brilliant!

    There is a bit of good news, in a negative sense.  With this month's scorecard, we are reporting that the pace of decline appears to have stabilized.  That is for NOW. 

    However, if you are even mildly confused about the trajectory of the economy, we can reinforce a better understanding in a simple way:  after that Fed rate rise in December, not only has the Fed made "noises" in recent weeks that the next rate rise may be put off for a month or two into the future at the least, but the Fed's Chair mused that, if necessary, the Federal Reserve would venture into negative interest rate territory, like the Euro Zone and Japan, if necessary.

    Does that sound like rhetoric oriented around a rosy economy?

    In terms of something more concrete, the good news is that Income is continuing to hold up pretty well, in fact.  And that ties in to the labor picture.  Hiring continues to grow, slowly, but it's growing. 

    But the rest of the picture isn't so good.

    Industrial Output continues to drop, as does Capital Spending.  And there's no help coming from Tax Policy/Fiscal Policy.  Demand is clearly weakening, as denoted by Factory Utilization.  Of course, the credit picture isn't showing us any positive signals, either.

    As we said, the good news is that, on balance, the picture did not significantly worsen this month.  But it did not improve, either.

    What does this mean for you? 

    First, if we're right and that disinflationary pressure is going to be the theme for the medium-term, it's not a good time to take on additional debt that doesn't generate immediate profits.

    Second, if your investment portfolio doesn't have an asset allocation orientation for the long term, you need to take a close look at your portfolio.

    Third, it is probably not the time to take major risks on the job.

    It really is going to be an interesting year.

    Current Scorecard - Global

    March 2016

    Current Scorecard:  -10

    Full Scorecard:

     

                                                                                                                   Current                    Last                       Two
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -9
                  -8 
                   -6
     LEADING & CONFIRMING SCORE              -10               -9
                   -6
     Leading Indicators              -14              -13
                   -9
    Confirming Indicators               -5               -4
                  -3
     Foundation               -6                -6
                  -5

                                
    Despite what you may be hearing, the difference between the economic situation in the U.S. and the globe, as a whole, isn't very different.  It's a difference of degree rather than anything else. 

    It took the major players in the U.S. a while to catch on, but the fact that the Fed even mentioned, two months ago, that it would consider moving toward negative interest rates if necessary, should tell you much about how falsely the U.S.'s economic state has been portrayed.

    So, if Europe, Japan, and the rest are having difficulty muddling through, it would be very fine of us to think us their better.

    You want to understand the global collapse in demand that began roughly nine months ago?  We're going to tell you, in a nutshell.  It was all about the collapse in Crude Oil.  Okay, not all of it was about Crude Oil.  But that was the bulk of it.  Plummeting commodity prices (largely Crude Oil) brought about significantly lower inflation, and that, in turn, brought about significantly higher real interest rates. 

    And we hope we don't have to tell you, Gentle Reader, what higher real interest rates mean.  Yes, they mean curtailed capital investment, as higher real interest rates provide those with capital less of an incentive to engage in capital spending (vs. saving). 

    Of course, the big story embedded in all of this is just how fragile the economy really is.  If significantly lower inflation, which has the effect of boosting the power of existing income, results in real interest rates that are higher than they were a year earlier, yet still far below "normal" levels, there's a strong signal that you should be very wary.

    Remember that point.  We're going to come back to it in two paragraphs.

    The reason you want to keep that point in mind is that we are very close to updating our forecast to one of growth.  We want to see three more weeks of data, but...for all intents and purposes, we believe that the economic softening is stabilizing and that there is likely to be a moderate global upturn in the months ahead.  It's important to note that this upturn is likely to be moderate, at best, and the turnaround will be all around credit conditions and lessening over-leverage based on good earnings that are related to a cease in the decline of prices.

    Now, back to that point.  The first half of that point is that we've got a very long way to go until, no matter how much it might feel that things are improving, that things are truly stable as reflected in economic ratios.

    The second half of that point is one that we've mentioned plenty of times before...and it's the over-leverage in the sovereign debt area. 

    The plain fact of the matter is that budget deficits--across the board--are just too high.  They are not too high for standing at the height of a recession, but they are far too high for standing seven years after a financial crisis and after ultra-aggressive monetary easing.

    We are holding to this line that we've state before: we believe the next black swan is going to come from a crisis in international currency and sovereign debt markets.

    To argue otherwise, you're going to have to explain to us how the budget balance situations get resolved.

    We'll wait.

    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.

     

     
  • SCORECARDS - April 11, 2016

    Current Scorecard - Domestic

    April 2016

    Current Scorecard:   -3                                                            

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -1             -3 
                  0
     LEADING & CONFIRMING SCORE              -3             -4
               -11
     Leading Indicators            -11            -11
                -2
    Confirming Indicators               6               3
                  8
     Foundation               3                3
                  6


    Well, at last we can say that it's becoming part of general knowledge that the U.S. economy has been softening.  If you're a regular reader, you were ahead of the general public on this.

    In fact, you could say that the change in the rhetoric out of the Fed Chair, from December to March, is nothing short of startling.  And, in our opinion, only a fool would believe that the seeds that have resulted in this softening weren't evident during November and December.

    There are really two big points to take away from this month's scorecard:  (1) increased softening appears to be ready to take a breather (2) the fact that the economy does not show signs of increased weakening in the near term does not mean that the economy is set to begin growing or expanding.   Drill those points into your brain.

    We have hinted that there's a possibility that modest growth could be on the horizon.  However, it's appearing increasingly likely that those visions of greener shoots may be a mirage.

    To recap much of what we've said recently, why is the economy in the state that it is?

    For one, we're getting no help at all from Tax Policy.  Second, partly as a result of Tax Policy, Capital Spending continues to decline.  And, Corporate Earnings have recently begun to come under pressure.  That's not a good picture for the near future.

    In terms of describing the present, it's not as bad, though it's certainly worse than it was six months ago.  First off, Industrial Production has been declining--at a diminishing rate--but it's still declining.  But this indicator, though very meaningful, is often somewhat remote to the Consumer's understanding of the economy.

    So we look to Income and Spending.  And it's a simple picture to describe.  Both Income and Spending have been growing...at very modest levels, levels that are too low to be considered expansionary.  Yes, Inflation has been low and been trending lower, but even so, while Income and Spending are not negative and not poor, growth has been very modest.

    It's fun to issue dramatic forecasts.  But we're certainly not going to do that if the data doesn't support it.  We will tell you immediately if the Model suggests an important move upward or down.  For now, for the next few months, it appears that the trend will be one of stagnation.

    Current Scorecard - Global

    March 2016

    Current Scorecard:  -9

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -9
                  -8 
                   -6
     LEADING & CONFIRMING SCORE                -9               -9
                   -6
     Leading Indicators              -14              -13
                   -9
    Confirming Indicators               -5               -4
                  -3
     Foundation               -6                -6
                  -5

                                
    Despite what you may be hearing, the difference between the economic situation in the U.S. and the globe, as a whole, isn't very different.  It's a difference of degree rather than anything else. If there is anything that is different that's worth being aware of it's that because of higher inflation in some key emerging-type markets, short-term interest rates are significantly higher in some markets.  Why is this significant?  In terms of measuring the general health of the global economy, that skews things a little, because the ratio of Output to Monetary Policy is not as bad as it is, say, in most of the developed countries.

    We are, of course, deep into that economic softening that we said would happen.  If the softening isn't a collapse, please understand that expansion isn't remotely in the picture.  Put a picture of complete stagnation next to modest expansion, and how does the current picture (stagnation) now look?

    The big question before us, is the direction in which Inflation is going to head.  Yes, rising consumer prices are strongly associated with increased economic activity and capital spending as, other things being equal, rising inflation has the effect of driving real interest rates down. 

    So, where is Inflation headed?  That's a question we're leery to weigh in on strongly...at least at this moment.  There's no question that there's going to be a slight uptick in inflation in the next few months, but whether it's enough to drive growth is something else.  At the moment, we don't see it.

    power of existing income, results in real interest rates that are higher than they were a year earlier, yet still far below "normal" levels, there's a strong signal that you should be very wary.

    To quickly review the current situation, it's one of near stagnation.  Globally, Inflation exists, but it's very modest.  But couple that with Output that's essentially flat, and you have an uninspiring picture.

    Looking forward?  There's good news, of a sort.  We think, as we said last month, that the softening is stabilizing.  Stabilizing is not the same thing as growing.  Remember that.

    And our chief concern?  What keeps us up at night?  It continues to be sovereign budget deficits. 

    See you next month.

    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.

     

     
  • SCORECARDS - May 23, 2016

    Current Scorecard - Domestic

    May 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -2             -6 
               -10
     LEADING & CONFIRMING SCORE               1              -4
                -9
     Leading Indicators            -13            -16
               -19
    Confirming Indicators             15               9
                  1
     Foundation            -11             -16
               -16


    The first thing we want you to notice is the direction in which the figures on the Scorecard have been moving.  Can you see that, as we said would happen, things have been stabilizing a little?  The Leading Indicators aren't quite as bad as they were, and the Confirming Indicators firmed up a smidgen.  But how much should we read into that?

    Let's talk about current conditions for a moment, first.  The good news is that consumer income and spending have both held up decently.  In fact, the numbers are pretty good considering that Inflation has been very low.  Even adjusted for inflation, are the figures very good?  No, but they're respectable.  So, essentially, income has more or less kept up, and that has given the consumer room to continue spending. 

    However, you simply cannot run away from the fact (and it is a fact) that Industrial Production has declined for seven consecutive months.  You can cite misleading Fed reports about raising interest rates all you like but, seven months of declining industrial output is not a landscape of anything even remotely coming close to strength.

    That's a summary of the current picture.

    What about the prospective picture?

    It's mixed.  First, you need to accept that there is no help forthcoming from fiscal or monetary policy.  Next you need to understand that energy demand/usage has declined the last few months.  That's not something you want to see if you expect to see an expanding economy.

    Then you need to acknowledge that corporate earnings have been coming in very mixed the last few months (versus strongly, as they did a year ago).

    And now we come to an interesting dichotomy in the picture.  On the one hand, the landscape of price movements versus demand and inflation is suggesting not just a stabilization, but a gradual, though extremely modest, improvement. 

    On the other hand, capital spending--a tremendous forerunner of expansion--has been declining for 11 months.  Think about that for a moment.

    It's not often the Model presents us with contradictory conditions such as this.  Of course we're going to postpone any dramatic declaration until the figurative clouds clear, but...there's an important point we need to make, not just to you, but to ourselves.

    The last few months have seen terrific unpredictability and instability in commodity price movements, not to mention currency movement.  Our belief is that the Market is seeking stable and firm ground and, for the last eight weeks, has been responding in a hair-trigger way to market stimuli, so that we are not looking at a market picture that is based on stable and clear understanding. 

    In other words, if we were to make a wager, it would be on what the directionality in capital spending is telling us.

    But there's one thing more, and it's a big one, and something that, in our mind is so big that we will likely dedicate an entire Editor's Letter to it, shortly.

    One of the key indicators of health and stability in the credit environment is the ratio between the Fed Funds rate and the rates that non-financial enterprises pay for Commercial Paper.  For those of you who are not familiar, Commercial Paper is nothing more than unsecured lending banks make to companies for operational purposes.  The key schism in the rates for this sort of lending is the rates that financial enterprises pay vs. what is offered to non-financial (i.e. industrial and commercial) businesses.

    That ratio, in normal times, fluctuates within a very small band.  The typical fluctuation is no more than 3 or 4 basis points around the Fed Funds rate.

    Not surprisingly, when conditions deteriorate and lenders begin to develop apprehension bout borrowers' ability to repay a loan, the rate they will typically charge will rise.  

    And yes, such a situation appears to be developing.

    In April, the spread of the Non-Commercial Commercial Paper Rate over the Fed Funds rate rose to 11 basis points. What does a spread of that size mean? 

    Well, It did rise to as high as 23 basis points in January and has come down to 11 since then.  But, please know that that spread of 11 is still the highest since June 2010 and is roughly 5 basis points higher than any other month in the intervening time.  And you then have to go back to April 2009 to a rate, again, that is not lower.

    Does a difference of a few basis points like this seem trivial?  Remember that the big financial movers and shakers traffic in differences of a couple of basis points.  Based on volume of hundreds of millions of dollars, a difference of a couple of basis points can mean incredibly high profits or losses.  Yes, that rate hovering 5 basis points above any rate at any time in the last four years (at least) is not insignificant, especially if it's sustained.

    Of course we will watch this closely.  And it may not mean a lot since the rate has dropped since January.  But to quickly dismiss things on that point would require inquiring why January spiked and what that means.  In other words, you can't simply dismiss the matter, and our bet is not so much that January was an aberration but the outlying point of a general trend.

    You know on which side our money is, if we had to make a wager.  We'll know more within two months, we're certain.

    Current Scorecard - Global

    May 2016

    Current Scorecard:  -1

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -3
                  -4 
                   -5
     LEADING & CONFIRMING SCORE                -1               -3
                   -4
     Leading Indicators                 0               -4
                   -8
    Confirming Indicators               -2               -1
                  -1
     Foundation             -11              -11
                 -10

                                
    Well, it's not pretty, is it?  To start with, Industrial Output is basically flat and stagnant.  In terms of how that feels to the average global consumer, that wouldn't be a complete disaster if inflation were also flat, but...it isn't.  What that is translating to is an increasing disjoint between Output and the effectiveness of monetary policy, on an aggregate global scale.  That's a problem.

    However, the good news is that labor markets around the world continue to improve somewhat and that credit conditions appear to be stabilizing somewhat.  Note that we wrote, "stabilizing," not really improving. 

    There is some small indication that on a global scale we may get some improvement somewhere between what we'd characterize as modest and moderate, sometime in the late year time frame, but this is still uncertain.  We will know more next month.  Partly what's driving the indication that improving conditions could be around the corner is a slightly better situation in the energy markets.  At the same time, we have little confidence that credit markets are acting confidently and securely to reaction to how energy markets are performing.  As we've said before, credit markets do sometimes get the situation wrong over a period of three to five weeks.  They never get it wrong over two months.  In other words, we expect our most significant of indicators to settle into a consistent and telling pattern very soon.

    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.

     

     
  • SCORECARDS - June 20, 2016

    Current Scorecard - Domestic

    June 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -6             -8 
               -13
     LEADING & CONFIRMING SCORE              -7              -9
                -13
     Leading Indicators            -30            -28
               -29
    Confirming Indicators             15              11
                  3
     Foundation              0               -6
               -12


    How should you read the Scorecard?  It depends on what it is you want to know.  Our opinion is that the information you should mostly want is contained in the combined Leading and Confirming Score rather than the Leading Score alone.

    Looking at the former, the good news is that, as we said, the figures are stabilizing.  They're still a bit negative, but they've left off declining.  You will note that the primary reason that the combined Leading and Confirming Score is stabilizing is because the Confirming Score has actually trended up the past few months.  So, let's talk about what's going on there.

    For the most part over the past few months, the components of the Confirming Score have been stable and haven't moved much.  Spending and Income aren't strong, but they're moderately good.  And Inflation has been both muted and stable.  And--believe it or not, this past month, there was a surge in the value of new single-family homes sold.  (Our view is that that was a function of the low ratio of supply to demand at the moment, and will not be sustainable.  Because this ratio has been low for several months, we believe that this surge is a reflection of a development that was inevitable.)

    And, while New Orders for Durable Goods are still in negative territory, the amount by which they're in negative territory has diminished.

    And, of course, let's not forget Industrial Output, which continues to be negative and is, arguably, the signal indicator of current economic conditions.

    So now we turn our eye to the Leading Indicators.  And, it's a mess.

    We continue to get no hep from Tax Policy.

    Capital Spending has now declined for more than a year.  To give you a specific point of reference, Capital Spending in May was $69,396,000, down from $84,474,000 a year ago.

    And what about Energy Consumption, a terrific indicator because it correlates strongly with Demand.  It has fallen, now, for two consecutive months.

    And lastly, our key measure of credit conditions, where bond traders send the yield on the 10-year government bond relative to our measure of inflationary pressure, has stopped declining, but it is still hovering in solid negative territory, and that's a significant problem. 

    We are not yet issuing a formal updated forecast anticipating a further downturn, but...it's highly likely that we will and that we will do so before August is out.

    Current Scorecard - Global

    June 2016

    Current Scorecard:  -3

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -4
                  -5 
                   -6
     LEADING & CONFIRMING SCORE                -3               -4
                   -5
     Leading Indicators                -3               -5
                   -8
    Confirming Indicators               -3               -2
                  -1
     Foundation             -11              -11
                 -11

                                
    This is going to be a quick round-up this month.  In a nutshell, the global softening, just like the domestic one, is stabilizing for now.  You want some more good news?  Our leading indicators, which look three to six months out, show a stability in how soft things will continue to be.  In other words, while our Leading Indicator Score is slightly in negative territory, it's only slightly in negative territory. 

    While upward inflationary pressure isn't the only way that economic activity becomes stimulated, it's one of the obvious ways.  And, the fact is that inflationary pressure is continuing to look very muted.  What that means, of course, is that countries want to stimulate their economies they're going to look to monetary and fiscal policy.  We're not going to hold our breath on those fronts, for now.  We think that, while most global economic organizations, are increasingly seeing the chance for a global recession to rise, we think that most major governments are in denial about the problems.

    As for the current situation....on the one hand, while Inflation is not out of control, the chief problem is that even in the presence of some mild upward pressure on prices, Industrial Output, globally is flat.  That is not a very healthy picture, and it's why the Confirming Indicator Score is where it is.

    Well, it's not pretty, is it?  To start with, Industrial Output is basically flat and stagnant.  In terms of how that feels to the average global consumer, that wouldn't be a complete disaster if inflation were also flat, but...it isn't.  What that is translating to is an increasing disjoint between Output and the effectiveness of monetary policy, on an aggregate global scale.  That's a problem.

    We are eager to hear how major emerging markets respond to a continuing stagnation in growth.  It will be interesting, to say the least.

