The Practical Economist

  • EDITOR'S LETTER - April 6, 2015


    For the last three weeks we took a good look at the foundational health of the U.S. economy.  Now we're going to expand on that.

    We're going to look at a corollary, which is where the U.S. stands relative to its peers in the global financial system or, more specifically, what global financial investors think of the U.S.

    Because the Business Press traffics in selling copy and because the U.S. Government doesn't particularly delight in spreading bad news, it may have been easy to forget that a couple of years ago, Standard & Poor's downgraded the credit rating of the U.S.  This fact would be a less significant development if there weren't quite a few other countries that continue to be rated triple-A borrowers by all the major credit rating agencies. 

    Now, when you think about credit ratings and risk, there are two general components that you should be thinking about.  The first is capacity to pay debts.  The other is the will to pay debts.  Underestimate the second component at your peril. 

    When we talk about a country's will to pay debts, we're talking about a country's political much confidence investors can have that the system is reliable and other words, how transparent it is.  And all of that is translated into the yield that investors demand for return on buying a country's bonds, for essentially funding a country's balance sheet.

    Generally speaking, lower yields denote higher investor confidence.  And higher yields denote a lower level of confidence, investors thereby requiring a higher rate of return to compensate for the risk of repayment.  This is a slightly tricky business since, in some cases, a higher yield can denote nothing more than much higher levels of inflation.  This is why it's not just useful, but compulsory to compare "like" sovereign entities.

    Now, there are five countries whose currencies are widely regarded as "reserve currencies."  A reserve currency is any currency that is considered so stable that it's considered a safe haven, a haven in which sovereign entities can put stores of cash.  These five are the U.S. Dollar, the Japanese Yen, the Euro, the Swiss Franc, and the British Pound.

    Guess which one investors prefer the most and guess which one investors prefer the least.

    We won't torture you--here's the point: on government 10-year bonds, investors are requiring the United States to pay more to service its debt than any of the other four.

    Think about that for a long time after you've concluded reading this column. 

    Switzerland leads the pack, in investor sentiment, with the yield investors require being just slightly negative, at -0.05%.  It's hard not to admit that that's a pretty compelling view of what the world thinks of Switzerland as a place of stability and transparency.  It's also significant because, for many years, that's the position Japan held.

    Next up we have the Euro at 0.20%.  And not too far behind is Japan at 0.42%.

    But then you have the United Kingdom at 1.79%.  And coming in last place, the United States, at 2.06%.

    What do you do with this informationWell, there's a number of directions in which we suggest you could use it--the foremost being how to consider your long-term financial planning.  As we occasionally like to remind, there is nothing settled and permanent about the global currency system.  And there is nothing settled and permanent about the U.S. Dollar being the king of currencies.  And we think that point is amply demonstrated here.

    Regardless of your political prejudice, investors are deciding the matter.  The U.S., among its peers, is in last place.  Fiscal policy is oriented neither toward growth or stability of a payment system.  And the political mechanism, by dint of a slew of government policy actions over the past several years, is easily demonstrated to be far more opaque than that, of say, Japan or the United Kingdom. 

    Has time gotten away from you so that perspective is lost?  Do you have a close living relative who is over 70 years of age?  Ask them if they ever thought the day would come that General Motors would declare bankruptcy and that the U.S.'s credit rating would be downgraded?

    We think that it's not possible for you to spend too much time contemplating the signal point of this column: of the five countries whose currencies are reserve currencies, investors are demonstrating the least faith in the United States.

    Absorb it, think about it, and talk about it.  It's a pretty startling and inconvenient fact.

  • EDITOR'S LETTER - April 20, 2015


    In last week's update of the Domestic Scorecard, we issued a fresh forecast.  In a word, we're projecting that the next six-to-nine months will be a period of a sharply lower rate of growth in all sector of the U.S. economy.  At this moment, at least, we don't forecast an actual contraction, although we suspect that, in three or four months, it will feel like a contraction to many, based on the change.  It will certainly be a contraction in the pace of growth, at a minimum.

    In our view, the new landscape got kicked off with that lousy labor report a few weeks ago.  And the latest economic indicators--as we report in the Economic & Market Analysis column, are no better.  

    Our sense is that consumers have subtly seen this coming and have already begun to pull back.  And that's probably smart.  The time to tighten your belt is before conditions become very tight.

    Now, back in January, we told you that we were forecasting that the signal investment class performer for the year will turn out to be Gold.  In this column right now is the last time you will hear us opine on this subject until we're in a position--later this year--to say "we told you so."

    On a very basic and practical level, we'd argue that the simplest way to predict a rise in the value of Gold is to look for a combination of declining consumer confidence with continued and/or increased monetary accommodation.  But let's look closer.

    Let's review some basic and important inputs to this theme.

    Until roughly the middle of last year, the Budget Deficit continued to fall at a steady pace.   However, continued improvement since that time has stalled. 

    If there are two significant inputs to the direction of the Budget Deficit, they are the level of Inflation and Industrial Output.  Higher Industrial Output means a declining Deficit, as does a higher rate of Inflation.

    Now, let's look at the landscape before us.

    For several months, Industrial Output rates of growth were quite robust.  But not only is it difficult to make a case for a forecast in which Output continues to grow, Output has already begun to grow at a declining rate.

    Now let's talk about Inflation.  While we'll be first in line to say that after the precipitous drop in oil prices, the only way out is up for Inflation,'s a fool who will tell you that the forecast for Inflation is even moderately strong.   It's simply impossible for anyone to make a strong case for anything but very tame Inflation for the next six to nine months. 

    You're left with a picture of Industrial Output under pressure and very modest price growth.

    That is the textbook definition of how you achieve a rising Budget Deficit.

    A gently rising Budget Deficit would not mean much if the Deficit were hovering near 0%.  But while it's not wildly high, it does continue to be on the low side of moderately high.

    And now the forecast is for it to rise?

    And that guessed it....continued deepening of monetary accommodation and currency devaluation. 

    Hello, Gold.

    You will hear some observers offer a variety of opinions about the major drivers of Gold, and most of them are valid to some extent.  Rising Inflation?  Yes  A declining Dollar?  Yes  Rising industrial usage?  Yes  Political and financial instability?  Yes

    But, bhNyVZ2HyofbzGq4DGnuy far, the single-most powerful input to the movement of the price of Gold is the extent and direction of sovereign debt.

    You're being advised here for the last time before Gold makes its move, which will probably be much later this year...probably a few months after the Deficit has actually started rising.

    While it may be true that all that glitters is not Gold, when the Budget Deficit is tarnished, it should look the color of gold to you. 

  • EDITOR'S LETTER - May 4, 2015


    The concept of "six degrees of separation" is a powerful one.  It's powerful because it's true.   Everyone is connected.

    It's also true of economic variables.

    If you've been paying attention, you know that one of the sub-themes that concerns the folks who write and work for this site is trust in currency, trust that people and markets can have in currencies.  One of the themes that we come back to again and again is that the amount of figurative currency an actual currency has is directly related to how devalued--or diluted--a currency has been left to come about.  And when you think about currency devaluation, what you're really talking about is real economic growth relative to money creation.  It's really that simple.

    To the extent that any central bank creates money in excess of value created in the economy, you have currency devaluation.  And currency devaluation is not an empty jargon-y phrase.  It simply means that that $10 you had in your hand last year is, on a tangible basis, worth less today.

    It's not possible that this topic not concern everyone.

    And this is precisely why the issue of real economic growth is so important.

    You cannot spend too much time on this issue when your agenda is handicapping where currency valuation is headed.

    And just as creating money in excess of real economic growth brings about currency devaluation, driving the supply of money down in excess of economic contraction (and certainly in the face of economic growth) brings about strong northward currency valuation.

    And therein lies the greater point, not new on this site, but new to be put in this context, perhaps.

    Even though the Fed's bond-buying program has come to an end, the Fed is still generating new money at a pretty fast clip.  As long as the economy was growing at the nice pace it has been the last nine months, all was relatively fine.

    But if economic growth slows down, what do you think is going to happen to the value of the dollar, barring a monetary tightening by the Fed?

    And do you think we've had remotely the level of economic growth we need to justify tighter monetary policy.

    Think, that's all we ask that you do:  think.  Connect the dots.  They're not that difficult to connect. 

    Think.  It's a radical concept.

  • EDITOR'S LETTER - May 18, 2015


    The past fortnight, we suggested that you spend more time contemplating the relationship of the value of the Dollar to monetary policy.  This fortnight we're going to pick up on the latter half of that theme.

    Doubtless you've heard the adage, "Don't fight the Fed."  But do you know what it means?  In a nutshell, it means that you should align your investment and business interests interests in the direction in which the Fed is sending monetary policy, with looser policy tending toward economic expansion and tighter policy tending toward economic slowing

    Now, we fully subscribe to the "Don't fight the Fed" axiom.  In other words, we believe that the relationship between Fed policy and economic direction is very strong.  The problem?  There's a difference between direction and sufficiency of Fed policy. 

    We'll explain with an example.

    Let's say that the economy is booming right along and inflation is jumping ahead.  Well, it won't take long for the Fed to likely to decide to tighten the reins of monetary policy, right?  Let's say that in an environment of 6% inflation, the Fed raises short-term rates by 0.25%.  Would you reasonably call that a tightening, a measure that would likely have a meaningful impact on slowing the economy?  Probably not.

    Conversely, if in the face of ultra-low interest rates, the economy is sputtering but the Fed does not take steps to further provide monetary accommodation, would it fair to characterize the Fed's policy as truly accommodative?  Of course not.

    And that's fundamentally where we are.  When the Fed can be reasonably characterized as providing stimulus to investors to loading up on riskier assets, those riskier asset classes are likely to perform well.

    But while the Fed's stance, at the moment, is, indeed, oriented toward providing an incentive to investors to look toward riskier asset classes, that incentive is rapidly eroding as most reasonable measures of economy activity are starting to exhibit major slowdowns.

    What does "Don't fight the Fed" in this context mean?

    Well, of course, what we're really trying to tell you is that what "Don't fight the Fed" really means is that you should measure your investment activity to how stimulative the Fed's monetary policy really is relative to the economy.

    And would it be fair to characterize the Fed's monetary policy, at present, as accommodative, relative to economic strength and trend?

    Absolutely not.

    The Fed's policy is the Fed's policy.  We are not shy about stating what we think policy should be or where we think Fed policy is likely to go, but the policy of the moment informs the earnings and investment outcome of the moment.  To bet on a more prosperous economy because you think the Fed will announce a fresh monetary easing program because the economy is about to seize up...well, that's too speculative for our blood.  Yes, believe it or not, the Fed has misgauged the economy before, and it's likely to do it again. 