    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.

     

     
  • SCORECARDS - July 18, 2016

    Current Scorecard - Domestic

    July 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -7             -10 
               -16
     LEADING & CONFIRMING SCORE              -5              -7
                -13
     Leading Indicators            -28            -28
                -30
    Confirming Indicators             18              14
                  4
     Foundation           -14              -20
               -26


    How should you read the Scorecard?  It depends on what it is you want to know.  Our opinion is that the information you should mostly want is contained in the combined Leading and Confirming Score rather than the Leading Score alone.

    If you like, you can view it as good news that we have not updated the forecast to show a further deteriorating situation.  On the other hand, the bad news is, of course, that it's impossible to see anything remotely rosy in the near- to medium-term.

    Many, many people are blithely unaccepting about the forecast.  Truly, it appears that most people have a great difficulty differentiating the current from the future.  We're not joking.  They do seem to have a sense that things will just continue as they are.  Our experience is that if you point out where a leading indicator is pointing, the fact that they're not feeling th effect at the moment causes them to discount what you're telling them the indicator is saying.  It seems that they don't understand the meaning of "leading indicator." 

    In terms of the present situation, there are two truths that are probably most important to know.   One is that the economy is being held together provisionally by consumer spending.  Understand that consumer spending is at a respectable level, especially given how tame Inflation is.  What happens if Inflation either picks up or Demand falls off?

    Some more good news, from the Housing Sector: looking back to 2008, there is no bubble in the Housing Sector at the moment.  Home prices relative to incomes appear to be in line pretty well.

    On the other hand...

    Industrial Output has declined for more than half a year.

    Capital Spending has declined for more than a year.

    Credit conditions are deteriorating rapidly.  Our signal example here is the spread of the rate that non-financial corporations pay for unsecured short-term borrowing, over the Fed Funds rate.  That rate is at the highest level it's been since before the Financial Crisis in 2008, and yes, this level is associated with greatly tightening conditions.

    We don't want the early words of this update to mislead: consistent with the last couple of paragraphs, our Leading Indicators are in solidly negative territory.  It's very difficult to forecast anything but a deteriorating economic picture.  However, the most recent formal forecast called for a stabilizing of conditions, and that's what we have had.  Things have not improved, but they haven't deteriorated further.

    We're putting off writing a fresh formal forecast until we see some movement in the leading indicators.  Our feeling is that there will be some consolidating movement over the next three weeks.  And if that happens, that will mean that around the time we next update the Scorecard, we will also write a fresh forecast.  Don't hold us to it, but...our feeling is that it's not going to be pretty.

    Current Scorecard - Global

    July 2016

    Current Scorecard:  -2

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -4
                  -4 
                   -6
     LEADING & CONFIRMING SCORE                -2               -3
                   -5
     Leading Indicators                -1               -3
                   -8
    Confirming Indicators               -3               -3
                  -1
     Foundation              -12              -11
                 -11

                                
    Frankly, if you're going to skip reading the Global Scorecard one month, this would be the month to do it.

    Truly, nothing much has changed.  Stabilization?  Yes, if stabilization of stagnation means anything meaningful to anyone.

    The good news is that the Leading Indicators aren't trending further into negative territory.  How much of that is due to a further push toward monetary easing in the Euro Zone?  That's a good question, we think, and we think the answer is that credit markets think that the new level of monetary easing/policy is going to be sufficient.  We are not remotely sanguine about those prospects.

    The bad news?  Well, the bad news is that, if things are stabilizing and if the Euro Zone is engaging in more aggressive monetary policy measures, there is still no sign of economic growth on the horizon. 

    Stagnation isn't necessarily bad news...especially if growth is already at a moderately strong level.  But when economic growth is practically nil, stagnation is not positive.

    Of course we will do our best to accurately convey how we think the economic landscape changes.  In the meantime, you are probably deeply concerned about your investment strategy.  Our best advice: keep up with the Investment Outlook.

    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.

     

     
  • SCORECARDS - August 22, 2016

    Current Scorecard - Domestic

    August 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              -5             -5 
                  -7
     LEADING & CONFIRMING SCORE               3               3
                  -1
     Leading Indicators              -9             -7
                  -6
    Confirming Indicators             16              14
                  4
     Foundation            -37             -38
               -30


    We are at a very interesting juncture. 

    On the one hand, a person's natural desire to understand the economy as being at any time, on a steady trajectory and offering dramatic and finite clues as to direction is not hard to understand.

    On the other hand, the economy is under no requirement to behave in such a way.

    We believe that the tea leaves behind our leading indicators are pointing to a very definite period of contraction.  However, those tea leaves haven't morphed into a landscape sufficiently clear for such a forecast....not yet.

    There are two points to know:

    1.  That softening that, in the fall of 2015 we said would happen, did, in fact, happen.  It's evident in the statistics around Industrial Output...around Capital Spending...and in some tightening of credit conditions.  As a consequence, real interest rates declined (below their already low level), an indicator of how fundamentally weak the economy is.

    2.  As we also forecasted, that softening did stabilize, such that the first quarter of this year demonstrated a stem in that slide.  That does not mean that the economy is back on a strong upward path.

    The latter point is demonstrated by a nice gentle rise in the Confirming Indicator Score of 16.  That figure is up from 4 three months ago.

    However, our Leading Indicator Score is now at -9.  

    In other words, if you think the Fed is going to raise interest rates any time soon, you are reading and listening to the wrong media outlets.

    So, what's going on?

    First, let's repeat ourselves that the economy is getting zero help from Tax Policy.

    Second, we have now had more than 12 months of declines in Capital Spending.

    Third, the economy has benefited from low inflation, but much of that is due to low commodity prices, which are now beginning to rise again.

    Lastly, even though things have stabilized to a great extent, let's keep in mind that Industrial Production has declined for 10 consecutive months--the Fed's reports to the contrary.

    There is not enough in our Model at the moment to forecast an imminent and dramatic downturn.  But there's enough there to suggest that (1) a downturn is close to being imminent and (2) that downturn will be dramatic.

    Pay particular attention to the Investment Outlook over the next few months as the major themes around that landscape begin to change.

    Current Scorecard - Global

    August 2016

    Current Scorecard:  -14

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -16
                  -13 
                   -1
     LEADING & CONFIRMING SCORE                -14                -8
                   -4
     Leading Indicators                -27               -13
                   10
    Confirming Indicators                 -1                -3
                  -3
     Foundation               -18               -31
                 -31

                                
    Frankly, if you're going to skip reading the Global Scorecard one month, this would not be the month to do it.

    If we wanted to draw your attention to just one thing in this months' Scorecard, it would be the dramatic contrast between the Leading Score three months back with the current Leading Score.  That's a swing of 37 points!  You see that score of 10 three months back?  You will notice that the current Confirming Score is -1, and you can see why it makes sense, right?  Our Leading Scores point to where we expect the economy to be pointed three to four months out.   Yes, it's true that it might be reasonable to expect a Leading Score of 10 to lead to a higher Confirming Score three months later, but...when the Leading Scores had been trending positive, but at a diminishing rate?  You get the point.

    This is not the month to skip the Scorecard for one signal reason: this is the month that the Leading Indicator Score moved into strongly negative territory.  We are now moderately bearish on the global economy.  One more month of a similar score and we will be quite strongly stating that you should be expecting a global contraction later this year.  If we are right, and we think we are, you should expect to hear a decidedly different tone on the part of policymakers, and particularly central bankers, in the next two to three months. 

    What's going on?  On a positive note, the labor picture, globally, has improved remarkably.  On the other hand, inflation is running at a low-to-moderate level, which wouldn't be bad, except that Industrial Output is essentially nil.  And looking forward, the landscape for business investment has become particularly unfavorable, especially in the wake of disinflationary pressures that are having the effect of driving real interest rates up. 

    That last sentence is crucial: do not confuse the fact of existing inflation--at a moderate level--with the impossibility of disinflationary pressures.  Inflation is slowly trending downward, but in the meantime, on a net basis, real output is diminishing. 

    The thesis in central bankers' rhetoric in short order will be all about expanding and continuing monetary accommodation....not about tightening policy.

    Buckle your seat belt.

    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.

     

     
  • SCORECARDS - September 26, 2016

    Current Scorecard - Domestic

    September 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL            -14            -13  
                  -6
     LEADING & CONFIRMING SCORE              -8                -7 
                   1
     Leading Indicators            -33             -29 
                  -8 
    Confirming Indicators             17              15 
                   9
     Foundation            -37             -37 
                -31


    If you've been reading this column for a long time, you probably know that we encourage you to focus on the combined Leading & Confirming Score if you're looking for the most effective digest of what's going on.  That figure, while relatively representative of how weakly the economy is trending (after all, it is in negative territory, if only mildly), is also demonstrating a temporary disjoint between the current and prospective picture

    Take a long look at the Leading Score alone.

    We are in solid negative territory.  In other words, there is no escaping the fact, at least according to our Model, that the near term picture is pretty strongly negative.  

    We fully expect that the tenor of the  Business Press regarding the economy will have begun to change dramatically by mid-November.  

    Let's talk briefly about the current picture.  First off, Industrial Output has been declining for 10 months.  And Consumer and Retail Spending have been fairly steady, if not robust, but/and Inflation has been trending higher faster than Spending.  This is a modestly good picture, at best.

    Now, let's look at the prospective landscape.

    First, we're getting no help from Tax Policy.

    Second, Capital Spending has declined for nine consecutive months.

    Third, we're getting no meaningful growth in Corporate Earnings.

    Fourth, Inflation is gaining on us faster than the Dollar is strengthening....note that the relationship between Inflation and the Dollar is a critical indicator to us of how robustly the economy is performing.  We care less about Inflation growing if the Dollar is also growing at the same rate--when the two are in lock-step that's a powerful indication that the economy is in a strongly expansionary mode.  And that, ratio, at the moment...is weak.

    Fifth, energy consumption continues to decline.

    Lastly, the spread of bond yields over commodities prices has continued to narrow, demonstrating that credit markets have a very phlegmatic view of the outlook.

    We are not going to mince words.  

    We are formally updating our forecast to state that we are expecting a moderately strong contraction over the next three to six months.

    How will that contraction be manifested?  That's hard to know, but we think you should conclude that it could include everything from a dramatic weakening in job growth, significant hits to corporate earnings (and consequent hits to equity prices), softening in residential real estate, and downward pressure on Personal Income. 

    We will write a column for the Editor's Letter, shortly, to reinforce that this is a formal update to our forecast.  But we should take a moment to reinforce that yes, we are not "playing," so to speak.  We are now on the threshold of a major economic weakening.

    Current Scorecard - Global

    September 2016

    Current Scorecard:  -7

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -12
                  -12  
                  -11
     LEADING & CONFIRMING SCORE                 -7                -7 
                   -6
     Leading Indicators                -14               -12 
                  -9 
    Confirming Indicators                   0                -2 
                  -3
     Foundation               -31                -31
                 -31

                                

    It often appears that most people are simply incapable of understanding the distinction between cause and effect.

    When your income growth declines, that's an effect.  The point of a cause is that you don't feel the power of the cause.  If you did, it would already be an effect.  The major point about forecasting is that you are concerned with identifying forces that are causes.

    Yet if, even while economic activity appears to be satisfactory, you point out those driving forces that are gathering to create downward-pushing causes, you will often be met with a puzzled look.

    If you want to argue that the problem is one of agreeing on what the major driving forces are, we won't give you much of an argument in return, so we'll keep it simple.

    When you think about leading indicators of economic direction, there is simply no more powerful driver than...inducement to capital spending.

    What is capital spending?  It is, simply, actual application of capital to goods and services that are put toward the activity of creating enterprises of some kind.  It is really that simple.  And, we know that there are some basic drivers of capital spending, including declining interest rates, especially declining real interest rates.  

    If you're looking at this month's Global Scorecard and noticing the persistent downward trending along the Leading Indicator line, that is precisely what's going on.  You are looking at an indication that capital investment is persistently declining.   And it's declining without any offsetting benefit from tax policy...across the globe.

    Remember: when you read reports about declining manufacturing activity in China, for example, that's an example of an effect, not a cause.  

    It's difficult to argue that countries around the globe haven't instituted, on a persistent basis, monetary policies oriented toward fostering growth.  So, what's the problem?  It is, we hope you already understand, a matter of ill Fiscal Policy.  We do not wish to muddy economic waters with political waters, but...you'd be hard-pressed to find, among most of the major players, fiscal policies oriented around fostering private enterprise, and do we think that that is related to political agendas around increased statism?  Yes.

    Talking about the current situation for the moment, there's not actually much to say. Industrial Production has slowed to the point of almost complete stop, even though consumer prices continue to rise.  The labor picture has continued to improve, yes, but...we hope we do not need to remind that the labor picture in particular is a lagging one.

    So, yes, the near- to medium-term outlook for global economic direction is one not of stability, but negative growth.

    Absent significant change to fiscal policies in the countries that are major economic players, it's very hard to see the picture changing.  Period.  Is that a stark statement?  

    Let's put it this way: you'd be very hard-pressed to point out to us a country that experienced positive economic growth without, beneficial changes to Fiscal or Monetary Policy in the recent past.  

    Does this month's Scorecard betray some anger on our part?  We are, indeed, angry, not so much at governments but, instead at the citizenry that looks to false indications and reasons for economic outcomes.

    There's something else, too.  Please remember: while economic outcomes tend to come in cycles, there's nothing inevitable about an economic turn.  Every positive economic turn is preceded by beneficial changes to monetary or fiscal policy (or both).  

    Without either, there is no reason to expect things to improve.  

    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.

     

     
  • SCORECARDS - October 24, 2016

    Current Scorecard - Domestic

    October 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL            -16            -14  
                  -9
     LEADING & CONFIRMING SCORE            -11                -8 
                  -2
     Leading Indicators            -39             -33 
                 -18 
    Confirming Indicators             18              17 
                  13
     Foundation            -36              -37 
                -38


    If you read last month's Scorecard you know that we have made a major update to our economic outlook.  In a figurative word, we are projecting an economic contraction, and the timing for that contraction to become manifested is sometime over the next one to three months.  Our belief is that the landscape will become tangibly and noticeably altered to the layperson before Thanksgiving.

    Let's talk about some bright spots.

    Jobs continue to be added at a good pace.  Consumer Spending has been stable.  And Income...has been stable.

    However:

    1.  You will remember that trends in the labor market happen on a lagging basis

    2.  Spending is stable, not actually growing

    3.  Income is stable, not actually growing

    4.  Industrial Output continues to decline

    5.  Inflation has been nudging upward

    6.  The ratio of home prices to income is starting to come under pressure

    7.  Corporate earnings are not showing growth

    And, perhaps most compellingly of all, Core Private Investment (i.e.. Capital Spending) has been declining for more than a year.

    We appreciate that most people have a tough time buying into dramatic scenarios until those scenarios actually come about.  Of course, there's little value to be derived from observing that a contraction has come around once it has come around.

    We think the points above, taken as a group, are compelling.  Of course, you can choose to discount one or more specific leading indicators, but...to ignore the cumulative effect?  You can do so, but we will loudly say "We told you so" afterward.

    What is particularly interesting to note is that, with regard to the Confirming Indicator Score, which is stable, though very modestly, it is being held up primarily by gains in the sales of new residential construction.

    And we might be painting a different picture if the Leading Indicator Score were only mildly negative.  But a Score on the order of negative 35 and lower for a period of at least three months?  We would be irresponsible to forecast anything but a noticeable recession.

    Current Scorecard - Global

    October 2016

    Current Scorecard:  -6

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                 -7
                   -6  
                   -5
     LEADING & CONFIRMING SCORE                 -6                -4 
                   -3
     Leading Indicators                -10               -7 
                  -3 
    Confirming Indicators                 -1                -2 
                  -4
     Foundation               -13                -12
                 -10

                                

    The Global Scorecard isn't substantially changed from last month.

    The key point to know is that, for all practical purposes, all of the developed countries are in situations of near stagnation at the moment.  Before you continue reading, please take a moment to take that in.  The most effective way to understand this is that (1) current combinations of monetary and fiscal policies are not sufficient  to bring about economic growth and (2) given the extent of monetary accommodation across almost all of these players, there is a large misalignment between monetary and fiscal policy.

    Please read that sentence again.

    Looking at the key dimensions of the global picture, what we want you to know is that, as in the domestic situation, globally, budget deficits have come down significantly...but are still high (read: too high); industrial production is stagnant; and consumer prices continue to rise, however modestly.  

    Rising consumer prices in the face of stagnant (and in some cases, declining industrial output) is not an auspicious combination.

    To sound like a broken record, not only is stimulus from monetary policies not having sufficient effect (due largely to poor fiscal policies), but....this effect is being manifested in narrowing credit margins that are having a tightening effect on growth.

    In other words, while the global outlook for the near future is not as negative as that for the United States, it is, nevertheless, a sober and stagnating one.  

    The most practical application of this knowledge: don't go reaching for yield in your investments.  The global economic picture is not having a magnifying, rather than a diluting, effect on risk relative to growth.  

    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.

     

     
  • SCORECARDS - November 21, 2016

    Current Scorecard - Domestic

    November 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL            -12            -13  
                  -11
     LEADING & CONFIRMING SCORE              -6                -8 
                    -5
     Leading Indicators            -31             -33 
                 -24 
    Confirming Indicators             19              17 
                  15
     Foundation            -35              -36 
                - 37


    The ugly fact of life, at least from the perspective of an economist, is that most lay people are very simple--too simple--about understanding the state of the economy.  Not unnaturally, they tend to measure the state of the economy by how well off they feel at the moment.  And, unfortunately, when you ask the average person how things are going, they will likely factor what kind of profits they're sitting on in the stock market, quite heavily, into their answer.

    We hope we don't have to explain why that's a specious approach to understanding how well off you are!

    We hope you understand that you should be far more concerned with the factors that drive your profit-making.

    We remain committed to a dour economic outlook.  What's holding the economy together for now is the Consumer.  The Consumer is continuing to spend.  However, as we've said before, the Consumer is spending the smallest percentage of her Income in years.  This situation is clearly not sustainable, especially with Inflation rising (gently) for now.  That speaks to why the situation hasn't collapsed.

    However, we continue to get no help from tax policy.

    Industrial Output declined, yet again, in September.

    And Capital Spending declined, yet, again, in September, as well.

    There is simply no case to be made for even a moderate economic outlook for the near term.

    The icing on the cake?  Corporate earnings continue to disappoint.  Never forget: the equity market is all about earnings.

    Our best advice: fasten your seat belts and hang on.  

    Current Scorecard - Global

    November 2016

    Current Scorecard:  -6

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -7
                  -7  
                  -5
     LEADING & CONFIRMING SCORE                -6               -5 
                  -4
     Leading Indicators              -10              -9 
                  -5 
    Confirming Indicators               -1              -1 
                  -3
     Foundation             -14              -13
                -11

                                

    There's really nothing in the way of good news at this point.  

    Budget deficits are starting to rise.

    Hiring is slowing.

    Inflationary pressure is growing.

    Industrial output is stagnant.

    In a nutshell, the disconnect between monetary and fiscal policies, on a global basis, is beginning to become unsustainable....again.

    Our guess is that the theme and tone in the conventional business press will start to change very shortly, mostly spearheaded by commentary on global markets from leading economic ministers.

    Stay tuned.  

    Were you expecting an abstruse discussion of technical points?  Sometimes the most effective way to drive home a point is to be blunt and simple.

     

    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.

     

     
  • SCORECARDS - December 19, 2016

    Current Scorecard - Domestic

    December 2016

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL            -11            -13  
                  -12
     LEADING & CONFIRMING SCORE              -4                -7 
                    -6
     Leading Indicators            -28             -32 
                 -33 
    Confirming Indicators             19              19 
                  17
     Foundation            -37              -37 
                - 36


    In our next Editor's Letter, we're going to lay out some of the facts of life that are hidden from most people's "take" on the current economy.  The economy hasn't contracted at the speed and in the time frame we thought it would, but it has certainly slowed down, and all of the principal leading indicators are negative.  Try to present these facts to a lay person...and the response you get is one that is about the stock market...as if consumers' putting their money into the market is a direct input to economic expansion.

    What has kept the economy afloat is simply consumer spending.  Consumers are spending the smallest part of their income in a decade, but it is still what is holding the economy together.

    On the other hand, industrial output has now declined every month for over a year.  And more importantly, capital spending has declined every month for over a year and a half.

    If you think that we are going to amend our forecast in the face of a continuation of a decline in capital spending without proportionate positive developments elsewhere (say, in tax policy, for instance), you are certainly wrong.  And if you're counting on a straight upward economic expansion in the face of this economic truth, you need to re-evaluate the basis on which you make your investment decisions.

    We have repeatedly said that, every other leading indicator aside, every contraction has been set off by over-leverage in some segment of the economy.  Business borrowing relative to earnings is very close to a critical threshold.  If things turn around for the better, we'll be the first to reverse our forecast.  But, (1) the trend is not moving in the right direction and (2) the level of over-leverage is dangerously close to an important threshold.

    Stay tuned.   

    Current Scorecard - Global

    December 2016

    Current Scorecard:  -5

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -7
                  -7  
                  -5
     LEADING & CONFIRMING SCORE                -5               -5 
                  -4
     Leading Indicators                -9              -9 
                  -5 
    Confirming Indicators               -1              -1 
                  -3
     Foundation             -14              -13
                -12

                                

    If you think that monetary policy in the United States has been accommodative, we hope that you're aware that the level of accommodation by the Federal Reserve is nothing--seriously, nothing--compared to interest rate policies of the other major global central banks.

    Almost everywhere you look, you can see rates that are, at a minimum, lower than those of the U.S., and in some cases, actually negative.

    If the global economic picture in aggregate is not very good, the problem is not that central banks aren't doing their part.

    The problem continues to be...fiscal policy.  Whether governments around the globe figure it out is not something on which we care to opine.

    In the meantime, we are getting tired of having to say the same thing every month.

    For the moment, the good news is that Inflation, globally, is moderate.  The bad news is that Industrial Production is not keeping up with Inflation.  

    Looking forward, it's mostly about credit markets, and the bad news is that credit spreads are telling us that demand and availability--at least on a level required to get the global economy moving--are not there.  Again....the blame belongs to Fiscal Policy.  And when we talk about Fiscal Policy in this context, understand: we are not advocating increased government spending on the back of higher borrowing and taxation, but rather advantageous tax policies that encourage capital formation and intrinsic economic expansion.

    We wish to be abundantly clear: until and unless governments craft policies that encourage private investment, malaise will continue to be the theme.

    We may get tired of saying it over and over, but we will continue to report the state of the world as it presents itself.

    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.

     

     
  • SCORECARDS - January 23, 2017

    Current Scorecard - Domestic

    January 2017

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL            14             12
                  11
     LEADING & CONFIRMING SCORE            27 
                24               23
     Leading Indicators            31             25
                 22
    Confirming Indicators            22             23
                 24
     Foundation           -37              -37 
                -36


    If you've been a regular reader, you'll notice that this Scorecard's figures look significantly different than recent Scorecards.  One of the things that has continued to plague us is not so much what to measure, but the timing of when leading indicators are manifested into effects.  To put it more simply, we are always too early in our forecasts, and it was time to do something about it.  Over the past month, we took a hard look at these factors, and made serious changes.  What you see above is the result of those changes.

    To keep it relatively simple, everything we have said about the economy sliding is still true, and the facts of the deterioration in the economy are still there.  Is it not true that Output has, in fact, declined for over 12 consecutive months?  It is.

    It's also true that the effects of declining capital investment have yet to be manifested, but they will.  For the moment, what the model projects out three to six months is a period of modest growth.

    Yes, Employment has continued to grow, and it will probably continue that way for a while.

    Keep in mind that corporate earnings, however, continue to stagnate and that inflationary pressures, effectively, are declining.  Yes, energy prices have recovered, but capacity utilization continues to decline.

    Consider this month's Scorecard, if you will, as transitional with regard to a major switch in associating economic indicators and effects. 

    You will note that we are not backtracking on our forecast of a continual decline in the economy.    

    Current Scorecard - Global

    December 2017

    Current Scorecard:  14

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                 9
                  8 
                   7
     LEADING & CONFIRMING SCORE                14              14
                  13
     Leading Indicators                30              29
                  26
    Confirming Indicators                -1              -1 
                   -2
     Foundation                 9 
                   8
                    7

                                

    The Global Scorecard is falling victim to the same temporary fate that befell the Domestic Scorecard: apparent upheaval.

    Again, we are not talking back or walking back our declining forecast, not in general.  It's merely a question of timing.  We hope we're getting smarter, and we hope that you reap the benefit of that.

    Does that sound naive?  You tell us how many economists nailed the onset of the financial crisis.

    The good news is that modest growth appears to be the continuing theme for the next few months.  The bad news is that things are certainly already beginning to change.  Industrial Production has been flattening, and Consumer Prices?  They've been gently rising.

    Think about it: isn't every recession foreshadowed by a steady rise in consumer prices?  Because...it is been that way for as long as our data can remember.

    Take this month's Scorecard with a grain of salt.  As our Model regains its footing, we will have more insightful and timely updates.

    If the subject is the global investment picture, just remember that the big questions for 2017 will be whence the British Pound and Mexican Peso. 

    The story in every other investment class will be uninteresting by comparison.

    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.

     

     
  • SCORECARDS - February 20, 2017

    Current Scorecard - Domestic

    February 2017

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             7               8
                    9
     LEADING & CONFIRMING SCORE            18 
                19               20
     Leading Indicators            17             17
                 19
    Confirming Indicators            19             20
                 22
     Foundation           -38 
               -37 
                -37


    The single most important thing about the new Scorecard is what you're probably not seeing.

    The good news is that the Leading Indicator Score is still modestly positive. 

    The bad news is that it was 26 a year ago.

    Let's talk about the confirming indicators.  The current score is just 19.  Let's talk about reality.  Industrial Output has declined month after month.  Inflation has been mildly trending up.  Yes, Consumer Spending has been trending up, but remember that that's in the context of rising consumer prices.  The single reason that the Confirming Indicator Score is holding up is that employment has continued to grow at a pretty fast clip.

    The plain fact is that it's very hard to run from the very long decline we've had in capital spending.  There's a lot in economic forecasting that you can dance around, but it's hard to hide from more than a year of declines in private domestic investment.

    We call ourselves The Practical Economist for an obvious reason: we think that it's possible to keep things relatively simple.  While there is a number of leading indicators that are very important, even we cannot run from a simple fact: economic contractions are triggered by over-leverage.  And that over-leverage does not exist.  However, be mindful: with every passing month, we're watching levels of leverage in the private sector, and....it's growing fast.

    In the spirit of keeping things simple: if you're struggling for an understanding of why things have kept afloat, it's very easy: even as the Dollar is hovering around par on the US Dollar Index, commodities prices (as measured by the Bloomberg Commodity Index) are significantly below par.  And there you have it: upward price pressure, while slowly growing, is significantly under control, and this is having the effect of making businesses and persons feeling much richer than they would be, otherwise.

    And, it really is that simple.  

    Current Scorecard - Global

    February 2017

    Current Scorecard:  7

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                 3
                  3  
                   2
     LEADING & CONFIRMING SCORE                 7               7 
                   6
     Leading Indicators                15              16 
                  13 
    Confirming Indicators                 0              -1 
                   -1
     Foundation              -14  
                -14 
                 -13

                                

    We are living in interesting times.  Take a good look at these numbers.  What you're looking at is a picture of a global economy that has continued to show extremely modest gains...and that will continue to show such gains for the very near term.  

    Whence this modest growth?

    The growth that we have been experiencing is directly tied to an expansion of credit, due in part to modest growth in earnings, both business and personal.  However, it is our belief that a great deal of that credit expansion has come on the figurative back of those modest gains in earnings.  In other words, leverage on the global level is growing, as it is, domestically.

    To put it plainly, credit is growing faster than earnings, and while it is not a problem yet, if the pace of expansion in these facts does not change, i.e. if the pace of growth in earnings doesn't pick up, we expect to see our leading indicators flashing a figurative warning sign relatively soon.

    There's something else: don't let the modest expansion in the global economy fool you: it has come at the expense of the average global citizen.  Nearly across the board, interest rates continue at ultra-low levels.  Two points:  (1) the fact that interest rates continue at such low levels for such an extended period of time is starting to create permanent structural distortions in capital formation and government expectations and (2) the fact that economic growth hasn't occurred at a faster pace in such a low-interest environment speaks volumes about the failures of fiscal policies around the globe.

    In Japan, short-term interest rates are hovering around 0% and the 10-year rate it's hovering at 0.10%.  At the Euro Zone level, those respective rates are at -0.33% and 0.28%.  And in Switzerland, those rates are -0.73% and -0.35%.

    In this context, does it still seem to you that the global economy is experiencing true growth?

    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.

     

     
  • SCORECARDS - March 20, 2017

    Current Scorecard - Domestic

    March 2017

    Current Scorecard:                                                               

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -2
                  -1
                    1
     LEADING & CONFIRMING SCORE              7 
                   8               10
     Leading Indicators             -6               -2
                    1
    Confirming Indicators            18              16
                 19
     Foundation           -38 
               -38
                -37


    Probably the most useful way in which to read the current Scorecard is to remember that in its most recent announcement that it would be raising short-term interest rates a quarter of a percentage point, the Fed pointed less to data suggesting that such a move was warranted and more to a need to normalize monetary policy.

    The current leading score tells you everything you need to know: the near term outlook may not be poor, but it's almost barely even modest.  

    The good news is that jobs continue to be added at a good clip and that income continues to rise.  And consumer spending is fairly strong.  But industrial output is flat, factory utilization is falling, and...this is important: growth in sales of new one-family homes has dipped in a very big way (for neophytes, this facile-sounding indicator is one of our favorites because it correlates terrifically strongly with the economy).

    The most significant thing to know about the outlook is that leverage in the private sector is growing at a fast clip.  Our view is that leverage is the single-most important predictor of the ability of the economy to grow or contract.  Below a certain point, the economy has great room for the credit markets to grow, but above a certain threshold, that ability to grow becomes hampered, and...we have, in the past two months passed the lower bracket of that threshold, and the indicator continues to rise.  If this indicator of leverage continues to grow at the same pace, we predict that we will be forecasting a significant economic downturn by late summer at the latest.

    Current Scorecard - Global

    March 2017

    Current Scorecard:  3

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                 0
                 -1 
                  -2
     LEADING & CONFIRMING SCORE                 3               3
                   1
     Leading Indicators                 5               5
                   4
    Confirming Indicators                 1               0
                  -1
     Foundation              -13 
                -14 
                 -14

                                

    We are living in interesting times.  Take a good look at these numbers.  What you're looking at is a picture of a global economy that has continued to show extremely modest gains...and that will continue to show such gains for the very near term.  

    If there's only one thing you have to time to take away from this, it's that leverage in the business sector--on a global level--is growing, and it's growing too fast, just as in the domestic picture.  The ratios are okay right now, but they're only okay, and they have been deteriorating. 

    The rest of the picture is easily summarized.  The current picture has picked up the smallest of smidgens...but again, related to the first point, that's related to an expansion in credit.  Maybe you've heard a lot about the good growth in the labor market in the United States?  ON a global level, taken in aggregate, the picture isn't nearly as good.

    Lastly, if you're a regular reader you know that we are particularly interested in what the credit market thinks of the economic picture, and we derive that answer from the directionality of long-term interest rates in conjunction with inflation.  And...the prognosis isn't particularly strong.  Even as inflationary pressures appear to be rising, long-term interest rates aren't going anywhere.

    There is a strong historical pattern of rising inflation just before very strong contractions, even as the bond market prices inflationary pressure out of its rate demands.

    Pay attention.

    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.

     

     
  • SCORECARDS - April 24, 2017

    Current Scorecard - Domestic

    April 2017

    Current Scorecard:  6                                                          

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL             -2
                   0
                    4
     LEADING & CONFIRMING SCORE              6 
                  10               14
     Leading Indicators             -7                 0
                    7
    Confirming Indicators            19               19
                  21
     Foundation           -37 
                 -38
                -37


    You'd have to look very closely to see that this month's Scorecard is a mite different from last month's.  And by "different," we mean that it shows a slight deterioration.

    There seems to be plenty of sufficiently good news.  Jobs continue to be added at a good clip, income continues to rise (though, adjusted for income, at a slower rate), and the retail sector continues to perform pretty well.

    That's the current situation.  Looking at our Leading Indicators, the picture is different.  There is not one leading indicator that is strongly positive, hence the composite leading indicator figure that is modestly negative.  Let's talk about the areas that give us the most concern.

    There's the fact that leverage in the commercial and industrial sector is now over the lower threshold over what we consider troubling...and it's continuing to grow.  In plain language, corporate debt is starting to become a problem.

    Then there's the fact that inflation is starting to gently rise.  Truth be told, given that the Dollar is fairly stable, rising inflation should be a sign of growing economic activity, but the fact is that most sectors of the economy, especially adjusted for inflation, are not growing very much.  

    Corporate earnings?  They're just a bit above what we call a neutral level.  We hope that you don't listen to the strongly positive earnings reports that come out, but are listening to everything.  The complete picture, when it comes to earnings, is only modestly positive. 

    As a consequence of inflation having a bit of a reappearance, real interest rates have fallen off a figurative cliff.  The real interest rate is now hovering below -2.0%.  It's true that lower real interest rates are associated with stimulating the business sector.  Such stimulation and expansion are a result of ultra-low rates, not their manifestation.

    Real interest rates below -2.0%...

    Ask yourself: can the economy withstand sufficient interest rate tightening to bring that real rate up to, say, zero percent?

    And, if real interest rates are that low at the present time, what does that say about the current state of the economy?

    Such low levels of real interest rates are associated with both troubled economies and with economies that see an outflow of the local currency, putting downward pressure on the currency and creating soaring levels of inflation.  Does this mean that inflation is about to sky-rocket?  No.  The point is that, if in an environment of ultra-low rates inflation does not sky-rocket, you have a sickly economy on your hands.

    Current Scorecard - Global

    April 2017

    Current Scorecard:  0

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -3
                 -4 
                  -3
     LEADING & CONFIRMING SCORE                 0              -2
                  -1
     Leading Indicators                 0              -1
                  -1
    Confirming Indicators                 0              -1
                  -0
     Foundation              -15 
                -13
                 -13

                                

    How silly does it seem to you that these numbers just bounce around a range of no more than 10 points  for months and months?

    The reality is that, no matter how you look at it, globally, we're in a sustained period of, if not complete stagnation, extremely modest growth.

    We can talk to you until we're figuratively blue in the face about curtailed investment spending, credit conditions and so forth, but...it's time to face the prospect of being labeled as partisan and speak the truth: it's all about taxation.

    In almost all of the major developed countries, effective personal tax rates are over 35% and effective corporate tax rates are almost never less than 25%.  (And in some countries, tax rates were actually raised in 2016.) Let's please remember that, to the extent that corporations distribute profits to their shareholders, that income is taxed again at the personal level.

    We would like to hear from the person who believes that government is going to create a capital environment equivalent to that created by the taxpayers, themselves, on a collective basis.

    To those who might try to argue that government is effective at creating the right capital environment as the private sector, we would ask the question: would $1 returned to a consumer (or earned by a consumer), if taxed by the government in that amount, yield $1 of output?  Let's remember that that dollar passed through another organization's hands.  It is not remotely conceivable that the money earned directly by the private sector would be equivalent to the amount of money spent by the government if first handed to the government.

    Is our language a little brusque?  And does it veer toward the partisan in a way we haven't in the past?

    If you want to understand why the globe is, economically, in something approaching a benign malaise, it's all right there in the tax story.