    What's all of this building up to?  In a figurative word, we now believe that the economy has shown sufficient indication of a pullback to say that, for the moment, monetary policy is not accommodative.

    That means significant consequences for the stock market, the bond market, the labor market, and business investment in the short-term, or at least until the Fed puts in place quantitative easing programs that sufficiently compensate for economic pullback that we're now experiencing.

    Yes, we consider this a major announcement and a corollary to our formal forecast of the economic softening that we are now experiencing.

    And yes, we will tell you when we think the Fed takes sufficiently corrective action. 

    It's bad enough when the economy takes a turn for the worse.  It's worse when Fed policy feeds that downturn.

  • EDITOR'S LETTER - June 1, 2015


    We honestly didn't think it would happen like this.

    As "late" as this, early June, it appears that we are the lone voice forecasting a significant economic softening in the latter part of this year...and stating that the softening has begun.

    There is, after all, tangible evidence of the softening having begun.  How do you experience two consecutive months of declines in New Orders for Durable Goods and have almost all outlets forecasting a second half that will consist of at least modest growth?


    At least twice a week, the major Business Press continues to comment on the Fed's posture on raising interest rates, in a vein that suggests that it believes that such a rate rise is in the cards in a short time frame.

    We're not sure what these folks are thinking.

    If you're a regular reader you know that we will often muse in an unofficial vein when we think the economy is likely to move in a particular direction.  We don't issue a formal forecast until we are past reasonably sure.  And, at this point, the evidence continues to pile up.

    We have two major metrics that point to the future.  One has to do with the extent to which monetary policy is resulting in a minimum of neutral growth.  Another is what the credit markets are telling us about where they expect interest rates to move, but adjusted for our metric of inflationary pressure. 

    Both are pointing solidly negatively. 

    We are not hedging our bets on this.  We are standing behind our forecast more than ever before.  And, if you pay attention, you will likely look like a genius to your friends and colleagues.

    Oh, and by the way, we're going to give you a practical tip for handicapping the short- to medium-term at home.  While we don't put a lot of stock in the government's top-level measure of Gross Domestic Product, there are elements in it that can be illuminating.  One of the most useful is the government's measure of Gross Private Domestic Investment.  Want to keep score at home?  You take a good look at the percentage change in GPDI in the most quarter over the last quarter and the previous three quarters.  Look at that trend.  And look at the nominal data, not the data, adjusted for inflation.  Swings in inflation over the course of one year are not very meaningful and when factored into adjusting things like GPDI, can be misleading. 

    You take a look.  Take a long look at the result for the first quarter and how it contrasts to the previous four quarters.  Private Business Investment is one of the strongest inputs to economic growth.  Take a good long look.  And then draw your own conclusion about where economic growth is headed this year.

    Call us naive if you wish, but we believe that there are heuristic methods for evaluating and measuring most things.  It's just a question of spending enough time figuring out what they are. 

    That's called being practical.

  • EDITOR'S LETTER - June 22, 2015


    We hope that everyone is well aware, by now, of the forecast we put out almost two months ago, for a significant economic softening.  Of course you're always interested in the short- to medium-term economic picture, but what concern you more is probably the question of how we dig out of that slowdown.

    Slowdowns that are brought about by a reaction to overheating are usually fairly easily overcome.  It's simply a matter of manipulating policy to bring about less borrowing, less speculation in risky investment classes, and the like.    As a result, after a period of time, you eventually end up with a surfeit of pent-up demand that requires satiation, and thus begins the business cycle anew.  

    A key component to that cycle of collapse and renewal is that the Fed, in an effort to have kept the economy from overheating will typically have raised interest rates, hopefully by amounts sufficient to keep the economy growing, but not by enough to kill it.  Invariably, the Fed doesn't get it quite right, though to be fair to the Fed, there's more to the economic equation than Monetary Policy.  Monetary Policy, to our mind, comprises about 40% of the equation.  Another 40% is taken up by Fiscal Policy, and the remaining 20% by legislative and administrative measures that either facilitate or hinder business growth.

    But, to get back to the main point, the Fed's typical reaction to an economic contraction, brought about by an exhaustion of demand, is more accommodative monetary policy, specifically a lowering of short-term interest rates.  (We hope that all readers understand that low interest rates are considered inputs to business formation for a variety of reasons, including that they make business borrowing cheaper and that they encourage capital formation, because it makes parking money in money market vehicles less attractive.)

    Now, earlier in the year, we sounded off on one of our favorite topics, the disconnect of monetary policy to effect.  Economic growth, this past 12 months, ranged from moderate to strong.  But this also has come at the expense of interest rates that have hovered near 0%, with real interest rates hovering near -1%.

    Experienced observers of the economy know that real interest rates cover a big range over a long period, but, over time they generally range most tightly between 1.0% and 3.0%.  Rates at the upper end will have the effect of tamping down business growth and rates at the lower end have the effect, typically, of spurring economic growth. It is distinctly abnormal to fix rates so that real interest rates hover at or below 0% for a period of several years and not have economic activity soar.  In any normal business cycle, by now, there should have been enough growth that the Fed could easily raise its economic forecast and target interest rate.

    Yet short-term rates continue to hover near 0% with real interest rates below that.

    And that's combined with a forecast for economic softening.

    The obvious first real question that you should be asking is what's going on that the economy hasn't picked up enough.  The answer is one that we've given before: fiscal policy, and specifically, tax policy.  They are are not what can be termed accommodative...not crafted so as to encourage new business formation and development.

    In the meantime, however, we have had a fair amount of economic growth since the onset of the financial crisis in 2008, but at what cost?

    The Federal Reserve has been printing money at a rate that can only be characterized as nothing short of startling.

    So, now, let's talk some numbers.   We're going to work with two time give you perspective.  Period 1 is from January 2005 to January 2009 and Period 2 is from January 2011 to January 2015.  Both consist of four years.  The former begins just before a period of expansion and ends just after the onset of the Financial Crisis.  The latter begins a little more than two years after the onset of the Financial Crisis. 

    From the start of Period 1 to its conclusion, the ratio of M1 (the most widely-used measure of the money supply, currency in bank checking accounts) to Industrial Output was fairly steady, with just a little uptick in the money supply toward the end.  Period 2 begins with that ratio only marginally higher than at the end of Period 1, but by the end of Period 2 has grown 40% since its beginning and is double the ratio at the start of Period 1.  Does that sound dramatic?  It is.  The issue is the amount of real economic growth relative to dilution of the money supply.  And it's right there. 

    Get the point yet?  

    Yourcurrency has been diluted by a lot.  And it's the single biggest reason that Gold experienced the great run-up in price it did, from 2010 - 2012, in particular.  Sure, it overshot the range in which it settled, but that side-steps the point.  Gold is a good 40% higher today, still, than it was before the Financial Crisis.  No, the point of this column is not to canvass for Gold, but to increase reader awareness of the extent to which she's being taxed and to point out that markets are aware of it.

    Not convinced yet?  We hope you are, but...just in case...let's take a look at how the value of the Dollar has fared against the US Industrial Index.  (For our exercise, we're working with the US Dollar Major Index and the Index of Industrial Production, both available from the Federal Reserve.)

    In January 2015, the Index of Industrial Output stood at 105.5.   That's a new high for industrial output.  And the US Dollar Index stood at 87.38, where par is 100.0.

    To get a reading on the Dollar Index in a January month that was over 100.0 we had to go back to January 2001 when it stood at 103.7.  Now, intuitively, you might expect that Industrial Production to be commensurately higher than it is in a month in which the Dollar Index only stands at 87.38....but no.  In January 2001, the Industrial Production Index stood only at 90.9.

    Do the comparison.

    January 2001, with Industrial Production at 90.9 and the Dollar Index at 103.7


    January 2015, with Industrial Production at a new high of 105.5 and the Dollar Index at 87.4

    In other words, yes, your currency has been severely diluted.

    To be fair, is it right to expect Monetary Policy to be the only work horse of the economy?  And at the expense of the taxpayer?

    Our belief is that the economy is 40% monetary policy, 40% fiscal policy, and 20% a web of administrative and legislative laws and codes surrounding business regulation.

    We are only repeating what everyone knows, to say that those in charge have relied too unfairly heavily on monetary policy to do the work that the other two components should be taking on.  This is an issue of political agenda and initiative, as well as financial priorities and respect for the taxpayer. 

    It's not something the average person gives a lot of thought to, but in any economy, the soundness of the currency is easily one of the top five priorities of any Central Bank.

    Go over those numbers again.  No, Inflation is not the only source of currency devaluation  And, that Gentle Reader, is precisely what has been happening to the money in your pocket. 

  • EDITOR'S LETTER - July 27, 2015


    By now, we hope that all regular readers are caught up-to-date with the Domestic Scorecard and are fully cognizant of what we think the medium term holds for the country's economic prospects.

    Since we issued our initial formal forecast of the economic softening that is under way, we have continued to proceed down that path at a steady rate.  The change in economic direction is almost always sudden.  The speed with which all economic indicators flash danger signs and that the consumer is made to felt that change is another matter.  Two months ago, lay people were essentially looking at us with a proverbial glassy eye, so little was the change in trajectory yet affecting most consumers' lives.

    Yet with every fortnight, key economic data, both of the leading variety and of the confirming variety, have continued to come in with results that confirm rather than contradict our forecast.

    Business investment has slowed significantly.  Industrial Production continues to show annualized increases, but at a pace that is slowing so quickly that the chief point here is not the fact of it so much as that the Business Press is appearing to ignore it.  Even employment gains, which have continued to be good, have continued to come at a slower pace.

    Our view is that you'd be hard-pressed to achieve anything approaching sustainable economic expansion absent some combination of (1) a falling currency (2) increasingly accommodative monetary policy (3) increasingly accommodative fiscal policy or (4) rising levels of business investment.

    You simply can't make a case for any of these right now. 

    Now, when we think about economic forecasting, Inflation is a key component of the picture?  Why?  Because it's an indirect tax on consumers?  No.

    By itself, Inflation is hardly a beneficial force.  By Inflation rarely occurs in a vacuum.  Inflation is, generally speaking, a terrific indicator of Demand.

    If you're unsure about everything else we've been saying, this may be the piece to the puzzle that helps you understand where the economy is headed, in a much clearer way.

    1.  Orders for Durable Goods have declined for three consecutive months at an accelerating rate. 

    Do you know how often that happens?  Almost never, and almost always preceding an economic contraction.

    2.  Capacity Utilization, otherwise called Factory Utilization, a measure of the extent to which factories are being put to work, is at a level on its Index that is only extremely mildly inflationary, AND the Index has declined for two consecutive months.