    We will write a major piece on taxation for the Editor's Letter page later this year.

    Just remember this: expect nothing approaching a noticeable improvement in the global economic picture before significant tax reform or....of course breakout of a major war, which would necessitate massive government spending on a scale that can't help but bolster the global economy.

    How do you think the United States escaped the doldrums of the Great Depression?

    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.

     

     
  • SCORECARDS - May 22, 2017

    Current Scorecard - Domestic

    May 2017

    Current Scorecard:  14                                                          

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              4
                   8
                  16
     LEADING & CONFIRMING SCORE            14 
                  19               30
     Leading Indicators              6               12
                  24
    Confirming Indicators            23               27
                  36
     Foundation           -36 
                 -37
                -38


    If you're paying very close attention to this economy, you're probably already starting to see the cracks.  Even if your own personal situation has not been altered in any way in the past year, take a look at the person who lives to your left and to the person who lives to your right, and ask them about their prospects at the job.  We're betting a lot that between the two you'll hear some words of concern.

    Sure, our confirming indicators are still treading water nicely.  To start with, the economy continues to add jobs at a pretty good pace.  And/but the pictures moderates a little when you look at the net income picture: income continues to grow...moderately.  But, all-in inflation is picking up speed, and it's picking up speed faster than income.

    Of course most of that growth in inflation is coming from the energy sector, and that's a problem.

    And that dovetails with our concerns that are being illustrated by our leading indicators.

    In a nutshell, the engine is slowing down.  But to understand why it's slowing down, it's important to know that a big part of why it picked up so terrifically in the 2015/2016 time frame was that energy costs collapsed.  Those energy costs are starting to come back...not in a huge way--in fact, commodities, in aggregate are well under control--but enough.

    So there are two points related to commodities prices we want you to focus on understanding this month.

    The first is that, even as the Fed continues to increase the nation's money supply at an increasing pace (yes, you read that correctly), yes, energy and food inflation is rising, but...core inflation is holding steady.  That's not what you want to see.  You want to see core inflation rising faster than energy and food inflation.  That would be a sign of an expanding economy.

    The second point is the indications that we're getting from the market: long-term bond yields have been falling...and yes, commodity prices have also been falling, but here's the thing: bond yields have been falling faster than commodity prices.  And that's nothing but an indication from the credit market that it is expecting a flat to slightly contractionary landscape.

    We have said it many times before: bet against the credit market at your peril.

    Current Scorecard - Global

    May 2017

    Current Scorecard:  -2

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -4
                 -3 
                  -3
     LEADING & CONFIRMING SCORE                -2               0
                  -1
     Leading Indicators                -1               0
                  -1
    Confirming Indicators                -2               0
                    0
     Foundation              -13 
                -15
                 -13

                                

    Truly, there seemed to be no point in updating the Global Scorecard this month: the numbers haven't changed much, and to be honest, we don't expect much of a change over the next few months.

    We're going to repeat a passage we wrote last month. 

    We can talk to you until we're figuratively blue in the face about curtailed investment spending, credit conditions and so forth, but...it's time to face the prospect of being labeled as partisan and speak the truth: it's all about taxation.

    Okay, that's not completely true: when you think about drivers of economic growth, you should think about tax cuts and increased fiscal spending...or, of course some combination thereof.

    In almost all of the major developed countries, effective personal tax rates are over 35% and effective corporate tax rates are almost never less than 25%.  (And in some countries, tax rates were actually raised in 2016.) Let's please remember that, to the extent that corporations distribute profits to their shareholders, that income is taxed again at the personal level.

    We would like to hear from the person who believes that government is going to create a capital environment equivalent to that created by the taxpayers, themselves, on a collective basis.

    To those who might try to argue that government is effective at creating the right capital environment as the private sector, we would ask the question: would $1 returned to a consumer (or earned by a consumer), if taxed by the government in that amount, yield $1 of output?  Let's remember that that dollar passed through another organization's hands.  It is not remotely conceivable that the money earned directly by the private sector would be equivalent to the amount of money spent by the government if first handed to the government.

    Is our language a little brusque?  And does it veer toward the partisan in a way we haven't in the past?

    If you want to understand why the globe is, economically, in something approaching a benign malaise, it's all right there in the tax story.

    Just remember this: expect nothing approaching a noticeable improvement in the global economic picture before significant tax reform or....of course breakout of a major war, which would necessitate massive government spending on a scale that can't help but bolster the global economy.

    How do you think the United States escaped the doldrums of the Great Depression?

    Please maintain clarity of hygiene around your thinking on this topic.  Do not confuse our discussion of what drives economic growth with a discussion of taxpayer rights and how we think government should spend money.  This is simply a discussion of what conditions under which you should expect growth. 

    The argument against our thesis is not remotely sustainable.  Just for fun, of course, if you like, you might want to contact our cousin in Venezuela to develop support for that argument.

    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.

     

     
  • SCORECARDS - June 19, 2017

    Current Scorecard - Domestic

    June 2017

    Current Scorecard:  10                                                          

    Full Scorecard:

                                                                                                                   Current                    Last                       Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL              4
                   7
                   9
     LEADING & CONFIRMING SCORE            10 
                  14               16
     Leading Indicators              4                7
                  14
    Confirming Indicators            17               19
                  19
     Foundation           -20 
                 -21
                 -22


    The simplest way to express the cracks in the economy that can be most tangibly felt is the simultaneous decline in the rate of growth in Personal Income with the increase in the rate of growth in Consumer Prices.  Such is the case, and the combined effect is making itself felt.

    If you read the current Editor's Letter, you know that we think there's a very good chance that the economy is being set up for a robust period of expansion...but that's 18 months out.  Before then, we fully expect the economy to continue softening.  How much will it soften?  We are not certain

    The brightest spots?  Despite the fact that the Fed has tightened monetary policy a bit, monetary expansion continues to be the theme rather than otherwise.  And over-leverage at the consumer level and real estate, in general, is well under control.

    On the other hand, leverage in the non-real estate commercial sector is modestly high.  The level at which it's at suggests that there really isn't room for much expansion without a bloom in earnings or a price to pay down the road.

    As well, if it's true that Core Inflation has been roughly stable (though rising moderately), it's also true that Energy and Food Prices are rising relative to Core Inflation, and that's starting to put pressure on both consumers and businesses.

    Current Scorecard - Global

    June 2017

    Current Scorecard:  0

    Full Scorecard:

     

                                                                                                                   Current                    Last                      Three
                                                                                                                    Month                   Month                  Mos. Ago

      OVERALL                -3
                 -3 
                  -3
     LEADING & CONFIRMING SCORE                 0               0
                  -1
     Leading Indicators                 0              -1
                   0
    Confirming Indicators                 0              -1
                   0
     Foundation              -12 
                -13
                 -13

                                

    We're going to try to dispose of this month's digest of the globe quickly.

    The first point to know is that, the credit markets are simply reflecting a phlegmatic outlook.  Direct manifestations of that perspective are reflected in the fact that improvement in the global labor market is slowing down. 

    But, here's where the figurative rubber meets the road: inflation is rising, but not faster than is justified by depreciation in currencies and rising commodity prices.

    A few points to explain the above statement:

    1.  Rising inflation, other things being equal is a positive forward-looking indicator.

    2.  Rising inflation, when it came be explained merely by declining currencies and by rising commodity prices, is simply a realignment of equilibrium, and not necessarily negative.

    3.  However, when currency depreciation and upward pressures on commodities are greater than the resulting inflation landscape, you are facing the prospect of a contracting economy.

    And that is precisely where things stand.

    Expect a global economic upturn with perspiring hands.

    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.

     

     
  • INVESTMENT OUTLOOK - March 9, 2015

    Investment Outlook

    Some elements of Finance and Investment are understandable to everyone.  One of those elements is...Inflation.  Inflation is, simply put, the phenomenon of a general rise in price levels.  There are insidiously deceptive things that a general rising price level does to distorting how an economy performs and can be objectively measured, but that's beyond the ken of what we want to talk about today.

    For our immediate purpose, the reason to understand Inflation is that, unless the basket of everything that affects your financial net worth rises in at least a commensurate way, Inflation functions as a tax, in effect. 

    And that, Gentle Reader, is why working with a reasonably good forecast for Inflation is a "must."

    For reasons that we discussed in a recent essay in the Editor's Letter, our long-term forecast (think minimum of one year) for Inflation is for it to be be subdued.  No, that does not mean Deflation.  It may not even mean Disinflation, at least not from where we stand now, which is after a couple of months of Disinflation.

    The upshot of our conclusion: the trend in Inflation over the next 12 months is more likely than not to be to the upside (i.e. rising inflation), but, it's also enormously likely to be so at a very small rate.

    So, what does that mean for your investment perspective?

    A subdued level of Inflation has the effect of boosting the value of income and dividends that don't rise at the same rate as Inflation.  So, for example, that would drive up the value of certain kinds of Bonds.  And it would certainly do the same for Stocks that pay healthy dividends, other things being equal. 

    A very tepid rise in price levels would put less pressure on the Central Bank to raise short-term interest rates, and that would translate to less opportunity to make money by betting on the U.S. Dollar.

    It would tend to have the effect of providing incentive to the investor to look to investments that, like Bonds, provide steady streams of income, particularly if those investments provide for opportunities for those streams to rise at the rate of Inflation, or at a higher rate. 

    What does all this mean?

    Well, for one, even though, we believe that most bond classes are overpriced as to have distorted the relationship between risk and return, you should be surprised to not see U.S. government bonds provide a positive return this year.  Does this mean we're recommending U.S. government bonds?  No, because we believe the return does not compensate for the risk.

    Similarly, look out for the performance of the stocks of mature companies that pay steady dividends.  Those companies' stock prices will fare better than others.

    It also means that the landscape for rental housing as a property owner, is quite good.  When you can't get 3% on your money in a bank account, but you can get a minimum of a 3% increase in rent every year, that starts to make that asset class very attractive. 

    The rental housing market has already experienced a boom in the wake of the recession, but we think this year will see it bloom further.

    What else does it mean?  Well, it also means that existing debt becomes riskier.  Rising price levels often correspond to cost of living adjustments in employees' wages or higher prices that small businesses can charge for products and services.  But when these price levels rise at a very slow level, this keeps debt-to-income ratios higher than they would be, otherwise.  In other words, it's a risky time for people who are highly leveraged.  A good time to be careful about taking on more debt?  You bet.

    What does this mean for Gold, which we touted, at the start of the year, as the projected investment of the year?  Many people associate Gold with being a beneficiary of rising Inflation. 

    No, that's wrong.

    When you think about Gold, you should think about the direction of the U.S. Dollar (a lower Dollar means higher Gold), regional political tensions (Gold is still a safe haven), and Debt.

    Why do you think Gold soared from 2009-2012?  Hyperinflation?  Obviously not.  It was the high debt that many countries had relative to their GDP's at the time.  And why did Gold benefit?  Whether the naysayers like it or not, Gold is still the ultimate safe haven of value. 

    The fact of subdued Inflation being on the horizon doesn't necessarily tell you a lot about where to expect Gold to go.  But when you realize that subdued Inflation translates to greater pressure on sovereign deficits, the picture should look different in your mind.

    Everyone talks about Inflation, but many don't know how to factor it into their investment decisions. Are you getting a better sense of how to factor Inflation into your decisionmaking? 

    Simply put, to the extent that you are highly leveraged, lower levels of Inflation will hurt you.  To the extent that you have investments or income that are dependent on a general level in price, lower levels of Inflatin will hurt you.

    To the extent that you have less debt, a low level of Inflation will position you well.  To the extent that your investment position is dependent on a stream of income that is somewhat removed from the effect of Inflation, that will benefit you.

    You've been warned.

  • INVESTMENT OUTLOOK - April 20, 2015

    Investment Outlook

    If you're a regular reader, you probably know our position on the Domestic Equity Market, in general.  We think it's overvalued.  Grossly?  Not really, since the fact of short-term interest rates hovering near 0% continues to make the distribution yield that investors can get from stocks look attractive, even if, as we have said, over and over, the  Market is simply not returning enough reward for risk.  If you're invested for the long-term and not trading, that fact may be irrelevant, but...if you are a trader, we think you're gambling at this valuation level.

    Having said that, not all sectors of the Market are equal, that is, some are more or less vulnerable and are more or less risky.

    The time to take a position is, of course, in anticipation of when you think conditions and results will change.

    We just recently issued our formal forecast for a significant downturn in the pace of economic growth straight through late this year.  If you agree with us, that the economic landscape is about to change, you are probably asking yourself, which stock sectors are more likely than not to benefit in this sluggish environment. 

    Our answer: we think you should take a look at the staples of life...things like basic foods, discount retail stores, companies that make essential drugs.  The point is not so much that these companies' fortunes are directly related to economic sluggishness.  The point is that, in an environment in which consumer spending will be constrained, especially on luxury and discretionary goods, it's these companies whose earnings are most likely to surprise.

    Predicting higher earnings based on a strengthening economic landscape is an easy business...so easy that you're not getting an advantage over anyone else.  Guessing whose earnings are more likely to surprise--because consumers are switching their loyalty, because there's likely to be a dearth of earnings elsewhere, because every stock's earnings estimates have been downwardly revised--that's the name of the game.

    No one's going to make money on betting on Tiffany or a steak house chain when we're going into a downturn because Tiffany or that steak house chain are certainly not going to surprise to the upside.

    But basic foods and drugs?  Things for which demand is pretty inelastic and/or grows when times are tough?

    If any sector is likely to surprise in a positive way, it will be right there.

     

     
  • INVESTMENT OUTLOOK - June 8, 2015

    Investment Outlook

    Hopefully by now you know our "take" on the investment landscape.  While the economy and the investment landscape aren't the same thing, they're certainly related.  Factors that inform the direction of the economy inform the investment landscape.  And, at present, that landscape is oriented away from growth, and that holds for much of the globe, as well as the United States.

    The previous column said it, and we will repeat it only because it's too important: while we're not sanguine on the equity market in general, we feel, of course, that barring a Black Swan-type event or conditions that presage an economic collapse, long-term investors should probably hold to their positions.  But for those with a trading posture, looking at the near-term, the best trading opportunity?  Staples. Think food companies, drug companies, chlorine bleach, and so on.  The point is not so much that these companies' fortunes are directly related to economic sluggishness.  The point is that, in an environment in which consumer spending will be constrained, especially on luxury and discretionary goods, it's these companies whose earnings are most likely to surprise analysts in a positive direction.   But hopefully this is old news to you--we only mention it because it is significant.

    What else?  Well, long-term readers know that our investment editor has a bit of a strong interest in currencies, as an investment class.  We have to pull on her harness to keep her from trying to hard to find opportunities when even she knows they don't exist, and that's pretty much the case at the moment.  Especially with the economic landscape changing--and fast--it's not hard to predict that the landscape for currencies is hardly stable.

    But--for similar reasons, we're prepared to issue mildly bearish forecasts for the Chilean and Mexican Pesos.  This may seem surprising to readers who associate these countries with being commodity exporters, but...in an environment in which the economic outlook is softening, part of the point is, in fact, that there's less opportunity for these exporters.

    The story is really dull, it's really the same in both Chile and Mexico.  In both, it's essentially that monetary policy (combined with fiscal policy) is simply not accommodative enough--economic activity is simply sluggish AND expected, by us, to become more sluggish over the next three to six months.  Fortunately for our confidence in issuing such a forecast the credit markets are in agreement based on the movement in government bond prices and yield curves.  You're a trader?  Trading in currencies is not really for those on a budget or for those with low risk tolerances, but...if it's part of your game, we think you should take a long look at both currencies.

    But--and while, economically, things continue to turn further south for many economies, we're at a point that we're looking at some stability--in a negative way--in some spots.  In other words, some economies have already turned sour and have a near-term that will continue to sour.  Who's on that list?  It's actually a long list!  And here it is:


    The Czech Republic

    Denmark

    Norway

    Poland

    Sweden

    Hong Kong

    Singapore

    Brazil

    New Zealand

    Israel

    Chile

    Colombia

    Mexico

    South Africa

    What does this mean for you?  Well, in terms of the investment landscape, it means we think you should take a very long look at these countries' equity markets?  What's what, you say?  You think we're crazy? 

    We want you to take a long look at the Defensive sector industries in these countries...sectors that produce products and services that continue to be in relatively strong demand in economic weakness.  By Defensive, what do we mean?  You should take a close look at utility companies and companies involved in oil and gas development and refining.  You should also take a long look at companies that issue dividends with high yields....and real estate investment trusts.

    In other words, you want to look at companies where distribution yields are fairly consistent or where the demand for the underlying product or service is sufficiently inelastic that growth yields are almost built in.

    Any return that is either reliable or has inelastic demand fueling revenue growth takes on strong value in a low-growth environment such as we see in these countries.

     
  • INVESTMENT OUTLOOK - July 27, 2015

    Investment Outlook

    We have often been accused of being early on our "take" on both the economy and the investment landscape.  There is some truth to that, but now that the economy has begun to demonstrate a turn, we intend to reinforce a recommendation that we made not long ago.

    It's very difficult, going into this economic softening, to expect corporate earnings reports to surprise in a good way across the board.  We are committed to the perspective that says, across the board, earnings reports for the third quarter will either come in meeting expectations or failing to meet expectations.  Neither portends the prospect of increasing demand for equity shares. 

    However, there is an exception.  For those who are of the trading ilk, we do think that there will be opportunities in the domestic equity market.  

    Here's the point, which may not be evident: rising stock prices are not about rising earnings reports, they are about rising earnings reports that surprise to the upside.  The question you want to ask is, based on the economic landscape, which stock sector are more likely to surprise in that direction?

    The answer, going into an economic softening is, to our mind, clear:  you want to look long at companies that sell staples. No, not the metal pieces that hold paper together, but things that are the staples of life.  Think food companies, drug companies, chlorine bleach, and so on.  The point is not so much that these companies' fortunes are directly related to economic sluggishness.  The point is that, in an environment in which consumer spending will be constrained, especially on luxury and discretionary goods, it's these companies whose earnings are most likely to surprise analysts in a positive direction because consumers are more likely, rather than less likely, to spend a greater deal in these areas.

    The problem, of course, is that, across-the-board total-market investing is fraught with a modicum of too much risk at this point.  Not only is the economic landscape not poised to benefit companies across the board, in aggregate, stocks are at least mildly overvalued based on return for risk.

    If you separate your equity portfolio into your long-term investing and your medium-term investing, it's in your medium-term investing scenario that we expect you make adjustments for risk and return in the medium-term time frame.

    Now's the time to make that adjustment.

     
  • INVESTMENT OUTLOOK - January 18, 2016

    Investment Outlook

    We feel like it's almost not possible for us to spend too much time explaining our approach to investing.  We did spend time on this last time out, but...we think we need to spend a little more time on it, as well as placing a digest of sorts of our methodology at the foot of each column, going forward.

    The first thing to note is that we are talking about investing, not trading.  What's the difference?  Trades are allocations of money that have any of several characteristics:

    1.  The amount of time you expect to be in the allocation is defined at the start to be short-term, i.e. there's a time frame aspect that trumps everything else because you expect to need the money in short order, for other purposes.

    2.  The allocation is based on a speculative move in the market the outcome of which depends on the speculation of others (in other words, betting on how others will bet).

    3.  The allocation is otherwise at odds with a sensible long-term strategy for you, i.e. it is not, otherwise, a "suitable" allocation.

    4.  The allocation is highly dependent on the occurrence of other things that are, themselves are highly speculative.

    5.  The allocation is highly sensitive to changes in the business cycle.

    As a general rule, if your allocation of funds answers "yes" to at least two of these, your allocation decision can decidedly be termed a "trade."

    Trading is not Investing, and for the most part, is outside the scope of what we think is responsible for us to "tackle."  There have been and there will be moments when we will see an opportunity for trades that we want to discuss.  They will be far and few between.  What separates the ones we want to talk about from the ones we won't discuss?  The ones that have value in discussing are based on very visible disconnects in the market that are all but unavoidable to see and that, in our view, must be brought back to equilibrium in a relatively short time frame.

    Now, within the scope of investing, there are two parallel tactics that, we think, for most people, comprise the greater part of what their long-term financial strategy with regard to securities should be. 

    The first is the considered and sober arrival at an asset allocation that is suitable for one's goals. 

    The second is the considered and sober assessment of rare and almost-generational opportunities that pop up from time from time.  Like trading-type allocations, these opportunities always stem from strong disconnects in the market.

    Ask yourself: if, over the course of 30 years you always plunged into securities classes that were heavily out of favor and always sold securities classes that were being greedily acquired, what would your financial position look like at the conclusion of that 30-year period?

    We maintain that, even if one of those securities classes that you plunged into, did not perform very well, you would still be far ahead of any mass market securities index. 

    Does this approach require a little bit of risk tolerance?  Not really, in our view.  Spread over half a dozen securities classes over 30 years will provide more than sufficient risk mitigation as some securities classes are likely to complement others by benefiting from contrary market trends.  What this means is that you must be as diligent and attentive to when to liquidate a position as when to acquire it.

    Most of the time the determination as to whether a security class is a favorable acquisition is a function of a combination of both a serious deterioration in price and at least a minor favorable indication that the market is poised to benefit that class, by virtue, say, of strengthening leading economic indicators or a favorable interest rate outlook for that security.

    Is this an approach that you widely see used in the financial press?  No.  That's why we're practical.  You can battle for an extra 2% in yield, spending days and days on analysis, OR you can jump onto grand opportunities when investors appear to be abandoning all hope in a class.

    When investors are abandoning all hope in a country's sovereign bonds or when they are jumping the equity ship, you cannot abdicate your responsibility to make an independent decision.  You can choose to believe that that investment class is "done," so to speak, or you can choose to see opportunity.  To equivocate is to almost, proverbially, 'split the baby.' Greater reward potential, by definition, means that there is greater risk mitigation potential.  You can choose to wait until your reward potential diminishes, but your risk will also grow, as you will have, by definition, left yield on the figurative table.

    Here's where we're going to sound harsh.  If your investment strategy is informed by following what others are doing at the moment, all you accomplish is guarantee that you will not have any advantage in investment yield, when all is said and done.

    Again, we believe that you cannot abdicate your responsibility.  If you truly believe that an investment class is 'done,' you need to take appropriate steps.  But, if you have a history of having believed, thrice, that various investment classes were through, and they bounced back eventually, you need to evaluate your approach to assessing where a class stands in times of great disfavor.

    Again, at least in modern times, no investment class has ever permanently declined and not eventually bounced back in a big way, returning enormous return to those who were running into the burning room.

    This is our fundamental approach to identifying great investment opportunities.  By definition, they won't come around often.  At the moment, there are several, which we have discussed recently.  But we wanted to take a slow moment to make sure our readers understand our approach in depth.  We feel that this is enough of an update to this column for this week.  In a fortnight, we will reiterate those opportunities and perhaps add a couple more. 

    The balance of the time we will spend our time opining on how changes to monetary and fiscal policy, as well as general economic direction are likely to affect the investment landscape.

    But the underlying point is critical: because GREAT investing opportunities only come along every few years, it is impossible to overstate how much you should expect to hear us proverbially yell about them and how much you should take long looks at them before eschewing them.

    Take a week or two to read this column again.  And then prepare to take those long looks.

     
  • INVESTMENT OUTLOOK - March 7, 2016

    Investment Outlook

    Well, did we spend enough time leaving our philosophy on investing up in this column?

    It's a sport of sorts that people engage in: arguing about the direction the equity market will take in a given week, for example.  You can have your fun, but you must ask yourself: is spending upwards of 10 minutes every week debating where the market's going to go make any kind of sense?

    What kind of security do you feel in your investment if you have to engage in that kind of sport?

    If you are doing that, what you're really doing is playing in a casino.  It makes no sense to us.  True comfort in an investment comes from knowing that the odds are so heavily stacked in your favor that there's not much to think about.  It's about compound average annual return, not a quick buck.

    With this in mind, let's talk this month a few minutes about the equity market.  Globally, using our general framework for assessing a market--one that has fallen so out of favor that it starts to look appealing--there is actually one, and only one, stock market that is catching our eye.  It comes with a caveat due to the nature of its political regime and regional difficulties, and that's....Russia.

    The fundamentals are just very hard to ignore.  The Russian Stock Market is incredibly out of favor, with its Index hovering in the 730-ish range, down from a high, at one point, of 2034.  

    Could the Market continue to decline?  Absolutely.  Whether you plunge at 730 or 630, does it really make a difference when the Market is this much out of favor?  We're not trading hustlers, we're investors.

    The other point about the Russian Stock Market is...Energy.  Whether or not we've reached a bottom in the prices for Natural Gas and Crude Oil is up for debate, though it does appear we are now scratching a bottom, but...the greater point for Russia is the greater point for Energy.  It's very hard to see energy prices enjoy wholesale declines at this point, and the potential is much, much more to the upside and that holds only strongly positive things for Russia.

    If you feel like gambling, you're far better off plunging into the Russian Stock Market than, say, the U.S. Stock Market.

    But let's talk about the U.S. Stock Market for a moment.

    Yes, the essential point holds, that there is nothing remotely appealing about the price level of the S&P 500.  But there is, if not a greater point, a point that we think you should find of sufficiently provocative weight.

    It's true that real interest rates continue to be almost absurdly low, and fact that alone, on paper, continues to argue that it's almost impossible to see anything but continued mild gains in prices for stocks, in general.

    Here's the problem--completely aside from what the bond market and other indicators are telling us about the economy--:  stock traders, themselves, are not behaving robustly optimistically.

    The Price/Earnings Ratio on the S&P500 is strong, and yes, above its historical average of roughly 14.5.  It's trading in the 20-ish range.  And that's not something to discount.  But, when traders are strongly optimistic, they are rarely wrong in the short term and when they are strongly optimistic, the P/E Ratio should be expected to hover in a range of 25 and well above it.

    A P/E Ratio of 20-ish when real interest rates are negative?

    Does that sound like stock traders are very sanguine about earnings prospects and levers to manage risk?

    Indeed...it does not.

    A word to the wise is sufficient.

     
  • INVESTMENT OUTLOOK - April 4, 2016

    Investment Outlook

    It's always important to keep in mind the primary "take" we have on discussing investment classes in this column, and that's...identifying investment classes that are severely out of favor.  We are not talking about investment classes that are undergoing "corrections," but rather wholesale price movements on the order of which a facile mind would conclude that the bottom is permanently falling out of that class. 

    Those are the times that make for great investing opportunities.

    Hopefully, in weeks past you listened to our counsel around Crude Oil and Natural Gas.  The good news for those that did is that both have begun to creep up.  However, both are very strongly still out of favor, even if it does appear that we have seen the "bottom" in both by now.  If your money management technique is leaving you with ample cash, these classes are still very much out of favor, and are still good bets.  Nevertheless, could both soften a bit in coming weeks?  Absolutely.

    But there's another investment class that we really want to talk about today, and that's...Silver.

    Silver has recovered roughly $1 per ounce in price since its recent low, but...it still represents a tremendous opportunity.  In this context, please keep in mind that Silver's "high" had floated around $43.00.  We have our own theories around why Silver has not fared well in recent years.  Much of that theory is centered around the phenomenon of Gold still being the ultimate hard-asset store of value in the minds of most cultures, and a growing lack of confidence in the monetary system. 

    It is not so much that we think Gold is going to lose its luster so much as adherence to discipline that makes Silver attractive.  You think you're smart enough to cherry-pick those investment classes that are figuratively scraping the ground?  Good luck.  We think that's foolish.  You will almost always be able to find a reason to eschew an investment that is severely out of favor.  But you don't make big money by buying investment that are in favor, do you?  You make money by consistently buying all investment classes that are severely out of favor.

    Given Silver's ridiculously low price level, we think you are very foolish if you do not include some amount of Silver in your portfolio.

     
  • INVESTMENT OUTLOOK - June 6, 2015

    Investment Outlook

    So now, while you should generally be discouraged from thinking about Real Estate, specifically Housing, as an investment, the reality is that a great many people--not unrealistically--understand their home as a future source of wealth-tapping...and, it's a fact, of course, that many of you do dabble in Real Estate--and specifically the Housing sector--as an investment discrete from your own home.

    And that's what we want to talk about.  As you might expect, we wouldn't devote much, if any, time to talking about a subject on which there's nothing to say in the way of potential or danger.

    And...we believe we have something to say at this juncture.

    One of the problems with the popular and conventional business press is that its main purpose is to sell copy...to generate excitement and/or fear.  Its main purpose is not to provide cogent, easily-digestible and useful information.  What data point will give the speaker enough opportunity for color and screams?

    We do try to keep things simple here.

    There is more than one indicator we use to measure the health and directionality of the Housing sector.  But we only work with a few that we think are powerfully informative. 

    First, let's talk about housing prices relative to the economy in general.  Briefly and accurately, when we measure housing prices, nationally, when we compare where they are, both relative to GDP and to Income, house prices are....NOT over-priced.  Yes, you read that correctly.  It's very difficult, at this moment in time, to project that any kind of major housing price correction (never mind, collapse) could possibly be imminent.

    But that's not the whole story. 

    You measure home prices against GDP---they're ABSOLUTELY FINE.

    You measure home prices against Income--again, ABSOLUTELY FINE.

    And, by the way, what do we use as our metric for home prices?  The Case-Shiller Price Index, of course.  It's an astoundingly accurate measure, in our opinion.

    Now, as many of you probably know, there are fewer sound indications as to economic direction than the sentiment indirectly displayed by bond traders in the way of demand they demonstrate for fixed-income instruments.  And here's our problem in a nutshell: the price of U.S. government fixed-income instruments, taken as an aggregate (the U.S. Government Bond Index) is not just high, but measured against home prices, is....too high.

    Or, rather, put another way, home prices are too high relative to bond traders' demand and preference for longer-term fixed income instruments.  Demand for intermediate- and long-term bonds tells you an awful lot about what the bond market thinks is going to happen to the general economy and price levels, in general.  When bond prices are as nearly screamingly high as they are at the moment, it tells you that they are not particularly sanguine about the prospects for growing economic activity.  What that means, in turn, is that the price level for homes that would make sense in the context of high bond prices (or low rate yields) is a significantly lower level than we have today.

    The gestation period for corrections for these kinds of things tends to be long.  That housing collapse that came around in late 2008?  Remember that the real fall-out didn't come about 'til later in 2009, but that the beginnings of the decline came in 2007.  Don't hold us to a time-table, but...we think that it's a long gestational period that we're looking at before a correction in housing prices comes, but...we're certain it will come, and we think it will come no later than the first quarter of 2018. 

    What does this mean for you?

    It means that, if you're looking to buy a single-family home for any other reason to have a place to live in and for at least 10 years, you may want to hold off for up to two years.

    It also means that, if we're right, there will likely be a displacement of newer homeowners an/or existing homeowners who run into difficulties in maintaining their financial sanity in their homes...in other words, while it's fairly common knowledge in real estate circles that valuations of true investment-type properties (think 5+ unit properties) are very high at the moment, we think it's very likely that valuations, in the context of a correction, could go higher. 

    Many investment concerns that had invested in that end of the market have been divesting to some extent to take advantage of high valuations.  The question: aside from the necessity to make distributions to investors who are demand them, where would you sensibly invest that capital?  We think that this market is going to figure out very shortly that this is one aspect of the market to stay in, assuming they don't need to make distributions for at least three years, which is, we think, the minimum period of time you'll need for first the correction to take place (and for some homeowners to become displaced, seeking rental housing) and for the economy to then begin recovering enough that credit markets heal.

    When you stand back and look at the totality of this update, it's actually a bold and startling column, isn't it?  We're standing behind every word of it.

     

     
  • INVESTMENT OUTLOOK - August 1, 2016

    Investment Outlook

    Let's chat about the U.S. equity market.

    Uppermost in our mind is the thing that should be uppermost in your mind.  And that is how to value the equity market at this juncture.  And, by juncture, we're specifically thinking of the fact of the market reaching new highs in conjunction with very moderate growth and essentially no more fuel in terms of conventional monetary tools.

    We're going to try to keep this simple and stick to the few points that we think are most pertinent to understanding how to think about the market right now.

    The first thing to know is that when we look at the 12-month rolling average of earnings of the S&P 500, that figure is now the lowest since February 2014.

    Read that sentence again.

    In February 2014, the price-earnings ratio on the S&P 500 was roughly 17.9.  In July it was 24.9.  That's a fairly substantial rise in the premium you're paying. 

    Now, you wouldn't mind paying an increased premium if earnings were also rising, would you?  But you're paying more for less earnings.  Please read that again.

    You are paying more for less earnings.

    That's the first point we want to make sure you digest.

    The second point we want to study is how the price level of the S&P 500 relates to the size of the private sector portion of Gross Domestic Product.  We are going to be kind and not going to deluge you with numbers.  The upshot?  The price level of the S&P 500 is close to being in line with where it should be to be fair, but it's only close and in fact is now just below the threshold we consider to be neutral.  So, in other words, if the price level of the equity market grows even a little and if the private sector grows at a slower pace, we would shortly be in territory that shows the market clearly overvalued. 

    So far, the case for the market's being overvalued is there, but it's mild, right?  True

    The last area we want to cover is the topic of whether equity investors are being sufficiently compensated for risk...and, we're measuring risk by our metric of what bond traders think of the economy, specifically by the yield curve, a remarkably accurate indicator of where economic trends are heading. 

    And what the ratio is telling us is:

    1.  Bond traders are too phlegmatic based on the return currently gotten from stocks, i.e. the return from equities is too low for the risk that bond traders think the economy has.

    2.  While that indicator is in negative territory, it isn't deeply so.

    This probably isn't the portrait you expected us to paint for you.  The overall picture is that equities aren't, overall, your strongest and best investment right now, but the signals we're getting aren't ones that are flashing a precipitous situation.  Of course if you are a sophisticated investor--and especially if you're already well-diversified--taking some money off the table probably makes some sense:

    1.  These leading indicators are flashing mildly negative signs.

    2.  Building a cash position when investments are overvalued, for the purpose of being ready when great opportunities arise, is not an abundantly smart idea.

    Of course, based on the rest of the economic picture, we think it's very highly likely that (1) earnings will continue to come under pressure and (2) the general economy will come under pressure.

    Of course, if that happens, we will certainly let you know.  But for now, while it's probably better to begin cashing out of some equity positions, it's not a disaster should you choose to retain your existing positions, especially as very accommodative monetary policy is continuing to make the equity market a very attractive place for lay investors and befuddled money managers. 

    Just remember: you do want to get out of the market before they do.

     
  • INVESTMENT OUTLOOK - August 29, 2016

    Investment Outlook

    It's a little unusual for us to visit the same topic twice in a row, but...the situation in the equity market continues to evolve, and clarity around how you should be looking at is becoming more easily gotten.

    First, we want to say that, if we think the bottom of the market is about to fall out (1) we will say so and (2) if you wait that long, you'll have missed the right window to have re-allocated your funds.

    Having said that, we think that the market continues to become more overvalued and that we're getting very close to the point that we expect to be urging a strongly bearish position.

    There are two points we want to make on how to understand that the market is over-valued.

    The first has to do with private sector business leverage. 

    One of the strongest and most important ways to understand the capacity of the market to continue to achiever greater price heights is understanding earnings pressure.  The most significant metric for understanding earnings pressure is simply...leverage.  How heavily leveraged is the private sector?  It's a simple question, and because we are The Practical Economist, we have a simple but powerful metric for gauging it. 

    As we mentioned last time, it's all about that ratio of borrowing to earnings. 

    So, what about that ratio?  The first thing to know is that while that ratio has not reached the threshold at which we'd be ringing the alarm bell, it's very, very close. 