    3.  Total Energy Usage in this country has declined for three consecutive months. If you can find an economic who can say with a straight face that energy usage and demand do not correlate almost 100%, we'd like to meet that person.

    If you wanted, you could try to make a specious case that relative strength in the Dollar correlates with demand.  This argument would make more sense if Japan and the Euro Zone weren't struggling as much as they are or if investors weren't reacting to continued claims by the Federal Reserve that raising short-term rates is on its agenda. 

    Don't believe that latter agenda point. 

    We believe that Chair Yellen wants very much to move monetary policy toward a framework of normalcy, and that she would very much like to make significant strides in that direction on her watch as Chair.  Where people often misjudge Yellen is seeing her as accommodative.  Don't be fooled.  Chair Yellen is, in terms of policy, pretty fairly a traditionalist.  If she has been happy to be accommodative it's been a function of economic and employment weakness.  At least as anyone else, she is aware that the Labor Market isn't close to normalcy, but significant gains in the industrial sector and in hiring over the past year have made her sanguine about that possibility.  Based on the more recent economic data, we think you have to be strongly against a rate increase in the near future. 

    If you listen closely to the Chair's language, it has been modified.  She cites a rate increase as being on the Fed's agenda, but she doesn't say that a rate increase is justified by the data.

    We think we've made our case solidly.  And we hope that everyone reads the language herein properly.  We are not projecting that Demand will fall.  The point is that Demand has been falling and is falling.

    From an investment standpoint, we will be alert to changing conditions.  Check in on the Investment Outlook from time to time to get your bearings.

    We think it's going to be a very bumpy winter, and we think that those who prepare will be glad they did.


  • EDITOR'S LETTER - August 24, 2015


    This column will be the first of two parts. 

    The subject is nominally going to be about how the investment landscape is presenting a rare window into a couple of opportunities.  But the deeper theme has to do with differentiating between the "now" and the "future."

    After waiting for a few months for signals that the economy was about to turn a negative corner, in April we came out with a formal forecast to that effect.  We have not deviated from that forecast.  The economy has been sliding and softening at a gentle pace.  Most of the time, the Business Press encourages consumers to think and act apocalyptically and dramatically, unfortunately.  In fact, of course, by the time the economy is in a contraction, months of diminishing performance is always already in the books.  And in hindsight, it's somewhat easy for everyone to see and acknowledge, but how often do you hear your friends and colleagues really spending time on understanding how the economic picture had been changing in leading to the tangible effect of a contraction?  In other words, if it's so easy to see in hindsight, why didn't you see it while it was unfolding?

    We have talked 'til we're practically blue in the proverbial face, and it's startling and frightening the percentage of people who are in denial over the economic slide.  We have cited fact after fact demonstrating that the economy is not in the same position it was in even six months ago.  And all you typically get in conversation is a blank look.  Are consumers unable to make fine distinctions between how the economy affects their pocketbook?

    This is less a question than an observation: consumers are, apparently, unable to distinguish between a confirming indicator and a leading indicator.  If it doesn't feel like a contraction at the moment, then a contraction isn't coming.  That, in a nutshell, is how you can sum up the posture of the typical consumer.  By definition, they don't value the idea of a sound forecast until the fruit of that forecast has arrived.  Pretty silly, no?  But that's how they behave.

    This is significant for the obvious reason, but it's a mind-set that's significant because it also informs how consumers typically invest.

    Does everyone know that, by the time the Consumer has invested in an investment class, the greatest returns in that class are behind them?

    We have a few unbreakable tenets of how to invest.  We have written about some of these before.  The signal rule we have:  never buy into an investment when it's overvalued.

    You sure can buy into an investment class when it's fairly valued, but you had better be able to make a strong case for the fundamentals in that class.

    But, we don't have just one rule of investing.  We have another, a corollary rule, one that you've probably heard Warren Buffett talk about.  In a nutshell, assuming you can rule out that an investment class will not survive, you get your biggest return on the buck by doing your investing when all others (or nearly all others) are divesting.

    If you buy into an investment when it's strongly out of favor and you sell an investment when it's strongly in favor, it's extremely unlikely that you will not experience a total investment return that's far above the average.  This requires patience.  For example, by our reckoning the stock market has been overvalued for at least a couple of years.  Except for long-term positions and strategic trading positions, had you sold your investments in stocks two years ago, you might well have been sitting twiddling your thumbs, becoming more anxious by the month about how to obtain return.

    And yet, in the last week, the S&P 500 dropped 500+ points.  Yes, investing properly requires great patience and discipline. 

    In this vein, let's talk about the U.S. Equity Market, using the S&P 500 Index, and please pay close attention to this example.  In February of 2009, it stood roughly at 797.87.  By the middle of July 2015, it had risen to 2107.40.  The mid-point in time was May 2012.  If you invested in May 2012, you'd have made, by July 2015, an annualized return of roughly 16% (exclusive of dividends).  But, if you'd invested in February 2009, you'd have made an annualized return of 38%.

    When would you have preferred to have invested?  May 2012 or February 2009?  Among other things of course, the greater return by having invested earlier provides you a greater buffer to retain a bigger profit if the market were to begin dipping or slowing in its growth in the later months.

    Do you see the parallel with making judgments about the current economic environment and where it's headed?

    Judging that you should get into an investment class because it has performed well for the last 18 months is silly, just as it's silly to conclude the economy will be performing well in 18 months' time just because it's performing well, say, today.

    The point, of course, is not about timing a perfect moment to get in or out of an investment class, but judging when that relative moment is.  By definition, that moment when an investment is greatly out of favor is when you stand to make your greatest return by investing at that moment.

    What you want to look for can be defined in two ways, either when yield is at the high end of its range and/or when it's being eschewed by almost everyone.

    There's a ton of hot air expended by pundits who theorize and speculate incessantly about investment trends.   What if--just imagine now--what if you did nothing but plunge into an investment class when it's sorely out of favor and sold such classes when they were overvalued and highly sought after?

    What if you did nothing else but simply lived by that rule?  How far wrong would you go? 

    From Gold to Bonds to Stocks, the data is compelling.  You'd have some time frames in which you'd have to be patient and sometimes have a lot of your investment dollars simply in cash'd make out like a bandit.  What's more important to you?  Sounding like a big shot with your friends on a weekly basis?  Or actually making a great investment return? 

    Don't confuse investing with gambling.

    In our estimation, in every generation, there are about 12 value-driven opportunities.  We are facing two right now.  In Part II we will discuss those opportunities.

  • EDITOR'S LETTER - September 21, 2015


    As we concluded Part One of this extended column, we promised to lay out for you what we think are some rare investment opportunities.  But before we dive into those specifics, it behooves us to review the criteria that drive a rare investment opportunity.

    Let's remind ourselves that by the time the Consumer has invested in an investment class, the greatest returns in that class are behind them.

    Let's ask the question another way: how much less risk and how much more return do you achieve by waiting to invest in a class until it's risen 20% above its relative low?

    How much?  We can appreciate the fear that you might feel when a particular class appears to be spiraling down...the fear that the infrastructure that supports that class is collapsing, but, there are two points we want to make:

    1.  First, if you look back, say, as far as you want in the history of the U.S. financial system, how many classes can you point to that, upon collapsing, figuratively, in price at some point--and we mean collapse, by a decline on the order of 40% plus, that didn't end up far exceeding the price level it fell from?

    2.  If you plunged into buying each class that fell 40%, how great would your total return be today?

    Let's talk about the former point for a moment.  How silly do you look if you're afraid to buy into a class after a 40% drop because you're afraid of a collapse in the financial system?   If the first time you worry about mitigating risk of a collapse is after an investment class has fallen 40%, you're a pretty poor investor.  And if the prospect of the total return you're likely to experience after a decline of 40% doesn't make sense to you, but rather you prefer to suffer through the anxiety of achieving a return of an extra 1% when that class has roared back, you're pretty poor at managing the relationship between risk and return.

    Read that paragraph again.  Slowly.

    Our investment philosophy is not like others'.  We are happy to leave to other the niggling argumentation about reaching for yield when investment classes have more than recovered from being undervalued.  If you have to make a weekly case for an investment class, you can bet that that the risk-return relationship has become unfavorable for you.

    Again: our philosophy is that you want to plunge when an investment class is being shunned and, conversely, you want to tread lightly at a minimum and more likely divest when it is being gobbled up by all.

    The beauty of investing early when an investment class is out of favor is, of course, that you will end up having built such a comfortable return in your portfolio that timing exiting that class becomes less of an issue.  You have built up such a large return that your portfolio can withstand numerous and repeated buffets to it.

    Let's review the example we used in Part I, dealing with the Equity Market. 

    In February of 2009, the S&P 500 Index stood roughly at 797.87.  By the middle of July 2015, it had risen to 2107.40.  Now, the mid-point in time was May 2012.  If you invested in May 2012, you'd have made, by July 2015, an annualized return of roughly 16% (exclusive of dividends).  But, if you'd invested in February 2009, you'd have made an annualized return of 38%.

    Read that paragraph again.

    Part of the point here is, of course, the much higher total return you'd have made if you plunged into the Market when everyone else was still shunning it.  But the bigger point is that, if you invested in February 2009, the return you'd have made by May 2012 would have been so great that you would have had little need to engage in endless weekly or monthly analyses of market fundamentals.  And let's face it: few people--including professionals--have the ability to analyze the market sufficiently well to avoid the damage from a collapse.  If they did, collapses wouldn't happen in the first place.

    With ALL of this in mind, we want to be as clear as we can be that we are staring at a few rare investment opportunities at this figurative moment.  We are talking about investment classes that are, in terms of measuring historical patterns and return, are being shunned.

    The most significant at the moment, without question, is Crude Oil.  Put crudely, if you don't invest in Crude Oil at this moment, when would you?  Yes, it's true that supplies are abundant and it's true that that's in part because the U.S. energy industry has done much to expand supply.  It's also true that we may be entering a period of relative energy abundance, as technological advances enable consumers and businesses to do the same amount of work with consuming less energy. 

    But it's also true that Crude Oil has fallen something on the order of 50% in the past year.  FIFTY PERCENT.  Think about that a long time.  We believe that the technological advances in making energy more abundant are not nearly as great as some would believe.  Even as consumers use more energy-efficient light bulbs for example, and other devices come on the market, the infrastructure around the consumption of energy in major industry will not be seriously affected for many years, if ever.  Lastly, as we hope everyone knows by now, the chief reason that Crude Oil has become so abundant is that Saudi Arabia has embarked on a program of pumping up production for the primary purpose of driving the U.S. out of the energy business.  Sooner or later, the U.S. will have been put out of the energy business, and you will be sorry if you are not already invested.  But this gets into more fundamental-related analysis than we think is helpful or to the point.  You are staring at a 50% decline in the price of Crude Oil.   We're not sure what risk you think you're facing if you buy Crude Oil at 50% below a recent high, but if you think there's significant risk at that level, we 'd like to explain to us what events you think would conspire to keep Oil at that level or lower for a protracted period.  Could Crude Oil drop further?  Sure it could, but if you can't find a 50% decline in price attractive, we'd say you don't know an opportunity when you see it. 