    The second thing to know is that that ratio has been rising, with the exception of one month, for 12 consecutive months.

    So, in a nutshell, U.S businesses have been borrowing at an increasing rate over the last 12 months but earnings have not kept up with those increases in borrowing.

    Now, the second grand point we want to make is related to the first.  Let's talk more about Earnings.  In July, Earnings, in aggregate, of companies that make up the S&P 500 Index fell year-over-year for 12 consecutive months.  Read that again.

    July 2016 over July 2015, the price level of the S&P 500 Index rose 2.5%.  Over the same time frame, Earnings fell 15.0%.

    After reading that, is there anything else you need to know?

    The Business Press has been very noisy about chasing companies with "healthy" dividend yields.

    We don't know what it means to have a "healthy" dividend yield when earnings are coming under pressure, both in terms of absolute level and in terms of their relationship to debt.

    This is not an out-and-out alarm.  Consider it a kindly early warning. 

     

     
  • INVESTMENT OUTLOOK - November 14, 2016

    Investment Outlook

    Believe it or not, we're going to visit the Equity Market yet again, but...no, not the domestic market.

    The signal thing to know about the global investment landscape is that we are on the threshold of change.  No, there is no guarantee that the proper directional alignment of monetary policy will yield fruit, but...given sufficient directional alignment and given sufficient pent-up demand, "something's got to give," as the old song goes.

    Because we're The Practical Economist, our approach to evaluating thresholds for getting in or out is perhaps too frighteningly simple.  We say "frighteningly simple" because we imagine that many a layperson will be sure that nothing as hoary and mysterious as the equity market can be made sense of without endless blather and words that confer the appearance of intelligence.

    It's simple: our calculus for evaluating opportunities and threats is a blended metric of the extent to which a market is underpeforming relative to prospective growth.

    Put grossly simply, in the ideal situation you'd be looking at a market that has fallen, say, 20% from its height but is looking at prospects for latent demand particularly demand-based inflation.  It is that simple.  It really is.

    Perhaps shockingly to many of you, we think there are several "hot spots" around the globe at the moment, that is, markets that are primed for value-oriented growth.  Here they are, in no particular order:  Japan, Russia, Turkey, Singapore, Brazil, Chile, and Egypt.

    None of these is a marginal call.  All score well on our card.  Depending on your present allocation of capital, we strongly recommend that you take a very long look at these areas.

    Conversely, there are two markets that we think may be hitting rough patches....and those are the United Kingdom and Hungary. 

    Have fun with our forecast.  We definitely encourage you to keep a scorecard with regard to how these markets perform over the next six months or so. 

    We're the first to tell you (loudly) when, even though a country's central bank has adopted aggressively accommodative monetary measures that...such measures are insufficient.

    But we'll be happy to tell you when the reverse is also the case.

    A word to the wise, as they say, is sufficient.

     
  • INVESTMENT OUTLOOK - January 2, 2017

    Investment Outlook

    Sometimes, the outlook for a particular investment class is predicated on fundamental drivers whose effects are going to be hard to escape, so to speak.

    But, if you're a regular reader, you know that one way to arrive at the conclusion that a positive experience is not based on such drivers, but...how very poorly an investment class has performed.  Many will bob their heads when they hear it, but many will also fear to tread when opportunity knocks; we're talking, of course, about situations in which investors have figuratively run for the exits.

    It is in that context that we draw your attention to several commodities that we think are silly to ignore.  It may surprise that there are so many that fall into this category.  They are--simply: Silver Natural Gas, Crude Oil, Soybeans, Wheat, Nickel. 

    Could we sound less profound and less serious?  Probably not, but then again, we'd like you to summarize the ratio of signal to noise that you get from the popular press in this area.

    In the case of all of these commodities, price levels continue at levels that are significantly depressed on a historical basis. 

    We can guarantee you that, if you strike up a conversation with your colleagues, you will hear very smart-sounding reasons to avoid these investments...at the moment. 

    Here is the point: no one knows what's going to happen, and it may be that your colleague is correct that, in the short-term, some or all of these commodities will not fare well. 

    However, when an investment class is as significantly depressed as all of these are, you can either bet into the improbability that there is little opportunity for gain, or you can bet into the probability that you can accurately make investments that return adequate returns, consistently, over a long-term period.

    Consider your options....carefully....and remember that the pubic almost always buys into any rally after the first 20% of gain has been achieved.

    Maybe we should make this simpler: if you don't bet into these commodities, you're indirectly betting that the Dollar will either retain its level of strength relative to other currencies or that demand will continue to fall.

    Yes, we are on record that we think demand is going to weaken, but...do you really want to get aboard a perspective that has demand weakening in the face of a Dollar that doesn't also weaken?

    You will make a bet that both demand weakens and that the Dollar retains its strength...without us.

     
  • INVESTMENT OUTLOOK - February 13, 2017

    Investment Outlook

    If you're new to how The Practical Economist evaluates investment opportunities, we strongly recommend that you skip to the section below, first, in which we lay out our philosophy,

    In the spirit of our investment philosophy, there are three country equity market indexes we want to bring to your attention.  We think they're all poised to perform very well over the next six-to-18 months based on how out of favor they are, and based on some fundamental economic factors that will support those countries' economies.

    They are:  the Czech Republic, Russia, and Chile.

    Let's talk about the position of the major equity indexes of each country.

    In the Czech Republic, the major index is hovering around a level of 930.  That contrasts with the maximum level it previously hit....of 1266.

    How about Russia?  The current level of 1157 contrasts with that country's previous high of 2034.

    And Chile's major index is flirting with 3310 against a high of 4851.

    Take a close look at the differences between these present levels and these market highs.  These are major falls from these countries' highs.  We consider these current levels to be so depressed as to significantly raise the opportunity for reward.

    At the same time, there are some fundamentally mildly positive factors at play in these countries that, we think, minimize the risk for continued losses.

    You can invest into a market that's hitting new highs or you can invest into a market that has plenty of upward room for growth.

    Choose wisely.

    The Practical Economist's Investment Philosophy

    Perhaps the most fundamental cornerstone to the philosophy of The Practical Economist is the concept of maximizing opportunity for return.   Every time that you squeeze your opportunity for yield, you are either minimizing return opportunity or maximizing risk or...both.

    The classic way you minimize risk is to eschew and sell an investment that is hitting new highs...in concert with fundamental indicators that do not suggest a landscape of strong growth.

    And the classic way you maximize opportunity is to embrace investment classes that have not just experienced corrections but are so out of favor as to be considered in the figurative basement.

    Again, our fundamental indicators about the economy must support what the rest of the data suggests, i.e., just because an equity market index has fallen 50% off its high that's not sufficient unless the economic landscape suggests, at minimum, that economic slippage has come to a standstill.

    A combination of the two--severely out of favor investment class and at worst a neutral economic landscape?  That's what The Practical Economist needs to see, and when it exists we will tell you about it.

     
  • INVESTMENT OUTLOOK - April 3, 2017

    Investment Outlook

    If you're new to how The Practical Economist evaluates investment opportunities, we strongly recommend that you skip to the section below, first, in which we lay out our philosophy,

    One of our guiding principles in maintaining this site is to not look for create drama for you to believe in when it doesn't exist.  We're not going to make more of data when it comes out than that data requires.

    But that doesn't mean we don't want to cover the entire field...at least so you don't think we're missing anything.

    In this column, we want to briefly address the broad area of the Real Estate market, with emphasis on Housing.

    In the wake of the financial crisis, and after the enough mechanisms were put right toward getting the economic engine moving, there's little question that Real Estate, in the U.S., and as a whole class, was undervalued and was a terrific asset class for investors.

    That time has now appeared to have passed.

    It is not that the real estate sector is overvalued.  No, by every measure we look at--ratio of income to prices, ratio of prices index to GDP, and so on--the real estate landscape is roughly fairly valued.  One very simple way to understand the situation: while real estate price indexes have recovered greatly from their fall in the wake of the financial crisis, interest rates are at relative lows that have minimum opportunity to go lower.  Other things being equal, we hope that readers understand that rising interest rates are the enemy of real estate valuation.

    The smartest step you can take with regard to real estate assets you own is to assess the opportunity cost of the capital you have tied up in your real estate.  And, of course, when we talk about capital in this regard, you have to look at available capital...meaning the net capital you have left after you liquidate said investment. It could very well be there are better uses for that capital...on the other hand, if could be that, with that sector properly valued (roughly), you simply wait and see until the sector starts to become overvalued and even better opportunities develop elsewhere.

    We have written recently about the fact that the private sector is starting to demonstrate signs of being over-leveraged.  That over-leverage is specifically in commercial and industrial enterprises.  It does not specifically include housing or the consumer.  So, be careful about making false extrapolations.  We always say exactly what we mean.

    We hope that you invest precisely in the way you intend.

    And, we hope that you intend to invest in a way that maximizes potential and minimizes risk.

    The Practical Economist's Investment Philosophy

    Perhaps the most fundamental cornerstone to the philosophy of The Practical Economist is the concept of maximizing opportunity for return.   Every time that you squeeze your opportunity for yield, you are either minimizing return opportunity or maximizing risk or...both.

    The classic way you minimize risk is to eschew and sell an investment that is hitting new highs...in concert with fundamental indicators that do not suggest a landscape of strong growth.

    And the classic way you maximize opportunity is to embrace investment classes that have not just experienced corrections but are so out of favor as to be considered in the figurative basement.

    Again, our fundamental indicators about the economy must support what the rest of the data suggests, i.e., just because an equity market index has fallen 50% off its high that's not sufficient unless the economic landscape suggests, at minimum, that economic slippage has come to a standstill.

    A combination of the two--severely out of favor investment class and at worst a neutral economic landscape?  That's what The Practical Economist needs to see, and when it exists we will tell you about it.

     
  • INVESTMENT OUTLOOK - May 1, 2017

    Investment Outlook

    If you're new to how The Practical Economist evaluates investment opportunities, we strongly recommend that you skip to the section below, first, in which we lay out our philosophy,

    This month we're going to talk about Gold.

    There are many factors that inform the price movement of Gold...supply, industrial use and demand, inflation...and more.

    But by far the greatest factors are (1) the direction of the US Dollar and (2) the direction of sovereign budget deficits, most notably that of the United States.

    If you can make a case for either a falling deficit OR a stable deficit combined with a rising Dollar, we'll grant a lot of room to those who don't have much use for Gold in the current environment.

    Did you read our piece last week about the size and recent direction of the deficit?

    Remember that run-up in the value of the Dollar in the 2014-2015 time period?  That's been over for some time

    What case can you make for the Dollar resuming an upward climb?

    What case can you make for sounder currency vs. growing dilution of the currency?

    The Fed's recent rhetoric?  We're not buying it, and we don't think, if you're actually keeping score at home (on the Fed's announced plans for scheduled rate hikes against actual economic data) that you buy it, either.

    Ultimately the market determines how sound the currency is.  The Central Bank can tighten all it likes, but if that tightening is out of synch with economic growth, what do you think happens to the currency?

    Gold is not undervalued at the moment, but go ahead and tell that to the Dollar and the deficit.

    The Practical Economist's Investment Philosophy

    Perhaps the most fundamental cornerstone to the philosophy of The Practical Economist is the concept of maximizing opportunity for return.   Every time that you squeeze your opportunity for yield, you are either minimizing return opportunity or maximizing risk or...both.

    The classic way you minimize risk is to eschew and sell an investment that is hitting new highs...in concert with fundamental indicators that do not suggest a landscape of strong growth.

    And the classic way you maximize opportunity is to embrace investment classes that have not just experienced corrections but are so out of favor as to be considered in the figurative basement.

    Again, our fundamental indicators about the economy must support what the rest of the data suggests, i.e., just because an equity market index has fallen 50% off its high that's not sufficient unless the economic landscape suggests, at minimum, that economic slippage has come to a standstill.

    A combination of the two--severely out of favor investment class and at worst a neutral economic landscape?  That's what The Practical Economist needs to see, and when it exists we will tell you about it.

     
  • INVESTMENT OUTLOOK - May 30, 2017

    Investment Outlook

    If you're new to how The Practical Economist evaluates investment opportunities, we strongly recommend that you skip to the section below, first, in which we lay out our philosophy,

    This month we're going to take a step back and look at a larger picture that is key to the way many of you execute your investing strategies.  And that is...interest rates.

    Many of you work with investment algorithms that rely heavily on the directionality of long-term interest rates.  Many of you would be quick to say that if you knew where long-term interest rates were going to be two years from now, you'd be in a strong position to make a killing in the market.  So, it's not an unimportant topic.

    In this month's column, we intend to take the figurative sword to the Gordion knot, and attempt to divine directionality and reason.

    And...of course we're going to keep it simple.

    Based on the most widely digested data available to the consumer, it would be popular to hold the position that it's difficult to see interest rates rising significantly over the months to come.  The Dollar has been stable, inflation has been stable.  Commodity prices have been stable.  Yes, employment has been expanding, but...if the credit markets haven't seen reason to bet on a rising yield environment yet, why should you do so now?

    Let's ask the question differently.

    What case can you make for long-term interest rates falling, say, 50 basis points (or more) in the medium-term?   It's not easy, is it?  Even when the Fed was literally printing money a few years back, the yield on the 10-year government bond hovered just north of 1.50%.  The yield is presently flirting with a level of 2.30%. How big a spread does that seem to you?

    Now let's talk about the reverse situation.  How likely is it that rates rise over the next 12-24 months?

    Let's look at some facts.  First off, there's the point we just made, namely that long-term interest rates are still at a relative low.

    But about what prospects for business expansion?

    First of all, no one knows whether the federal government is going to effect changes to the tax code that will benefit the private sector, but...if you had to place a wager, you'd understand the situation this way:  (1) tax rates are already high (2) tax rates are not likely to go higher under the current Presidential administration and if anything, could possibly come down.

    Now, let's talk about another important input to profitability:  advances in productivity in the private sector are occurring at a pace that the average consumer has no knowledge of.  It is very easy to argue that the prospects for broad advances in business profitability over the next decade are significant.  (Yes, most of these productivity gains are related to what used to be called 'artificial intelligence'.)

    Add in the fact that commodities prices are already more than relatively low.  The Bloomberg Commodity Index is still hovering below 90 on a scale in which 100 is par.  (Yes, commodity prices could fall further, but what's that probability and how much could they really decline given how low they already are?)

    Now, take a moment and digest all of that.

    Would you want to argue or even be on a side that is invested (literally and figuratively) in a contracting yield result?

    Or even a stagnant yield?

    The medium-term forecast for rising long-term interest rates is, in our view, quite strong.

    With that in mind, you should apply that input to your investment algorithms and execute appropriately. 

    How does this dovetail with our current economic forecast?  Please remember: our economic forecasts work with a time frame that goes out six months.  There is no contradiction between the economic forecast and the interest rate forecast; the time frames are very different.  Also the economic forecast is highly quantitative in its modeling; our interest rate forecast is more theoretical.

    What would a rising yield environment mean?  We will discuss that in a future column.

    The Practical Economist's Investment Philosophy

    Perhaps the most fundamental cornerstone to the philosophy of The Practical Economist is the concept of maximizing opportunity for return.   Every time that you squeeze your opportunity for yield, you are either minimizing return opportunity or maximizing risk or...both.

    The classic way you minimize risk is to eschew and sell an investment that is hitting new highs...in concert with fundamental indicators that do not suggest a landscape of strong growth.

    And the classic way you maximize opportunity is to embrace investment classes that have not just experienced corrections but are so out of favor as to be considered in the figurative basement.

    Again, our fundamental indicators about the economy must support what the rest of the data suggests, i.e., just because an equity market index has fallen 50% off its high that's not sufficient unless the economic landscape suggests, at minimum, that economic slippage has come to a standstill.

    A combination of the two--severely out of favor investment class and at worst a neutral economic landscape?  That's what The Practical Economist needs to see, and when it exists we will tell you about it.

     
  • COMMENTARY - March 9, 2015

    If the Moon Turned Green

    It's tempting to believe we're living in regular times....well, relatively speaking, that is.  It's been almost seven years since the start of the Financial Crisis, and while the financial press--not to mention the Obama Administration--downplays some of the points about the economic foundation that are rickety, there are many things that show we're in a recovery...a very slow recovery.

    But there are occasionally things that pop up that shine a light on how non-normal this recovery is, that it might, in fact, be foolishness to call it a recovery.

    This week, Austria joined an exclusive club.  It joined the club of countries that are issuing five-year government bonds at negative yields.  Yup, you read that correctly.  There are bond traders who are buying bonds such that, at maturity, will receive less in principal than they invested.

    Who else is in this club?  Well, there's Germany, Finland, and Sweden.

    Now, when bond investors are willing to accept negative yields, it's something to think about.  The glib answer is that investors are anticipating that bond prices will rise as Europe continues to struggle and the European Central Bank buys the bonds of member countries.  But is that all there is to the story?  If that were the case, wouldn't the bonds of almost all Euro Zone countries be yielding negative returns?

    The point is that the fact that you can even make a case for why the expected return for these bonds is positive is irrelevant in context of the greater question.

    And the greater question?  The global economy isn't remotely close to being back to normal.

  • COMMENTARY - April 27, 2015

    Common Sense

    Writing commentary for a site like this is fun.  You're held to a lower level of rigor in point-proving.  Sure, opinions--even if they're backed by common sense--aren't enough.  You do have to throw some facts in there.  But still--

    Colleagues say that they've received no end of argumentation with regard to the recent Editor's Letter in which the point was made that faith in the U.S.'s currency is lagging.  Many people missed the point.  You can argue about whether, adjusted for monetary accommodation, the Euro or the Dollar is ahead, but it's an immaterial point.  Either way, both are essentially fighting for fourth or fifth position out of five reserve currencies.  Even if you want to make the point that they're fighting for third, fourth, or fifth position, the devil's advocate appears to really make the Editor's point. 

    Rather than belabor who's in last place, we want to shine a light on the other end.