    We're not sorry we spent so much time on that point with Crude Oil because the same argument goes for Natural Gas.  The price plummet there isn't quite as big as for Crude Oil (roughly 40%), but it's big enough and good enough for us to qualify as a rare generational opportunity.

    We believe that such an opportunity is probably coming in Gold, but...we're not there yet.  Sit tight.  Between the fact that the decline in Gold from its high is not quite on the order of a size that we think is big enough to build in enough comfort and the fact that sovereign budget deficits haven't stopped shrinking (we think that deficits will begin climbing shortly as the economic slowdown becomes a harsher reality), the sweet spot for buying Gold hasn't come upon us yet. 

    Those are our smart opportunities in Commodities.

    In Equities, there is one--and only one--play that makes sense, and it's for those who are of strong constitution and it's....Russia, believe it or not.  The Russian Stock Market has fallen roughly 40% from three years ago, may have guessed: it's all about the collapse in oil prices.  Remember: Russia is a major exporter of oil and natural gas.

    Lastly, in terms of long positions, there is one last investment class we want to talk about that we think presents, again, a rare generational opportunity and that's....Floating Rate Notes.  More specifically, you want to think in terms of the floating rate obligations of investment-grade companies.  These are companies that are extremely unlikely to default on its debt, and the debt we're talking about is debt that carries variable rates, debt whose rates are tied to short-term interest rates.  Basically the bet is that interest rates rise at some point.

    We are looking, right now, at an environment in which roughly half a dozen countries have monetary policies that have ultra-low short-term rates.  Is there a guarantee that rates will rise in the near future?  Of course not, but the greater point is that these rates cannot go lower.  If you don't buy into a bet that pays off if interest rates rise, what assumption are you making about these countries and the global market...and what assumptions are you implicitly making about the future financial system and planning for your future, because some of these countries are major global players, and taken in aggregate, would essentially result in a collapse.  Before you start bickering over when interest rates will rise, again, keep in mind how low rates have the U.S, for example.  Short-term interest rates are something like 75% below "normal" levels.  That not good enough for you?

    Now, what countries are we talking about?  Specifically, we are strongly supportive of buying into investment vehicles that pay off if short-term interest rates rise in the following:  United States, Euro Zone, Denmark, Sweden, Switzerland, Singapore, Chile, and Israel.  Strictly entre-nous, the big surprise on this list should be Chile.  Chile, as a commodity exporter, is in a better position than most to have been able to support an interest rate level that is higher than it is.  You want to bet that a commodity exporter does not raise rates above its proverbial bargain basement level?  You'll do it without us.

    Last but not least, for the very intrepid, we are now also facing some rare opportunities in currencies....currencies whose exchange levels have fallen at least 40% and in one case, more than 50%.  These are the Japanese Yen, the Turkish Lira, and the Brazilian Real.  Again, the logic is exactly the same.  These currencies have plummeted from relative highs.  In the Yen's case, we're talking about a fall of 1.3 cents in 2011 to a recent valuation of 0.8 cents.  In the Lira's case, we're talking about a plummet from 62 cents in 2011 to a recent price of 35 cents.  And, in the case of the Real, we're facing a drop in the price of the Real from 63 cents in 2011 to a recent price of 29 cents.

    Again, is there any guarantee that these currencies won't decline?  But how will you know when they've hit absolute lows.  Declines of up to 50%?  People running away from these currencies?  That's good enough for us.  Currency investing is not for everyone.  But, on the other side, if you think that buying into these currencies after these kinds of drops is risky, what you're essentially telling us is that there is no valuation level at which you would ever buy these currencies.

    So there they are.  Every one of these investment recommendations are investment classes that, we think five years from now will have thrown off returns far exceeding those that you can get anywhere else right now.  And the beauty of buying into such classes when they're so out of favor is that the likelihood of variability to the downside is extremely minimal.  In other words, you should have a higher probability of sleeping more easily.

    Really, think it through.  If you don't sleep more easily about your investments when you buy them downwards of 40% below their highs than when they're skimming their highs, we just can't help you.

    Less worry--that's what The Practical Economist likes.

  • EDITOR'S LETTER - October 19, 2015


    Has it seemed, the last couple of months, that we've gone on excessively about whether the Federal Reserve would move to raise short-term interest rates?

    If we have, we have done so because (1) changes in monetary policy are commonly understood to be a proxy for discussing economic strength and (2) it's alarming the extent to which the general business press handicapped the situation poorly and the extent to which the Consumer was misled.

    At a minimum, we said, months ago, that it was not possible that the Fed would be looking at data that would support a rate increase in September.  Here we are, a month later, and almost all observers are agreeing that a rate hike this year is very unlikely.

    "Very unlikely" is an understatement.

    But that only hints at the start of what people need to understand about the economy.  Of course, in this regard, we cannot urge you too much to read the Domestic Scorecard.  But the topic is of sufficient importance to warrant a little highlighting in this column.

    First we wrote a forecast that said there would be a significant softening later this year.  Then we downgraded that forecast somewhat moderately, hinting that while there might not be an outright contraction, the softening would be of such size as to erase anything but very nominal economic growth.  And, finally, we have downgraded our forecast again saying that (1) given that our Leading Indicators are in solid negative territory, a contraction is all but a foregone conclusion and (2) the coming winter would be figuratively ugly, economically.

    We are standing by that statement.

    It's amazing to us that, just as the usual round of observers got handicapping a Fed rate rise wrong, are now continuing to characterize the American economy as modestly strong.

    With every passing month, key economic indicators have declined.  In this column we are inviting you to look at actual current indicators, not leading indicators.  Let's look at some of the ones that resonate most with the Consumer.

    Let's talk about Retail Sales.  Over the past six months, Core Retail Sales have risen at a rate of anywhere from 0.5% to 1.1% on an annualized basis.  Especially with Core Inflation at roughly 1.8% (i.e. not really low), these figures are all but suggestive of an economy that is stagnating.

    Let's now talk about Labor.  Labor gains have continued to come about.  But what about direction?  Six months ago, the Number of Net Newly Employed (those newly employed adjusted for those leaving the labor force) was 114,000 on an annualized basis.  That figure fell to 97,000 three months later, and last month it fell to 64,0000.  That's a pretty steep decline, over the past six months, in the rate at which jobs are being added.

    How about Income, specifically, Disposable Personal Income Per Capita.  Rates of growth there have declined from 3.3% six months ago, to 2.7%.

    These figures so far don't show collapses, do they?  Of course not.  That's the point about economic direction and that our forecast calls for the winter to be rough.  These figures demonstrate a gradual sliding.

    How about the grand-daddy of current economic indicators:  Industrial Production?  This is really the heart of things.  In September, growth in Industrial Production came in at about 25% of the rate of January.  Think about that for a long minute.  The annualized rate of growth in January was 4.3%, and in September, nine months later, it came in at just 1.1%.  This is not just a recipe for no Fed rate increase, it's a recipe for seeing a big slowdown, the bottom to which we have not yet seen.

    Adding strength to this view is the fact that Factory Utilization rates have declined for four consecutive months at accelerating rate.

    In other words, whether the Fed raises rates or leaves them where they are is the least of the questions.  The question is not whether the Fed will leave rates where they are, but how soft the economic picture is going to get before it stops.

    If you don't fasten your seat belts now, you can bet we'll be saying "We told you so" later.

  • EDITOR'S LETTER - November 2, 2015


    There's a topic we cover in this space roughly twice a year, and it appears that it's again that time.  And that topic is the soundness of the Dollar.

    Not that we think it's smart to classify the world into two camps, those who think that the Dollar still has and will have, for a long time the prestige it has long had vs those who think that the Dollar's best days are over.

    But if you have to put us in a camp, it's the latter.

    There have been creeping signs that we've discussed over the past several years, from Russia and China trading lumber and fish in their own currencies, to China and Australia signing trade treaties in their own currencies, to the BRIC countries (Brazil, Russia, India, and China) lending to each other in their own currencies.  In fact, try to imagine what would happen to the Dollar were it not the case that all commodities contracts on major exchanges be required to be denominated in U.S. Dollars.  We're talking about eliminating trade of billions of dollars a month being eliminated.  While the Dollar is now showing some strength on a broad scale, keep in mind that against all its major trading partners, the Dollar is hovering below par, below 100 as par is measured.  This contrasts sharply with the Dollar trading at levels as high as 120 on the US Dollar Index (and above) just 20 years ago.

    We want to take you through a short look at how the world is evaluating countries and currencies.  To get at how the globe is thinking, in aggregate, in essence what we want to do is understand what the world's traders think of the creditworthiness of the U.S. and its major partners.  How do we do this?  Well, we start by looking at the yield that investors require from sovereign entities.  The lower the yield a country is required to pay, the more creditworthy, of course.  However, we need to understand that perceptions of creditworthiness are necessarily informed by sovereign levels of debt and current levels of economic activity.

    In short, what we do is score how little a country must pay to borrow and adjust it against current levels of industrial output and budget deficits, or, in other words against current apparent financial strength and flexibility.  In a case like this, if you are comparing two countries with the same level of interest rates paid on, say, 10-year debt (our metric), the country with a lower level of industrial activity and a higher deficit wins, so to speak, because what the numbers tell you is that traders have loads of confidence that country's ability and willingness to repay debt.

    In other words, a country that has a higher budget deficit and lower economic output that can borrow more cheaply than other countries is being held up as an example of a very creditworthy sovereign entity.  Counter-intuitive?  That's the point.  Bond traders are notoriously rational.  When they're willing to lend to a government at lower rates despite more debt and lower levels of output, you know they know something. 

    So...with all that in mind, let's take a look at the numbers.

    The population we're going to look at it is the U.S., Japan, China, the United Kingdom, Canada, Switzerland, the Euro Zone, and specifically France, Germany, and Greece.  Greece is specifically included by way of providing contrast and credibility for our measurement.

    The first thing we want to observe is that the scores for the U.K, Canada, Switzerland, and the Euro Zone in general are all generally bunched together, hovering in the mid 50's...(our score is like it is for our Scorecards, on a scale of -100 to +100), all very good.  Greece?  It's at roughly -14.  Greece's level of industrial output, at the moment, is actually fairly respectable (2.5%), and it contrasts in a way to almost balance out its budget deficit of 4.1%, but...with a 10-year bond yield of 7.8%, investors clearly view Greece as being a high risk.