    As this column recently pointed out, there are several countries whose five-year bonds are yielding negative nominal yields for a variety of reasons, including yes, the fact that some of these are members of the Euro Zone and will benefit from the new bond-buying program of the European Central Bank.

    But what can you say about a country whose 10-year bond has a negative yield and which is completely independent of the Euro, the European Union, and any other country?

    You can say an awful lot.

    We'd like you to name a country.

    Name a country whose political system is high on the list of being transparent...whose economy is at least mildly diversified...whose political and monetary system make it completely neutral and independent of everyone else.

    That's right:  Switzerland

    It's hard to ignore the force of military might when considering currency strength.  But if that were all it was to the matter, it'd be awfully hard to explain why Switzerland is #1 on investors' list of favorite 10-year bonds.

    We don't know what the future holds, and it's hard not to predict that the Franc has to come down in value a little in coming weeks and months, but...we think you'd be awfully stupid to make a bet that, however the world's economic and regional problems sort themselves out, the Franc won't be one of the top three winners for the long-term, and were there to be a collapse of the financial system, the last fiat currency to survive before the lights go out.

    Think about it.

     
  • COMMENTARY - June 22, 2015

    More Common Sense

    Logic is supposed to be logical.

    That means that to make a point properly, you don't do it by engaging in circular reasoning, extrapolating from a data set that's too small, or relying on sparse anecdotal information.

    But the latter--anecdotal information--can be compelling as support to a conclusion otherwise properly derived.

    About a year ago, we were chatting with Philip, the brother of a friend, Clement.  (Remember Clement's name...he figures later in the story.)  Philip is a successful trader who's been in the business a long time.  We were chatting on the subject of economic trajectory.  Even though we didn't issue our formal forecast for an economic softening until about two months ago, we were privately talking about signs that we saw of weakness as far back as a year ago. 

    We made that statement to our trader colleague.  He agreed that a serious weakening was on the horizon.  We opined that it would be a 2014 event.  He opined that it would be a 2015 event.

    Clearly, he was correct, though to our credit, you will note that we didn't commit to this forecast until early 2015.

    Fast-forward to two weeks ago.  We were talking about the coming economic softening with Clement (you remember him, right?).  We also raised, with Clement, our very early feeling that the possibility of a dislocation in financial markets is growing.  (More on that in future columns.)  Can you guess what happened next?  Clement phoned his brother, Philip, the Trader.

    Unfortunately for a complete story, Philip was pressed for time as he was, just at that moment, leaving on a trip.  Fortunately, for dramatic purposes, Philip gave a fast response that can't be beaten for impact.  His fast response to his brother, after saying that they'd follow up after his trip? "Yes, tough times are ahead."

    That's a long background to a story, but you can see why it was necessary.   

    And we don't know how you get the answer more pithily or with more impact.  Brother to brother...you get the kernel of what one brother, a successful trader, wants his brother to know.

    "Tough times are ahead."

    No, you wouldn't draw up a forecast based on one solitary statement like that, but in context of our forecast and in context of our oft-stated belief that professional traders are the smartest people on Earth, well...it's a pretty strong and valuable input. 

    "Tough times are ahead."

    When a successful trader tells you that tough times are ahead, well...you pay attention and you take action appropriate to your personal situation.

    Anecdotal evidence alone isn't logic.  But it can be very compelling.  It's just common sense.

  • COMMENTARY - July 27, 2015

    Two Sides, At Least, to Every Situation

    We assume that some of you watch or listen to the proceedings when the Chair of the Federal Reserve testifies before Congress.

    It's pretty funny, isn't it?  The sight of the Body that's largely responsible for having created the Housing Crisis (Congress) grilling the Fed Chair on responsibility and accountability.  Because that's what happened a couple of weeks ago.

    Most recently, Chair Janet Yellen was subjected to a grilling that called for much greater levels of transparency, with some Congressmen practically banging fists on tables.

    To our mind, there shouldn't be a Central Bank at all.  To our mind, more than half of the problems that come around, do so because of lack of equilibrium in markets, and that problem would go away if the market simply dictated what it wanted, especially in terms of interest rates.

    But, as long as we do have the Federal Reserve, we have to be thoughtful about how that mechanism should operate.  Congress, among other bodies, gets frustrated with the Fed's language with regard to the timing of managing interest rates.  Many observers grasp for easy and simple sounding policy statements.  The reality is that Chair Yellen is not a simple speaker.  She is phlegmatic, but clear...but PHLEGMATIC.  If you choose to hear part of what she says, you do so at your peril. 

    Is it necessary that the Chair be so phlegmatic?  Yes  Precisely because market observers look for gross statements is the reason she must be overly communicative about the Fed's plans.  The last thing that Yellen wants is for the Market to respond prematurely to a move it thinks the Fed is going to make.  Yellen's strategy is fairly obvious: by the time the Fed does actually make a rate adjustment, it will make abundant sense to the Market and investors will not artificially move markets  except to be in lock-step with true economic conditions

    We are alert to Chair Yellen's criticism of Congress eschewing its fiscal responsibility--both today and in the recent past--and Fed observers would be wise to attend to the Chair's words and tone.

    We think it's pretty obvious why the Fed needs to have some of the independence from the Treasury, the Presidency, and Congress that it's perceived to have.

    Janet Yellen is a mild-mannered, phlegmatic with a very strong background in quantitative measurement and policy making.

    If you think this diminutive, soft-spoken but deliberate-spoken economist with one of the strongest resumes for the Fed in history is going to be bullied, you need to rethink your thesis.

    Underestimating a gal from Brooklyn?

    Do so at your peril.

  • COMMENTARY - August 17 2015

    Do You Believe the Business Press is Informing You Properly?

    In the column most recently preceding this one, we made the observation that the Fed Chair is, in her soft-spoken but determined way, trying to make a point.

    It's critically important to remember that Janet Yellen is not really part of the President's political team.  Yes, she was appointed to her position by the President, but...the relative independence of the Fed is something that has always been fairly respected.  And the mandate of the Fed is not economic growth.  It appears that it's not possible for us to re-state that point too much because it's a point that appears to get confused in the public's collective mind.

    It's important to remember that Janet Yellen, in this regard, was not the President's first choice for that position.

    It's also important to remember that Janet Yellen's background is largely an academic one and that most of her public-sector employment has been working for the Central Bank.  In other words, if you conflate the Central Bank's traditional goals with other goals, you do so at great risk of getting it wrong.

    Janet Yellen has her mind on normalizing monetary policy, which has been lop-sided for six years.  If there's one thing we can assume she would like to achieve on her watch, it would be some small step toward normalizing policy. 

    But--you can also bet your last sou that she's not going to give the President or anyone else the least opportunity to be able to legitimately say she contributed to any further economic softening, either.

    With every passing week, the Business Press would have you believe that the Fed is poised to raise rates any minute now, any minute now.

    In the face of economic data that continues to soften?

    It's true that economic results aren't plummeting across the board.

    It's also true that, with every passing week, at least one major economic indicator that we report displays some weakening over the previous period.

    Given the increasing disconnect between economic activity (specifically output) and current policy, just how likely do you think an interest rate increase is?

  • COMMENTARY - October 5, 2015

    Whither the Federal Reserve?

    For months we've been practically banging our heads on the wall trying to impress on you how unlikely it was that the Fed would raise its benchmark rate in September.

    Please don't tell us that you're surprised that the Fed declined to raise rates.

    Please know: we don't make predictions or forecasts casually.  Such statements from us are not based on speculation or theory.  They're ALWAYS based on important data that are expected to inform such decisions.  Do we have access to all of the data that the Fed Chief has access to?  No, but you'd be surprised, perhaps, at the abundance of key data that is actually publicly available.  Of course, not everyone knows what to include in the mix and how to weight them...

    Now since then, there has been much speculation that the Fed is now on a path to raise rates in December.

    The first thing to say is that we validate and understand the Fed's strong desire to raise rates....to normalize monetary policy, or at least begin to.  Absent very hard data that the economy is sinking, it might have been able to pull off a modest rate hike.  But, in the face, for example, of the latest Labor report, especially if that trend continues?

    Not possible.

    In a stable environment, it is absolutely possible that the Fed Chair would make a case for a very small rate rise, but could the Chair raise rates into the winds of a declining economy?  No.  It would have been hard enough for Janet Yellen to look the President in the eyes in a stable economy that isn't growing fast.  But, if you think that Chair Yellen plans to face the President with a rate hike in the case of an economy that's slowing fast, well then, we've got a bridge we'd like to sell you.

     

  • COMMENTARY - November 9, 2015

    Whither the Consumer's Mind

    If there's been one thing that we can't stop meditating on these days, it's the extent to which the Consumer appears to be led about by the conventional business press.

    Here's the question we have: how does the Consumer gauge the strength of the economy?  And more to the point, how does the Consumer gauge the direction in which the economy is headed?

    We're really not sure.  We're not sure that the Consumer all but abdicates her responsibility to think about it and have a sense of where things are going.  Is the only way the Consumer knows that the economy is weak is whether her income has been directly affected at a particular moment?

    It's rather frightening, if you ask us.

    In point of fact, were you to canvass, say, a dozen of your acquaintances on a monthly basis and ask them to gauge how secure they feel in their jobs, you might have a fairly decent grasp on things.  Most people do generally understand the direction in which their businesses are headed. 

    What are your thoughts on where the Consumer's brain is on this?  Not this precise moment but how accurately the Consumer understands where things lie and where they're headed? 

    It does seem, too often, to be the case that the Consumer finds herself surprised by unpleasant turns of events.  And, she does, just the same, seem to be unable to gauge subtle positive trends that portend strong economic upturns.

    We don't say that you have to agree with our analyses, but we do say that you're foolish if you choose to abdicate your responsibility to understand where the economy is headed and if you choose to ignore what leading economic data tells you.

    You are entitled to your view, whatever it may be.

    You are not entitled to your own facts.

    You are entitled to your own view, but if you want to make an argument that the economy is continuing to grow at a steady and/or increasing rate, we'd like you to show us the data that supports that view.

  • COMMENTARY - November 23, 2015

    Our Great Public Institutions

    In theory, the International Monetary Fund serves a very useful purpose: to help stabilize financial markets when sovereign entities' fiscal budget situations become unsettled to the point of bringing about significant change the way markets work.

    Read that again.  On the one hand, it's useful.  On the other hand, it's abundantly unclear if these sovereigns feel an incentive sufficiently to aright their situations and structures because everyone knows the IMF is there to provide a helping hand.  Given the amount of funds that the IMF has kicked in, in recent years, to many global sovereigns, if anything,  there should be some worry that there lies a deep instability in the structure of the global monetary system. 

    As we say, in theory, the IMF is useful.  In practice, it's not clear if it doesn't do more damage than good.

    And now we believe that the IMF has sealed its reputation as a corrupt institution that must be looked on an eye that is at the least, wary.

    Keen observers will remember that, around the time of her confirmation as Managing Director of the IMF--and in the aftermath--Christine Lagarde, the former finance minister of France, too scrupulously avoided the subject of China's manipulation of its currency.  China does not like to be labeled a "currency manipulator," but what else do you call a government that, on a daily basis, actively manages its currency to stay in a tight range relative to the U.S. Dollar?  That is, by definition, manipulation.  And what is it they're manipulating?

    China is a major player in the global economy.  At the country level, it has the second-largest economy, and it's a major buyer of U.S. government debt. 

    For some time now, it has been gently arguing that its currency's status should be higher in the financial world, that it should be regarded as a "reserve currency," a currency in which sovereign governments would keep some portion of their reserves, not needing to convert them all to the Dollar, Euro, Pound, Yen, or Franc...all of which have been considered reserve currencies since at least the Euro came about.

    And now the IMF has said that it is about to label the Yuan (the Chinese currency) a reserve currency.

    Those of you have read the Editor's Letter column on the fiscal credibility of the governments will anticipate the point of this column.

    Let's take a look at October data.  Of the six countries (or zones) under consideration, Industrial Output in Switzerland was, by far, the lowest, and the rate at which that country borrowed 10-year money was, at -0.17%, the lowest.  That speaks incredibly highly for Switzerland's fiscal credibility.  Japan is right behind Switzerland, with a meager 0.2% annual rate of growth in Industrial Output.  Yet, adjusted for the Japanese Government's buying of its own debt, investors are willing to lend to Japan at something south of 1.8%. 

    Let's look at China.  Of the six, Industrial Production growth in China has been the highest.  And yet investors are demanding a yield of over 3% from the Chinese Government, more than a full 1% over its nearest rival in that department. 

    Highest industrial activity and worst long-term rates?  What does this tell you?  What it tells you that investors don't really trust China.  Why don't investors trust China?  Largely, of course, for the reasons that investors love Switzerland and Japan:  political transparency.

    China may have adopted measures to make itself economically stronger, but it is essentially a totalitarian government whose market-based ways are nods of the head, at best.

    And the International Monetary Fund wants to label the Yuan a reserve currency.

    It's easy to say that traders aren't going to "fall" for it.  But, here's the first of two points: if China will feel less pressure to convert its own currency reserves to other currencies, there will undoubtedly be some effect on other currencies.

    Second, if the International Monetary Fund believes that the Yuan, the currency of a totalitarian government, should be a reserve currency, what have we learned about the IMF?

    What do we always say? 

    Think for yourself. 

  • COMMENTARY - February 8, 2016

    Perspective

    Are you as tired as we, of hearing about the "strong Dollar?"

    How many times, in the past few months, have you heard or read, in connection with some point that an economic writer or pundit was making that the Dollar was pretty darn strong?

    We bet it was a lot.

    These pundits never put what that strength is, into perspective.

    It's valid to consider that some effects that are being felt today are a result of the Dollar having risen considerably in the middle part of 2015.  And those pundits' commentaries are valid because the effects of movements in currency do occur on a lag, a significant lag that can be as long as 12 months. 

    But the truth also reveals the misleading fact they talk about.

    Not only did the Dollar begin to stabilize (rather than continue to rise) several months ago, but...except for one week in November, at no point has the Dollar crossed north of the 100. par level on the US Dollar Index.

    During much of the mid-to-late 1990's, the Dollar was hovering in the 110's and 120's.

    Does it seem reasonable to you to characterize the Dollar as strong, now?

    The greater point, however, is that, of course, as mildly strong as the Dollar is on an objective basis, the fact that the Dollar is even hovering in the high 90's given how low interest rates are, would, in a "normal" environment, be very surprising.  But let's tun that around.

    If the Dollar is enjoying moderately strong support in an environment of ultra-low interest rates, what does that tell you about the state of economic affairs around the world, in both emerging markets and in major economic centers such as the Euro Zone and the United Kingdom?

    Exactly.

    It's bad.  The real story--and how you should be hearing every reference to the "strong Dollar"--is that the rest of the world is in far worse shape than the business press is letting on.

    You will never hear a reference to the Dollar the same way again, will you?

  • COMMENTARY - April 4, 2016

    Perspective

    This is a topic we've wanted to write about for a long time.

    There are some personages that take on, in the public eye, positions of near reverence when they talk about economic matters.

    We're going to pick, as an obvious example, Warren Buffett.  Warren Buffett has very strong analytical powers.  Part of what makes his analytical power so strong is his ability to distill a complicated picture into a simple understanding.

    Buffett has long been considered one of the deans of American business.

    But, we must remember that Buffett has a self-interested prejudice in favor of outcomes that benefit his business.

    Remember the Keystone Pipeline?  Buffett's influence with the current White House Administration is one of the key reasons that that project was derailed...a derailment that will greatly support Buffett's railroad interests.

    Of course the point of this column is not to single out Warren Buffett, although it certainly is to put you on notice with regard to advice that comes from that corner.

    The greater point is to consider from where advice you're hearing is coming.

    What are other pundits that you listen to, saying?  Do they have perspectives that could be at issue with your benefit?

    It's just a friendly reminder: when you listen to or read pronouncements and advice from economic and financial gurus and leaders, remember to ask yourself if that person is speaking from a position that conflicts with what's really in your best interest.

  • COMMENTARY - May 2, 2016

    Crazy?

    What's fun about this column is that we get to talk casually and we get to indulge in talking about things that are not about objective economic measurement solely, but talk about things

    If you're a relatively new reader, it's probably useful for you to know that we have long had serious concerns about the sustainability of the present monetary system from the perspective of the stability of the currency.  This concern is smaller in currency zones in which issuing countries have greater political transparency, not to mention strong economic fundamentals. 

    But the fact remains: all currencies are fiat currencies and certainly the U.S. Dollar has been a fiat currency since the 1970's.  And, if you didn't know that the Dollar was not technically, fully just a fiat currency for only 40 years, it's time you started paying attention.

    The key point there, as we have long said, is that we have never really settled what currency is.  It's still evolving. 

    The best response we've ever heard to the question of what currency is came from one gentleman who said that currency is the form in which you pay your taxes.

    It's a great answer because it is, practically, accurate, but it points to the essential problem, doesn't it?

    Currency, in the age of fiat, has no meaning or value to anyone, other than (1) the intrinsic value of the composition of the currency you hold in your hand and (2) the extent to which one person is willing to be compensated by it in exchange.

    And that speaks to the point that currency is, ultimately, what the Government tells you it is.  That is, of course, until and unless some form of monetary collapse were to occur.

    But buried in that point is an even greater point.

    If Government has the ability to tell you whether and if currency has value, it also has the ability to tell you that your currency has no value.

    Countries re-valuing currency?  We won't say it happens all the time, but it does happen.

    It can't happen here.  Correct?

    Keep something in mind.  Really, keep it in mind.  We're now almost six years into the Fed maintaining short-term interest rates at near 0%--and, in fact, for a couple of years, it actually printed money.  Don't forget that last part.

    And yet--and yet--economic growth is sluggish, so much so that the Fed has begun to talk about the possibility of moving toward negative interest rates.

    We've said it before: absent significant fiscal policy reform or a war, the U.S. economy is out of steam.  And, if you don't believe that there will be repercussions for the budget deficit, which is still high, and for the currency, we've got a bridge in Brooklyn we'd like to sell you.