    The most interesting about these currency zones already mentioned is that neither Germany nor France are in that bunch.  Here's what's happening, and it may surprise you.  Germany actually scores below this bunch at 38, and France scores well above at 64.  Germany is paying a scant 0.6% on its 10-year debt, but it has a budget surplus and industrial output is at 2.5%.  It's not hard to have confidence in a country with numbers like that.  However, France presents a different picture.  Not only is France's economy contracting at the moment, it's running a budget deficit of 4.1%.  And yet, traders are getting only 0.98% from France on its long-term debt.  That speaks volumes about what investors think about the creditworthiness of France. 

    Now, let's move on to Japan and the U.S.  Can you guess where Japan ranks?  Japan scores a very high 76.  Industrial output is all but nil, and the deficit is almost 7%, but investors are demanding a scant 0.33%.  The United States?  The budget deficit is significantly smaller, at 2.6% and the economy is still growing (though at a very small pace), but investors are demanding a whopping 2.04%....compared to 0.33% in the case of Japan.

    Stop right there and think about that.

    By contrast, China scores just 19.  While its budget deficit is comparable to that of the U.S., and Industrial Output is a strong 6.1%, investors aren't too keen about lending to China, requiring China to pay 3.1% on 10-year money.

    We have two more ways we want to parse the data for you to look at, but before we go on, you're probably thinking deep thoughts about why there are disparities that, in some cases, may appear to be great, to you.

    Creditworthiness is a complex thing.  It's somewhat about financial strength, absolutely.  But creditworthiness is about much more than ability to repay debt.  It's also about willingness to repay debt and the intrinsic nature of a political infrastructure that makes it (1) hard to not honor obligations and (2) makes evident to others where a sovereign's stance is likely to be at any one time.

    It's that last point that you need to focus on.  There is a reason that Japan gets a score of 76 while the U.S. is only at 41, and...that no one comes close to Japan.

    That reason is....POLITICAL TRANSPARENCY.

    It is inarguable that the political machinations and decisions of the U.S. Government are far more occluded than those of the Japanese Government.  It is inarguable, in our view, that the Japanese Government is the most politically transparent on the planet.  This gives investors great faith that, at any one time, the likelihood that that the Japanese Government will take a turn in its financial posture that will be a surprise, is extraordinarily small.

    Thus why Switzerland and all of the nations in the Euro Zone similarly score at least 10 points higher than the U.S.

    Let's make this very stark:  in terms of creditworthiness, Japan is to the U.K. and Canada as France is to the U.S.  In other words, the world doesn't particularly think very well of the U.S.

    Japan's creditworthiness score?  76  U.K. and Canada?  55  That's a difference of roughly 20 points.  France's score?  64  The United States?  41.  A difference of more than 20 points.

    Are you seducing yourself into believing that we think that the Yen will be the strongest surviving reserve currency?  Of course not.  We are not making a case for one particular currency taking the entire place the Dollar has had.  Our point is that the Dollar is far from the only game in town and that, the facts bear out the trend that the U.S. Dollar will have less to hang its figurative hat on, if current trends continue.

    An important corollary, and the real point we want to make: those who continue to discount the Euro relative to the Dollar are sorely mistaken.  The Euro Zone continues to struggle with the bifurcation of monetary and fiscal policy that is going to haunt and create troubles for the Zone until it is resolved.  But what currency traders know that you don't know ('til now, perhaps) is that political transparency and currency strength go hand-in-glove.  The fact is that, while the countries that comprise the Euro Zone don't all have the same high level of political transparency -- and certainly no country trumps Japan -- the political system in the Euro Zone gives investors a confidence they can't get from the United States.   And, given the size of the Euro Zone, it has rare financial flexibility and depth of resources.

    Remember: China may now be the largest single country economy, with the U.S. in second position and Japan in third position, an entire currency zone, the Euro Zone's size, in economic terms, yes...trumps even China.

    Have you been a U.S. Dollar-centric investor? 

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

  • EDITOR'S LETTER - December 7, 2015


    If you're a regular reader, you know that we take the descriptive, "practical," very seriously.  We're all about getting the answer that's roughly right, but using metrics that, at least, are conceptually easy to grasp and that make sense to the lay person.  We try to ask the right questions, and we try to match the right metrics with the right questions.

    And every now and then we need to take a step back and get a temperature read on things that are likely helping to paint a picture that it's quite likely no one is look at.

    In this column, we're going to ask you to come along with us and look at some common-sense elements of the market that, when aligned in a fashion that signals equilibrium among them, also signals a stable market.  Even if equilibrium were the case, we'd take the time to review that and opine on it. But, such is not the case.

    There are some key relationships that do, indeed, need to maintain equilibrium.

    Among those we want to talk about a relationship, or ratio, that we think tells a lot, and that's the relationship of Government Bond Prices (specifically in this case the U.S. Government Bond Index) to Commodity Prices.

    To review for a moment, let's remind ourselves that bond prices and bond yields have an inverse relationship.  Low bond prices denote high bond yields.  Rising and/or high bond yields are a typical characteristic of either optimism that the economy is entering a growth mode, is already in a strong growth mode, OR that inflation is rising, independent of true economic growth.

    While it is true that, along with economic growth, one expects some inflation to occur, it is also normal to expect short-term interest rates to be on the upswing, and along with that, for the Dollar to rise.  And a rising Dollar, of course, exerts downward pressure on commodity prices.  But, the point is that for the economy to truly register as healthy and growing, you should expect to see commodity prices rise, along with the Dollar.

    So, what's going on with this relationship?

    It's probably well known among all of you that commodity prices are skimming the bottom.  The point there is that it's not just Crude Oil and it's not just Natural Gas.  It's other commodities, such as Steel, Zinc, and Coffee, as well.

    Now, this is where you may have to put on your thinking cap for a moment.

    It's expected that commodity prices would drop in times of softening economic conditions.

    If your thesis is that the strengthening Dollar has had a big hand in this development, you need to be disabused: we have said it many times, but while the Dollar has exhibited strength over the past six months, (1) that is a reflection, more of economic weakness abroad than strength at home and (2) even after all this so-called strengthening, the US Dollar Index is just now flirting with crossing Par of 100.0.  So, you can't look there for your answer.

    The point, of course, is that demand, truly, is very slack.

    And that's not a great surprise.

    Where the surprise lies is in the behavior of the US Government Bond Index.  Are you trying to guess that the surprise is that the Index has shown a decline in prices, thus demonstrating investor confidence in a growing economy?  Of course not.

    No, the surprise is the outsize price appreciation in the Index.

    At this juncture it's probably useful to briefly describe the metric we use.  The metric is a ratio of the Bond Index to the Spot Commodity Price Index.  What we want, over time, is to see stability in the relationship of the two.  If you see Bond Prices decline (i.e. rising yields) and commodity prices stay roughly the same, this could usually be interpreted as a bullish sign for the economy.  If you see Bond Prices decline and commodity prices rise proportionately, this is likewise a bullish sign, though not to the same extent.

    But what if you see that ratio rise?  In other words, what if investors drive bond prices up?  What if investors drive bond yields down faster/more than commodity prices are dropping?

    The first and most important takeaway should be obvious: this is a signal of bearish times to come and that it's a theme that will remain until the ratio begins trending upward again.

    It's impossible to stress how useful this ratio/metric is in getting a gauge on the economic winds.  Simple?  Yes.  But devastating powerful.

    And this is the pattern that we've had underway for two years.  In November 2013 that ratio stood at 6.20.  In November 2015, it had risen to 7.50.  This tells us everything we need to know.

    Had bond prices risen without a decline in commodity prices, that alone would be a bearish signal.  And had commodity prices declined while bond prices remained stationary, that might have been okay, though declining commodity prices don't generally correlate with economic growth.

    But when you have (1) bond prices rising (2) commodity prices declining and (3) bond prices rising faster than commodity prices are have a problem.

    And what that problem is that the tea leaves are telling you to expect tough, bearish times in the near- to medium-term...and possibly long-term.  We cannot reinforce this point too much. 

    We hesitate to rely on our Economic Scorecard for general forecasting past six to nine months.

    But, touchstones such as these are not just difficult to ignore, not just useful, but compelling.

    The markets are clear: expect tough times ahead...very tough times.

    Now, what all of this doesn't tell you is the direction in which the ratio will continue to move.

    Before we take a look at the scenarios that could make the ratio move into equilibrium, let's ask ourselves a basic question.  Right now, the point is that the ratio is out of balance because it's too high, i.e. bond prices are too high relative to commodities.  This means that, to bring the ratio back into equilibrium, bond yields must either rise (as a reaction to rising inflationary forces) or that commodity prices must rise.  How likely is either of those scenarios? 

    There are three scenarios, going forward, that are possible.  Let's explore them.

    In the first, in order to bring the ratio into equilibrium, bond prices fall, i.e. bond yields rise.  Now, bond yields can rise for two main reasons, both of which justify bond investors demanding higher yields.  The first is that the economic outlook brightens considerably.  It is understood that one of the consequences of a brightening outlook is, almost necessarily, rising prices, which would place upward pressure on rates. We will review these scenarios later.  Let's label this scenario 1A.

    The second reason is that, independent of a broad economic brightening, prices simply rise.  The first thing to note about this scenario is how unlikely and unusual it would be for the pace of inflation to quicken without a commensurate rise in commodity prices.  In fact, when you think about rising inflation, normally one of the first places to look for a cause is actually rising commodity prices.  Rising inflation that doesn't step from or at least bring about rising commodity prices?  Exceptionally unlikely...barring--now hold onto your hats--a situation in which the government created a mass printing of money that, while it resulted in some upward pressure on commodity prices, would be insufficient to counteract a scenario of increasingly falling demand, i.e. a worsening economic outlook.  Let's label this scenario 1B.

    Remember, the point of both of the first scenarios is that they bring the relationship of bonds to commodities back into equilibrium, by seeing bond prices fall.

    Let's move on to the second scenario.  In this scenario, the relationship between the two comes back into equilibrium by seeing commodity prices rise, at least faster than bond prices.  Of all the possible scenarios, this is possibly the most unlikely.  First, is it possible that commodity prices rise, independent of, or faster than bond yields?  Yes, but not for long.  This scenario could come about as a result of a dropping Dollar, relative to other currencies.  Possible, yes.  But for how long is it likely that commodity prices would continue to strengthen without a general rising level in inflation, thus resulting in a general rise in the level of bond yields.  This is the scenario we consider the most unlikely, simply because the dynamics, even in theory, don't hold up.  We'll call this Scenario 2.

    Scenario 3 is the one that might could be the most plausible.  In this scenario, that relationship between bonds and commodities does not come back into equilibrium any time soon, but rather continues in the same vein, i.e. bond prices either continue to rise or commodity prices continue to fall.  But there's a big difference between Scenario 3A and Scenario 3B.

    In Scenario 3A, bond prices continue to move northward, faster than commodity prices do, reflecting the sentiment of bond traders that the economic picture is going to become gloomier.   Given that bond prices are already very high relative to commodities, this is one that you would fear much.  How likely is this scenario?  Well, the only point to make here is that there is literally no economic leading indicator on which to hang one's hat in terms of being sanguine in the near- or medium-term.

    And Scenario 3B?  Here we continue to have more of the same disequilibrium because, while bond prices stay roughly unchanged, commodity prices continue to decline.  This is perhaps the most interesting scenario.  Why?  Consider it this way.  Falling commodity prices are normally associated with disinflation and often deflation, in other words, falling demand and a tightening economic outlook.  That normally corresponds with bond yields that drop.  But, if commodity prices drop and traders are continuing to demand the same yield as before, that is, yes...:  a bright spot for the economy.  The key point in evaluating bonds against commodities is adjusting bond traders' view of where interest rates are headed, for inflationary pressure.  If inflationary pressure is declining but bond traders don't push yields down, that speaks volumes about what they think of the economic picture.

    There you have it, the top five scenarios that are most likely in light of where things stand today.

    Have we painted ourselves in a pretty corner?  Let's keep this simple.  The only scenarios that we think are remotely likely are 1B, 3A, and 3B.

    The Scenarios 3A and 3B are not unlikely at all, but it's 3A that's far likelier than 3B.  For 3B to come about, you need a reason that commodity prices will continue to fall absent declining demand.  How likely is that?  Not very.  We discard that.

    This leave us with 1B and 3A, and while neither is cheery, they are very different. And, to be frank, if we end up with Scenario 1B, it's far likelier that we get there by having gone through Scenario 3A first.  As unlikely as it may seem, the prospect of a government merely printing money isn't that odd.  Remember:  THE FEDERAL RESERVE DID IT FOR ROUGHLY 18 MONTHS BACK THREE YEARS AGO.  If you're confused, write to us and we'll review how it worked, but the Government did literally print money.  It's hard to drive this point home too strongly.  Your Government--the creator of the U.S. Dollar and all its king-sized strength--literally printed money for 18 months.

    But we firmly believe that the economy needs to demonstrate a significant sign of being stuck in a malaise before the political will to print money again will materialize.  Remember: we're in an environment in which people are fantasizing about normalizing monetary policy even though the economy cannot tolerate that, even as it now stands. 

    There's one key point that we have stressed this year that bears stressing again and again.  While the fiscal budget deficit has declined enormously from where it was in the wake of the Financial Crisis, it is, even now, at the highest it's historically been in the wake of a recession.  Four years after the height of the Financial Crisis, the fiscal budget should either be running a nominal deficit or a surplus, yet it's still hovering around 2.5% (using the conventional metric for these things).  And that's very high given how much time has passed and given that we have not been able to seriously normalize monetary policy.

    In other words, if the economy does not pick up (and there are no signs that it will do so), what's the medium- to long-term future of the deficit and the U.S.'s creditworthiness.  It's very premature to talk about skipping to Scenario 1B, but remember: inflation is the friend of the debtor.

    Does some of the reasoning behind our conclusion seem circular?  Here's the very fundamental point: behind EVERY economic expansion there has been an impetus that has stemmed from monetary or fiscal policy, or both.

    Barring going back to printing money, we are out of monetary stimulus.  OUT OF IT. 

    When we talk about fiscal policy, we are talking largely about spending initiatives and/or tax policy.  Spending initiatives can have some stimulative effect.  Remember that $800 BN stimulus package that Congress passed back in 2009?  Given how large the deficit still is at this point, there's going to be little stomach for a major spending package again.  And what about tax policy?  Think back: before every major economic expansion in your lifetime, there was a reduction in tax rates (the exception being the boom that followed WWII, which boom was a direct result of exorbitant spending associated with the war effort).

    So, ask yourself: whence the stimulus for an economic expansion?  And now you know what bond investors know.  And now you know why (1) a continuation of that disequilibrium is more likely than not and (2) that there will be a breaking point, informed by the credit markets, at which the Federal Government will be in a corner and will resort to printing money and trying like mad to create inflation.

    Germany 1923?  It sounds crazy, doesn't it?  Until you realize that though inflation didn't come about as fast as the Fed wanted it to, the Fed was literally printing money.

    Does all of this sound a little apocalyptic?  Short of speculative theories, please supply us with a plausible reason for where economic stimulus will come from.  It's time to face facts: nearly every major economic expansion over the past century has come either from outsized spending (associated with waging wars), tax code reform/reduction, or aggressive monetary policy.

    Can you tell us how we get either, at this point?



  • EDITOR'S LETTER - January 11, 2016


    In a recent column, we wrote about how useful certain key ratios are for understanding trends.  It's not a difficult concept to grasp that certain economic factors have a natural equilibrium to how they behave, and that when these factors are out of equilibrium, they are sending up warning flares to those who care to see them.

    This month, we're going to do a quick survey of a few and how they impact trends that are important to you.

    Hopefully by now, it's unnecessary for us to wax at length about ratios that spell the in-process economic slowdown, but just for fun, let's cover a few that, we think, we drive home some important understandings of what's going on. 

    One of our favorites has to do with domestic consumption of energy and how it relates to production.  How do we use this data?  Well, while we do believe that the dynamics of energy production are changing (consumption of energy is becoming more efficient), we also believe that they are changing very slowly.  That means that the historical truths persist: by and large, economic growth is associated with growing consumption. 

    And here's the fact: September 2015 was the seventh consecutive month in which consumption of fossil fuels declined.  (September is the most recent month for which the data is available.)  Give that a long think.

    September was also the third consecutive month in which the ratio of production to consumption of fossil fuels rose.  Add those two facts together and ask yourself if that sounds like it spells positive things for the price of Crude Oil in the short term?

    The second ratio we want to talk about today will resonate immediately with most people in light of the mild meltdown in the stock market in early January.  Hopefully, most readers, by now, know that we believe that credit markets are the key to understanding key economic trends.  What we want to know is where the equity market is priced relative to where bond investors think interest rates and growth are headed.  Of course the ratio fluctuates, but when the needle moves beyond a certain high or low threshold we get an indication that credit conditions are likely to make prospects for corporate earnings either more or less auspicious. the moment, yes, we have crossed a threshold. 

    Remember: when bond investors are sanguine about economic prospects they tend to push interest rates up...and bond prices down.  Our measures here are the S&P 500 Price Index for equities and the Barclays US Government Credit Index for bonds.  And at the moment?  It's not good.  It's not terrible, mind you.  But we're beyond having just barely crossed a threshold.  Bond investors have pushed prices up beyond a level that suggests equilibrium with the equity market.  In other words, they are indirectly saying that they think that the stock market, as a whole, is overvalued relative to where economic prospects are headed. 

    Third, let's talk briefly about Housing.  One of our key metrics is the ratio of the prices of previously-owned homes to disposable personal income.  This ratio tells us a lot about whether homes are overpriced based on whether consumers' income is sufficient to afford those prices.  And, for several years, after the fallout from the Financial Crisis, prices were well in hand, suggesting that there was plenty of potential for upside in home prices.  That has now changed.  While the consumer does not look particularly over-leveraged, again, we have recently crossed a bridge, and the potential for sustainable upward trends in home prices seems limited.

    In a related fashion, we care a lot about movement in the ratio of sales of new single-family homes to inventories.  And again, it's a similar story.  To see growth in home prices there we like to see a ratio of sales to inventories at or greater than 0.20.  When that ratio falls, it suggests that demand is becoming slack and that has the effect of putting a damper on home prices.  And that is precisely where we are at the moment.  That ratio is hovering in the 0.17 - 0.18 range.  The good news, of course, is that that suggests that brakes are being applied in terms of consumers becoming too leveraged.  The bad news, of course, is that it suggests that prospects for growth in the housing sector are limited.

    That's really the extent of what we wanted to cover today--and we think it's certainly enough--but we want to circle back to something we wrote in the first column of the Editor's Letter in 2015, and that's that Gold would be the Investment of the Year.

    Of course we were wrong, but as has been observed of us before, we're often too early.

    We are all but certain that 2016 will be a banner year for the yellow metal as sovereign deficits begin climbing again and central banks either continue or expand money printing programs.

    In this regard, coming back to the bond market, we take a look at the where bond prices are and where gold is now priced.  The way to think about this is that the prices of gold are typically positively correlated...and you can guess what the data is saying: gold prices are too low for where bond traders are saying the economy is going.

    Some years are dull, in the sense that economic trajectory continues mildly in one direction or the other with no particular drama.

    We don't think that's going to be true of 2016.

  • EDITOR'S LETTER - February 1, 2016


    The start of the new year seemed like a good time to take a "fresh-slate" approach to articulating our investment philosophy, so in the first update of the Investment Outlook, this year, we took more time than we've ever taken, to articulate it.  We think our philosophy is stunningly effective and refreshing. We think it's a stunning philosophy because the ideas behind it are simple, yet the discipline required to carry it out entails not taking comfort in what the rest of the market is doing. 

    We would very much like someone--perhaps, you, Gentle Reader-- to explain how, when you follow the rest of the crowd, obtain a superior yield and/or a yield that delivers return in excess of risk.   

    We believe that our investment guidance is a worthy part of this website and for that reason, we are going to feature here, that philosophy, as it essentially appears in the Outlook.  Our purpose: to make sure it's given enough opportunity for all readers to absorb.

    We feel like it's almost not possible for us to spend too much time explaining our approach to investing. 

    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.

    Yes, this means that, if you think it's very unexciting, in terms of no great opportunities, to be simply building your cash position...if you think that you must always be invested because you can't have the patience and tolerance and discipline that's required then you need to reconcile yourself to the fact that you will dilute your yield for the sake of excitement and not feeling "left out." 

    It's an old adage, but...don't confuse gambling with investing.

    Some people like to say that you can't time with markets.  That just isn't true.  Whether we talk about the yield you'd have gotten in equities had you plunged a few years before the start of the Second World War...or if you'd plunged into long-term bonds in the late 70's or if you'd made bets against Housing in 2008, you'd have beaten the market in a big way.  Timing the market is not about handicapping how the market and individual investments act on particular weeks.  It's about recognizing great value opportunities.