    Read this column again.  And read those last four paragraphs again and again. 

    There is nothing monolithically embedded in stone about the safety and value of your currency. 

  • COMMENTARY - May 23, 2016

    There are Lies and Then there are Lies

    There's nothing more natural than for you to expect us to say that we think we give you a great digest for understanding the economy.  And we haven't been shy about pointing out distortions and misleading statements that the conventional press sometimes makes.

    But, to be fair, while their errors of omission are pretty great, too--that is, they're not very good at covering the comprehensive picture, but appear to be eager to pick data points that sell copy--it's rare that they make bald-faced false statements about important economic data.

    But that's what The Wall Street Journal did on Wednesday of last week.

    They were trying to explain why the yield on the 10-year government bond drifted north by several basis points over the previous day (and seriously, there's nothing momentous about a move of several basis points in one single day).  And to do so, they made the false case that it was a reflection of strengthening economic data that was leading investors to be more sanguine and demanding higher return.

    At that point into the week, there were only two very major economic releases.  One was about Inflation and the other was about Industrial Output. 

    Now, it's true that, other things being equal, rising Inflation would have the effect of putting upward pressure on monetary policy. 

    But things are not equal.

    For one, if you look at the total Inflation picture, prices actually rose very modestly.  It's only when you strip out energy and food that the figure starts to look strong.

    And then we have to look at Industrial Output.  It can easily be viewed as the most significant indicator of current economic activity.

    And the fact is simply that the raw data, year-over-year for April, shows that Output declined. 

    That's right.  It didn't grow at a slower rate.  It didn't remain stagnant.  It fell.

    And The Wall Street Journal is telling you that investors are pushing rates up because economic data is strengthening.

    Isn't it really unbelievable?

  • COMMENTARY - July 11, 2016

    Perhaps Our First Conspiracy Theory

    How many times have you heard government officials in various Treasury, Fed or other finance functions, over the years, orally diminish the point to buying and owning Gold?

    Probably a lot.

    Their words usually amount to something like, "What can Gold do?" 

    Our counter to that specific argument is, "If that's so, especially since the U.S. Government is the largest single owner of Gold, why doesn't the U.S. Government sell its gold holdings?"

    But the purpose of Gold is not the main point of this column.  (That will be addressed in the Editor's Letter, shortly.)

    For only the most recent eight months, we have been tracking the Government's published statistics on its ownership of Gold.  What's nominally impressive about the published statistics is that it breaks down the amount of Gold owned by the Fed, working stock used by the U.S. Mint, and stock held by location.  The page has a lot of numbers on it.  And just to keep things clean, the figures that are reported are NUMBER OF TROY OUNCES, not simply current value.

    So far, so good.

    Eight months.

    And you know what the figures show?

    In eight months the amount of Gold owned hasn't changed by one ounce. NOT BY ONE OUNCE. 

    Not even the Mint's working stock.  The U.S. Mint does put out gold coins...quite a few, actually.  Go to their website and see what's for sale.

    Now, we're not silly.  We realize that it's quite possible that the Mint buys Gold to replenish its working stock. 

    But for the number of ounces to not vary in its reporting over eight months by even one ounce?

    For the record, that total ownership is 261,498,926 troy ounces.  And the MInt's working stock amounts to 2,783,219 troy ounces. 

    That is, at least, what the Government is reporting.

    One ounce?

    We're calling it: the U.S. Government is lying.  The U.S. Government is lying about its ownership of Gold, in some way.  We don't know precisely the scope of the lie, but we don't think it's possible that the Government's ownership of Gold hasn't changed by one ounce in eight months.

    If you accept that premise, that opens up all kinds of questions, doesn't it?

  • COMMENTARY - September 12, 2016

    Take a Breath and Go Back to First Principles

    We want to believe that, if you're reading this, you're probably smart enough to not have fallen into the trap of chasing yield beyond reasonable expectations of risk.

    That is, we want to believe that any equity investments you currently have are either very long-term or strategic plays...not places you dumped money because you think you have some kind of inevitable right to a certain minimum threshold.

    After all, the Market doesn't owe you any guaranteed return. And if you're paying attention to the risk/reward continuum, you'd have reapportioned your investments by now...so, at least, we hope.

    But that leaves the question of the incessant press chatter about the Fed's next move.

    And here's the point: Fed tightening is normally associated with a market that is expanding, that is heating up, so to speak, so that inflationary pressure is growing.  After all, let's try to remember: the purpose of the interest rate lever is to try to bring about price stability.  Raising interest rates is supposed to be associated with keeping a lid on rising inflation.

    But when you can't crack open a newspaper or turn on the television without hearing some pundit opine on the possible effects of a quarter-percentage point rise in interest rates, on earnings, is the economy really expanding?  When the concern is less with by how much earnings will exceed expectations?  When the concern is less with how to keep a lid on inflation?

    Does that sound like an economy that is sound?  And that does like an economy that is ripe for an interest rate rise?

    Well, does it?

  • COMMENTARY - October 31, 2016

    Just Call Us Cassandra

    Tell us the truth: if someone had opined in strong terms, say, on August 1, 2008, that come late September there would be a major monetary and credit crisis, what would you have said?

    After all, there were plenty of signs over the previous 18 months that things were not looking too rosy.  Among the most prominent at the time was the inverted bond yield curve that existed as early as 2006.  

    We think that we can probably get you to agree that there were signs--that there are always signs--that presage economic change, but that you have to know what to look for.

    In deference to those who are pooh-poohing our updated forecast for a contraction, we will concede one relatively important point: before the start of the last recession--before the start of that crisis in September 2008--there were clear signs (right there in the numbers) of over-leverage on the part of homeowners as well as on the part of businesses.

    It's an important point because as of this writing, we do not see that kind of over-leverage in any major area you would expect to see it in.  And we are inclined to be loath to predict a downturn without such a sign.  

    But--the accumulated signals that are scattered everywhere else are too much for us to ignore.  We have spoken of these in the Editor's Letter, and that Letter will remain up for one more week.

    However, we don't believe there is necessarily any hard and fast rule about timing.  In fact, we would argue that the fact of over-leverage is the result of other factors that we are citing as leading economic indicators.  Things like flat corporate earnings (in the face of increased corporate borrowing) and declining capital spending are more likely to lead to figures that result in over-leverage, than the other way around.  

    Over-leverage is the result of the economic trajectory that is already under way.  It's not the other way around.

    In other words, yes, we are certain that in order for our projected contraction to come around such a situation of over-leverage will occur first.

    But there's something else.

    There is one area in which such over-leverage already does exist.  We tend to overlook it because it's an area the Federal Government has a lot of financial control over, and that's the fiscal budget.

    Put simply, although the deficit has fallen tremendously over the last few years, it has essentially stopped falling (and in fact has risen slightly the past two months), even as industrial output is declining, consumers rate of spending is slowing, and capital spending is falling.

    In other words, at least as of this writing, the budget deficit is unsustainably large.  

    It sounds like we're hedging our bets, but in a sense that hedge is accurate.  

    We don't know what's going to happen.  But we do know that it's not out of the question that the next contraction (or crisis) stems from a position of unsustainable debt on the part of the U.S. Treasury.

    Keep all of these things in mind as you decide (if you decide) that nothing bad is going to happen until something bad happens.  

    And, for those of you who are already discounting this message, bear this is mind: even as industrial output continues to fall, the yield on the government's 10-year bond has been rising the past two weeks.  You know what that means, right?  Higher interest payments on the debt.

    Did someone say "over-leverage?"

  • COMMENTARY - December 5, 2016

    What Would You Do?

    We said, recently, that we were done talking to you about the advisability of the Central Bank raising short-term interest rates in the near term. 

    We're going to hold to that.  Sort of.

    There's more than one way to skin a cat, as they say.

    Let's look at some of what we think is the most important data that should be informing the Fed's decision on monetary policy:

    -  Disposable Personal Income rose, most recently, at an annualized rate of 4.2%, the highest

       rate since October 2013

    -  Industrial Production has declined for 13 consecutive months

    -  The latest read on all-in-inflation is a rise of 1.6%

    -  Capacity Utilization is at 75.50 on that indicator's Index of 1-100...and has declined for 19

       consecutive months

    -  The deficit is the highest it's been since July 2014

    If you were Janet Yellen, what would you do?

    This much we will say: if the Federal Reserve chooses to raise rates this month, it most certainly will be a politically-motivated decision.

    What would you do?

     

  • COMMENTARY - January 9, 2017

    It's About Knowing What to Watch

    We sure do like keeping things simple.  Of course, the trick when keeping things simple is to not make things too simple so as to lose the crux of what you're trying to measure.

    If we had to create a list of just 10 things that we'd advise you to watch and measure one of them would be the extent to which the supply of money is being diluted.  And one of the best ways to measure this is looking at the ratio of the money supply to personal income.  To the extent that the money supply is being grown at a faster rate by the Fed, than income, you do have a problem.  

    That problem would be with regard to why the Fed is creating more money without a commensurate growth in income.

    (For the record, our measure of the money supply for this exercise is all currency in both interest-bearing and non-interest bearing accounts.)

    So, where do things stand?

    As of November, that ratio stood at 79.7%.  That is...:  there was $79.70 in the supply for every $100 earned.

    To put that in perspective, in November of 2011 that ratio stood at 69.4%.

    In other words, over the past five years, the Fed has grown the supply of money against income by more than 10 percentage points or $10 for every $100 earned.

    Think about that good and long.

    How much confidence does that give you in the prospective value of the Dollar? 

     

     
  • COMMENTARY - January 2, 2017

    It's Easy to Stay Disciplined 'Til You Want to Do Something Else

    This is a time of year that many people review their financial situation against the plan they most recently put in place.  And they often tweak their plan and sometimes tweak their asset allocations. 

    We think it's a great idea to periodically do such reviews.

    But reviews don't mean much if you veer from your plan when emotion informs a compulsion to make a change. 

    And that's what many of you are guilty of.

    By the same token, sticking with discipline to a plan that might not be right doesn't make much sense either.

    Simply put, you cannot put too much time into formulating the proper plan.  So the big question becomes: how do you know when you have a good plan?  We're going to give you a few pointers to help you vet what a good plan might look like:

    #1.  The right plan can objectively and quantitatively be demonstrated to result in superior returns over a long period of time.

    #2.  The right plan will have just enough diversification that, at any time, there will be enough real liquidity to cover true emergencies.

    #3.  The right plan will minimize trading and investment fees without compromising returns.

    #4.  The right plan will leave or generate some liquidity to take advantage of opportunistic situations.

    #5.  The right plan will diversify the kind of risk that is often neglected: sovereign risk, interest rate risk, and currency risk.

    Do what everyone else, and you end up with what everyone else ends up with.

    And that's an average return.

    If that's what you want, well...who are we to meddle?

    We're just saying that, with investing, as in life, you don't get a superior result by doing what everyone else does. 

  • COMMENTARY - February 20, 2017

    When Is it Gambling?

    Much has been made in the business press about expectations of President Trump's economic policy plans.

    Let's get some clarity.

    First, we have no certainty of the scope and depth of those plans.

    Second, we have no certainty of the effect that such plans will have.

    Sound like a lot of speculation to you?

    There are ways in which you can load the dice in your favor, so to speak, with regard to your yield experience.

    This isn't a way to do it.

    And, of course, if all you're doing is looking for reasons to legitimize investing into a market that is hitting new highs, because you're too lazy and undisciplined to do anything else, that's your business.

    A word to the wise is sufficient.

     
  • COMMENTARY - March 13, 2017

    When is A Trust Not a Trust?

    For how many decades have politicians pounded their chests on soap boxes, pontificating about the need to regulate the big banks for the sake of the people?

    How many people have listened, rapt, eager to cast votes for said politicians?

    If there's nothing else we want, it's that our readers always have clarity around things.

    Be clear: the Federal Reserve Bank runs a sort of monopoly, or trust, over money.

    Yes, money.

    People are not forbidden to transact with each other on a basis of exchange other than the U.S. Dollar.

    But there is no other form of currency that is accepted by the U.S. Government toward the payment of taxes and fees and so on....other than...the U.S. Dollar.  And while the Dollar is the official form of currency as it's recognized by the Government, the only entity that is authorized to actually create a dollar (not print it, but actually authorize its creation) is...that monopoly, the Federal Reserve.

    In other words, the dollar is privately created but has the implied guarantee of the taxpayer.

    How do you feel about that?

    And, please don't display your ignorance by saying that the Federal Reserve isn't privately owned...because...it is.  The Federal Reserve Bank is an entity owned by its member banks, which are...not federally owned but owned by their own shareholders.

    Regulate the activities of a private-sector entity that is the sole beneficiary of its activities?

    There is nothing about this that reeks of rot to you?

    Now...imagine a system in which on the one hand, the current structure still existed, but instead of an implied taxpayer guaranty, every Federal Reserve bank members were required to display complete transparency with regard to its financial position in language so simple it could fit on one page and were available to all to see?

    Or...imagine a system in which member banks could issue money, but such money were backed 100% by tangible assets, which were re-valued, say, oh, every two months at a minimum.

    What do you think?

    Does the current system seem preferable to either of these?

     

     
  • COMMENTARY - April 17, 2017

    Have We Beaten You Over the Head Enough About the Stock Market Yet?

    We think that the current Editor's Letter tackles the topic in a sound way.  People are entitled to disagree with our logic, but...they have to explain why investors should accept an implied rate of return that doesn't compensate for risk.  Good luck to them.

    Here is another way to look at the same topic, and we think its beauty is its simplicity. 

    We're going to talk about prices....the S&P 500 Price Index Level and the Barclays Capital U.S. Corporate Bond Index Price Level and how both have changed over the past 18 months.

    You understand that, generally speaking, bond prices and stock prices move in inverse directions (that's assuming that we're talking about the bond sector that matches, most closely, that of stocks, hence the matching of the S&P 500 with the Corporate Bond Index).

    Our starting point is October 2015 and our ending point is April 2017 (working with the mid-point of the month).   

    In October 2015, the S&P 500 was at about a level of 2033.  Over the next 18 months it rose 14.6%.

    In October 2015, the Corporate Bond Index was at 2503.  Over the next 18 months, it rose by 7.6% to 2692. 

    There is nothing intuitive about this.  As investors become more confident in the economy, what is intuitive is that they would demonstrate an increasing lack of preference for corporate bonds. 

    Another way to understand this: as you probably already know, bond prices and yields move inversely.  So, as prices (demand) for corporate bonds has risen, the yield on those bonds has fallen.  So...some smart television observer on the economy needs to explain to you why corporate bond yields would decline in the face of a 14.6% rise in the S&P500.  In other words, why would trends in the corporate bond market seem to contradict sentiment in the stock market....that is, if the sentiment over the stock market is rational?

    Some things are simply subject to common-sense tests.

     

     
  • COMMENTARY - May 22, 2017

    Some Economic Indicators Are Just Too Simple to be Important?

    If you're a regular reader you're somewhat familiar with the big-sounding economic indicators that tell us where the economy is headed.

    But we have a few indicators that we consider "fun"-sized, so to speak.  Drawing a direct line between these indicators and where the economy is headed is not so easy; these indicators are better thought of as provocative points to ponder.  Yes, they can be early indications of things to come.

    What we want to talk about now is something you probably don't think about very much: the spread of yield in investment-grade bonds over that of 10-year government bonds.

    (For the purpose of our analysis, we use the yield for corporate bonds as published by Standard & Poor's.)

    How do you expect that spread to behave? 

    If that spread rises, it could be an indication that traders perceive risk in the private sector to be growing, right?

    What about when that spread declines?  Of course at the extreme, especially if the spread becomes negative (i.e. the yield on government bonds is higher than that of corporate bonds), it would be a fairy good indication that investors think that the government issuer's credit quality has declined significantly.

    Or...to use so-called elevator analysis, it means that investors are preferring corporate bonds more than they did formerly.  And why might that be?  The natural answer is that they have become more phlegmatic about economic prospects and thus more highly value a given, unchanged stream of income.

    And that's where we are today.

    In May 2015, that spread was 1.15%.

    In May 2016 that spread was 1.17%.

    In November 2016 it had fallen to 0.77%.

    And in May 2017 it was little changed, at 0.81%.

    If you know anything about the bond market, you know that a spread difference of 0.30% - 0.40% is significant.

    Does this sustained lower level of spread mean anything?  Maybe not. 

    And maybe it does.

     

     
  • COMMENTARY - June 26, 2017

    Your Financial Custodianship - What Kind of Hoarder Are You?

    Don't you get frightened at times by the facile understanding that people have with regard to the economy.

    It's embarrassing when you hear them say it: they equate the economy with the stock market and...if they hear that the stock market is continuing to climb, they think that they're some kind of genius.

    Listening to the "pretend" business reports doesn't make you a custodian of your money.

    Paying attention to the indicators that come out in advance of them being reported widely in consumer venues and at least in conjunction with listening to how your stocks are doing, does begin to make you a custodian.

    Look: there's absolutely nothing wrong with spending a heck of a lot of time on developing a template that's right for you and then practicing benign neglect for most of the time.  The point there is that if you developed your algorithm properly, you've already incorporated those ups and downs into your outcome.

    But, Heavens to Betsy! Hearing that your stocks went up doesn't make you a custodian  Not listening to stock reports when the market is crumbling (because it makes you feel like a loser to listen).  And, most of all, equating the stock market with the economy doesn't put you on the path to being a smart custodian, either.

    Of course we could take for several minutes about why they're different, but very fundamentally: if you don't know how to differentiate the two, we guarantee you that you will miss knowing when the market has hit an unsustainable high and when the market has hit an unsustainable low.  In other words, we'll be that you miss opportunities and hoard threats.

     

     

     
  • ECONOMIC & MARKET ANALYSIS - March 9, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 3.5%.

    S&P 500 Index - The Index finished at 2071.26, down 1.6% from last week.

    US Dollar Index - The Index finished at 97.72, up 2.6% from last week.

    Gold