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

    Or, if you can't summon the proper discipline, stick to watching the usual round of market pundits and buy and sell the same investments everyone else buying and selling.

    In other words: don't pretend you like to identify and capture great opportunities, if you don't like it.

  • EDITOR'S LETTER - February 22, 2016


    Our regular readers know that our approach to measuring government-issued data of economic indicators is different than the approach the government uses.  And, with very few exceptions, what you hear in the conventional business press is the result of working with the standard government approach to reporting.

    That major difference?  The government issues its analyses based on data that it calls "seasonally adjusted." 

    In theory, adjusting data for seasonality makes abundant sense  Quite naturally, many industries have seasonalities to their business cycle.  For example, you cannot possibly reliably compare a construction figure from January with one from May without adjusting for seasonal demand.

    There is one big problem: being sure that the seasonality figure you're working with is accurate and that it remains unchanging, i.e. that there is no seasonality to the seasonality factor, so to speak, or that, if it changes, you're on top of how it's changing.

    We have no confidence that seasonally-adjusted figures are going to tell us the real story of what's going in within an economic indicator because we don't have confidence that the government accurately has its finger on the pulse of how trends may be changing.  Instead, we work with data that is based on how the raw data changed relative to the 12-month rolling averages, which is no different fro the change year-over-year..  The beautiful part of working with raw data is that there is no room for mis-extrapolating trends.  It's really quite elegant. 

    A secondary measure, but just as compelling--and one we look at--is how a particular month's results compare to the same month a year earlier.  Remember: you've been working with this approach for years and just didn't know it...with Consumer Prices.  Inflation is, by definition, the change in how prices changed year-over-year.

    When you look at the data in this way, it's hard to go astray with misunderstanding data.

    And so now we come, this month, to an example of which there can be none better to illustrate the folly in basing your understanding of the economic picture on the government's standard reporting.

    We're talking about Industrial Production.

    In January, Industrial Production declined 1.3% year-over-year. 

    And yet, the reporting out of the Federal Reserve stated that "Industrial Production increased 0.9 percent in January after decreasing 0.7 percent in December."

    That's right: the U.S. Government, in issuing its report of how Industrial Production performed in January, said that it increased.

    Yet the year-over-year figure declined.

    So, who do you think is in a better position to interpret what's happening in Industrial Production, arguably the most significant measure of current economic activity?

    [For the sake of elegance in housekeeping, we want to inform that strictly speaking, the data as we report it here is accurate.  Note, however, that for purposes of interpretation and scorecards, we average year-over-year changes over three months.  Thus, for example, while the year-over-year change was, strictly speaking, 1.3%, as we report it in the Economic & Market Analysis column, we report it as falling 0.7%, which is the mathematical mean of the most recent three months' year-over-year changes and is intended to smooth out aberrations in economic activity.]

    How much confidence does this give you in the the analysis that the U.S. Government issues for your understanding?

    As we've always said, you have to look a little deeper.  And here is a case in which taking the standard line being delivered to you via the media's main business news outlets, is just plain misleading at best and inaccurate at worst.


  • EDITOR'S LETTER - March 14, 2016


    Time will tell--and shortly, too--if our economic forecast comes to fruition.  It has been underway, and is taking its time, but as the old saw goes, "That's the way the ball bounces."  In an age in which everyone seems to want instant knowledge and illustration, it can be frustrating to people to see things take their natural path.  Many, rather than accepting that things unfold as they do, choose to make a religion out of whatever posture they most want to believe.

    Making a religion out of a posture rather than data doesn't make a lot of sense to us, especially when the data is showing a trend, however slowly that trend is unfolding.

    That's our abstruse way of saying that the economy is continuing to soften at a slow pace, as we predicted.

    But softening and collapsing are different things.

    Every major recession in your lifetime has been preceded by a collapse that was preceded by a softening.

    The easy way out, here, is to fall back on our declaration that sovereign debt leverage is beginning to reach unsustainable levels and that it's from that corner that the next financial disaster, so to speak, will come.  We do believe that there will be some kind of sovereign debt crisis that will significantly affect currencies and their markets.  When?  We don't know.  While sovereign debt is high, it's not at a level at which the market's back is going to break.

    But what about the private sector?  Before every recession in your lifetime, the private sector has managed to over-leverage itself.  By "over-leverage," we mean that the amount of money that the private sector had borrowed was too high relative to earnings. And that's when trouble starts brewing.  When companies, across the board, start having difficulty meeting debt obligations, it has strong implications for business confidence, liquidity, and the ability of business to grow.

    For several years now since the Great Recession receded a bit, Corporate America has not been particularly over-leveraged.  And that has made it relatively easy for the private sector to borrow and continue growing.

    Trouble is, over the past three or four months, that amount of leverage--that ratio of debt to earnings--has been growing. 

    Two month agos, it reached what we would call the lower end of the threshold over which leverage becomes high.

    Just to be clear, too, we're not hiding anything in not putting the numbers on the table.  Our metric couldn't be simpler: it's simply a measure of total commercial borrowing on the books of domestically-chartered banks against the earnings of the S&P 500.  It is really that simple and clear.

    And that figure has been low enough since 2010 to admit of growth, that is, earnings overpowered borrowing enough to give enough room for growth in credit and business expansion.

    And two months ago, we began to skirt the lower level of a level of leverage that would suggest problems would begin brewing.

    The following month, i.e. last month, that leverage came to a level that we consider high, but sustainable.  Sustainability doesn't admit of growth, though.  In order for growth to continue, i.e. in order for that level of leverage to continue and for growth to continue, earnings simply must grow.

    Will they?

    That's a tough proposition to make a call on.  On the one hand, our forecast predicted economic difficulty.  And it's hard to argue that that hasn't been underway.  On the other hand, there are already some indications, with the recent growth in commodities prices, that inflation may be heading north and that therefore, real interest rates will head deeper into negative territory and that can likely do only one thing for earnings.

    And it doesn't hurt that preliminary indications are that a leveling out of tightening in credit conditions is upon us, in other words that the softening we predicted and that is happening may not continue at the same pace.

    BUT, that's not a call we're comfortable making absent a turnaround in capacity utilization and a turnaround in capital spending.

    Sometimes it's okay to say, "We don't know."  When the data isn't clear, it's the only honest conclusion to draw.

    So is this column all just much ado about nothing?

    Not really.  We are just putting you on notice.  As we report in the current Domestic Scorecard, it does appear that we are about to hit a pause in the softening in the economy.  Does that mean that that pause is going to translate to an acceleration?  It's too soon to know.

    And we are putting you on notice that, no matter what the next month or two brings, leverage in the business sector is at a new level.  Even if that leverage stays tame for the next month or two, please consider that earnings need to grow faster than borrowing in order for private-sector leverage to not turn into a full-blown problem.

    Worth your knowing and being aware of?  We sure think so.


  • EDITOR'S LETTER - April 11, 2016


    This column will, in a strong sense, be a companion to the most recent Letter.  A lot has happened since the last time this column was updated, and so it's appropriate to update our understanding.

    Six weeks ago, we saw, in real economic data, the proof that the economy was softening at a pretty quick pace.  And, finally--FINALLY--the greater economic press has acknowledged what we forecast back in November and December. 

    We're not going to get off this point too quickly.  In mid-December, talk of raising short-term interest rates was all the rage.  According to the prevailing wisdom, only a fool would have said that talk of raising interest rates was foolish, never mind talk about an outright softening.

    And, of course, that's precisely what we did.

    We went, in three  months' time, from mid-December to mid-March, from the Fed Chair laying out a schedule for raising rates straight through 2016, to raising the possibility of going to negative interest rates, if necessary.

    NEGATIVE INTEREST RATES!  Three months after a schedule for raising rates!

    One of two things is true, no?  Either the Federal Reserve Bank is not much more than incompetent or the Federal Reserve Bank has been equivocating when it suits its purpose. 

    We know which we think it is.

    There is a number of factors that go into our Economic Model, but...we want to help you out on handicapping things. 

    Every now and then, the Model may not point with great force in one direction or the other, terms of pointing to expansion or contraction, there are two indicators in particular that we think are stunningly correlative.  In other words, when these are pointing in the wrong direction, you need to hold strongly to your position against whatever else the Press and Government are saying.  And, when these are pointing in the right direction, you need to do the same.

    We are talking about Capacity Utilization and Capital Spending.

    Capacity Utilization is a measure of the extent to which factories are being put to work, and it is a very powerful indicator of where demand is likely headed in the short- to medium-term. 

    And the fact of the matter that this metric has been declining for well over six months.

    Capital Spending?  This is exactly as it sounds.  More powerful than the measure of New Orders for Durable Goods, it measures the amount of money that is being put toward spending on products and services that contribute to business formation and expansion. 

    If you think that economic expansion is something that can be reliably and sustainably brought about without an increase in capital formation (aka capital spending) you would be very misguided and likely guided by principles of economic organization that are at odds with the traditional American model.

    That's it for this Letter.  Not as short as we were hoping, but pretty succinct, and, we hope, helpful, as you play along with handicapping the economy.

    So what does all this mean for the near- to medium-term now?  First answer: read the updated Domestic Scorecard.  Second answer:  Capacity Utilization and Capital Spending are still declining, can guess what we think.

    Stick with The Practical Economist.



  • EDITOR'S LETTER - May 2, 2016


    Sometimes it's what the Business Press doesn't talk about that is of greater importance and is something that should, if not keep you up at night, give you pause to consider.

    One of the more interesting economic phenomena since the onset of the financial crisis has been the enormous disjoint between force of monetary policy and effect.

    Not only did the Federal Reserve set short-term interest rates at an ultra-low level, it engaged in an aggressive bond-buying program that literally printed money, for a couple of years.  For those who understand exactly what happened, it's still difficult to fathom the extent of how unprecedented these actions were. 

    But even more difficult to fathom is the extent to which ultra-accommodative monetary policy did not produce anywhere near the results that it should have. 

    This is a topic we have raised a few times in the past, but it's one we have not talked about in at least six months.  And this time we want to delve into the issue a little more.  We think you're going to find the simple research we did surprisingly compelling...and maybe a little scary.

    After just a little thinking, we realized that the Fed publishes data that will enable us to get somewhat to the heart of the matter.

    The Fed manipulates monetary policy for the purpose of stimulating or restricting the money supply.  A greater and growing money supply is supposed to have the effect of stimulating the economy.  The Fed's broadest measure of the money supply is called M2, and it is simply the amount of money in all accounts in banks under the governance of the Federal Reserve.

    Now, in theory, then, M2 should be extremely close to the actual measured amount of deposits on hand in Fed-chartered banks.

    The reality is that it's normal to expect minor differences, a function of reporting timing, primarily.

    But we realized that measuring how the two have correlated might give us a clue to phenomenon of the economy being out of joint with monetary policy.

    And...we were right.

    Want to know what we found?  (Don't worry, we'll keep this very simple.)

    First off, you need to know that we worked with the time frame of February 2012 to February 2016.  Why?  Before February 2012, people were still behaving in very fearful ways so the patterns are not very meaningful.

    From February 2012 to February 2016, deposits grew faster than the money quite a rapid pace.  In other words, the Federal Reserve appears to be somewhat successful in translating monetary policy into deposits, at least.  The ratio of growth in one dollar of money supply to deposits was 4.9.  That's a very strong result.

    But what happens if we look at more recent time frames?

    Let's take a peek at the last four series of six months. 

              February 2014 - July 2014:         1:1.0

              August 2014 - January 2015:       1: 0.7

              February 2015 - July 2015:         1:1.5

             August 2015 - January 2016:        1:0.6

    Do you see the point?  Yes, the needle is moving around a little.  But, there are two critical takeaways from this data:

    1.  Even though in the most recent time frame there are periods in which deposits have grown faster than M2, the rate of growth is far, far slower than prior to 2014.

    2.  Deposit growth is actually falling behind M2.

    So, what's going on?  Well, before we delve into an area that becomes speculation, let's dwell on the fact of what we've learned. 

    The key point is not so much that deposits are growing, overall, at a rate close to the money supply, it's that there's a huge comedown from what the ratio was, and more importantly, we're starting to experience gaps in growth between money supply and deposits.


    The obvious--and easy--answer is that it's going into things like brokerage accounts.  But let's be practical in our thinking: interest rates have been almost as low as they are now, since 2009.   Does anyone seriously believe that, at this point in the game, depositors are going to withdraw funds at a fast rate to put them into brokerage accounts?

    This column is not the place to engage in speculative reasoning, so we're going to leave the data right here on the table as it is, and let you ponder the situation.

    That situation is very simple.  State the situation another way, if you like.  The Fed is growing the money supply at a faster rate than deposits are growing.  Turn that around: deposits are growing at a slower rate than the money supply.

    Where are the deposits going?  We'll let you ponder that, but while you ponder it, here's something else to ponder: is it safe to assume that those vanishing deposits are no longer going to participate actively in the economy as we know it?  We only ask that specific question because we're afraid the question might not otherwise occur to you.

    You've heard countless other sources in the Business Press attack this subject, right?

    Because the Business Press always attacks subjects that are difficult to analyze or uncomfortable to discuss, correct?

  • EDITOR'S LETTER - May 23 2016


    We can't remember the last time we dedicated as much time as we will, today, to the very specific topic of the direction in which monetary policy is headed. But, it does appear as if a national discussion around whether the Federal Reserve will or won't be raising short-term interest rates and on what timetable, is reaching a level of near-hysteria.

    Of course the discussion is less real discussion than a dialogue that predictably starts with "What do you think of....?" to which the expected answer is a chorus that there's no doubt that higher rates are coming.

    You were told by the conventional press with certainty, last fall, that higher rates were coming.  And on that day in December when the Central Bank did make the politically symbolic move of raising rates 0.25% on the sixth anniversary of the Fed's having lowered the short-term rate to a historic low, it did give enormous fuel to the speculation that, not only would a further increase be coming but that several increases would be on the table for 2016.

    Do you remember what we told you then?  If you don't, we encourage you to search the archives.

    And consider this: the Fed's most recent chatter about raising rates possibly in June comes on the heels of not raising rates in March (as it said it would) and on the heels of talking about the possibility of moving to negative interest rates.

    Now really, think for yourself, please.

    Do you really think that a series of interest rate increases is in the offing?

    This past week the most recent releases for Industrial Production and Capacity Utilization came out.  And what they said tells you a lot.

    Simply put, these two indicators tell you almost everything about current conditions and the directionality of demand and prices.

    Remember: in the several months leading up to September 2008, Inflation was running around 2.5%-3.0%.  And then the bottom fell out.  In other words, only a fool believes that current Inflation tells you where Inflation will be in the short- to medium-term.

    But Capacity Utilization?  It's one of the strongest indicators of demand.  Bet into rising inflation against declining Capacity Utilization at your peril.

    So, let's talk about the actual data.

    The first thing to know is that, if we look at the most recent 12-month rolling average of the Capacity Utilization Index, that figure comes in at roughly 76.  Now, we would not consider that level necessarily deflationary, but...consider: this is the 13th consecutive month that the Index declined.  That's 13 months in a row that it declined.  Does that sound to you like Inflation is likely to be a problem?

    Sure, both Core and All-In Inflation ticked up in April.  But you have to consider that commodity prices did tick up a little last month and you have to consider that the Dollar came down a tick as well.  Those two data points tell you nothing about where Inflation will be in three-to-six months.  In other words, that tick-up in Inflation?  It's transitory.  Inflation is not remotely a problem in the short- to medium-term.  If you think it is, you need to reconcile that with declining factory utilization.  Good luck with that exercise. 

    Second, let's take a look at Industrial Output.  The Government reported that Output grew modestly in April.  That report is based on the Government's adjustment of raw data, for seasonality. 

    Just what's the methodology behind that seasonal adjustment and can it be trusted?

    Methodological concern for seasonality is a legitimate concern when you are comparing data points from time periods that are not consistent with the same seasonal patterns.  But when you compare raw data from the same time periods?  You end up with simply and sharply accurate data, with no data manipulation or interpretation required.

    And so, let's see what we have when we compare Output from April 2015 with April 2016.

    The Industrial Output Index for April 2015 came in at 103.789.  That's a real, raw data point collected by the Government. 

    The figure for April 2016?  It came in at 103.092. 

    Now, that's not a large decline is it?  But it IS a decline.

    And this is the data landscape into which the Federal Reserve is talking about raising interest rates.  Declining factory utilization and declining industrial output. 

    We can't speak for politics, that is, political maneuvers.

    But, from a purely economic and policy standpoint, does it seem remotely likely to you that the Fed is going to tighten monetary policy for at least, say, the next three or four months? 

    We'll go beyond that, and state that, barring unforeseen exogenous or political factors, the Federal Reserve will not raise short-term interest rates in 2016.

    And there's something else: how many people do you know who aren't saying that there won't be an increase this year?

    Remember one of our fundamental tenets:  when everyone is saying the same thing, something else will happen?

    Don't you just hate it when the business press is useless?

    Stick with The Practical Economist.


  • EDITOR'S LETTER - June 27, 2016


    We were going to write a major piece on Inflation this week....where we think it's headed for the medium-term.  And that information is an important input to your investment and lifestyle decisions.

    But while we don't want to add to the noise around the story of Great Britain's vote to exit the European Union, colloquially referred to as Brexit, there are one or two points around it that we need to make, points that aren't being adequately made in the wider business press.  And if not now, when?

    Let's start from a very aggressive place.

    Those who opposed Brexit essentially did for reasons that are ultimately about money.  If you want to make the argument that support for Brexit came more from the Right and that support for remaining came more from the Left, the Left has something to answer for in terms of putting money ahead of other considerations.  From a purely political and aesthetic standpoint, this is not a place that that group typically likes to be characterized as being in.   

    The idea of creating a union that facilitates the conducting of transactions and transfer of resources is a very good thing.  The question is around creating the right structure and strictures that don't compromise sovereignty and that don't muddle fiscal and political policies at the country level with that of the Union. 

    Does it make sense to anyone that a larger central body can dictate measures that individual countries are responsible for implementing and experiencing the consequences of?  That is the fundamental question.  Political decisions at a central level...and therefore uncoordinated with the goals and financial exigencies of the more local level?

    This makes whom?

    The idea that what's good for the economic growth of the Union is good for the country is a place that those who opposed Brexit would argue for, and it's one we can't support.

    This is not about political prejudices.

    It's about political sovereignty.  And it's important to remember that the integrity of the currency is intimately tied to political integrity and sovereignty. 

    We'll say it now: while the short-term will bring some pain to the United Kingdom, exiting the Union will ultimately bring greater strength to the Pound.  We fully expect to see the Pound on a slow upward trajectory in the medium-term.  Why?  Political transparency at a level (the country level) that can be better managed and understood and...relied on to manage the economy that is supported by the Pound.

    That sentence says it all.  You cannot overstate the importance of the link between the currency and the ability to control laws, monetary policy, and fiscal policy in a way that brings about greater faith in the currency. 

    We look to the Franc.  We have repeatedly told you--and shown you based on our analyses--that the Franc is the most coveted currency.  And it has risen something like 400x against the Dollar over the past 40 years.  Political transparency and independence: they are the bedrock of what currency integrity is about.

    A smaller pie for Britain in the medium-term?  Yes.  Remember: Switzerland is not in the European Union and is doing just fine.

    What will happen over time is that UK political leaders will undoubtedly craft economic policies around engendering growth at home...and, now, around a currency that is solely theirs to control on every level.

    The argument that the Brexit will deeply wound the UK economically is silly at the least.  The UK has benefited from the Union, but the rest of the Union has benefited from the UK, as well.  At the margin, the UK has probably benefited more,'s marginal and can be managed over the short- to medium-term and adjusted to.

    And in the meantime, investors will have more confidence in the Pound than ever before. 

    The Pound has remained one of the reserve currencies, though its standing has fallen over the last few years, particularly with the advent of the Euro.

    Now that Germany, France, and Italy (to a lesser extent) are basically the only countries in the Euro Zone to keep the Euro alive, do you really want to bet that the Pound doesn't move up a step in its stature as a reserve currency?

  • EDITOR'S LETTER - July 18, 2016


    We are falling dreadfully behind on our queue of topics we're intending for this column.  But there are worse problems than having too much to talk about.

    For the second time in a month we're bumping our intended topic to talk about something that's more topical and pointedly instructive. 

    This past week, the Federal Reserve put out its data release for results of Industrial Production in June.  That data, by the way, is usually released on or around the fifteenth of the month.

    We're going to quote verbatim from the Fed's press release on its website:

    Industrial Production increased 0.6 percent in June after declining 0.3 percent in May.

    Please read that again.  The key point that they're communicating is that Industrial Production rose in June.

    Now, we think our methodology for measuring economic data for the purpose of interpreting and forecasting the economy is very sound.  We look at 12-month rolling average data...and then further average the data over three months to smooth out aberrations that would distort an accurate description of economic activity.

    However, if that process sounds like it obscures, it can be very powerful to look at year-over-year data.  Year-over-year change is the definition of how you describe annualized change. 

    You will note that we do not work with the government's measure of seasonally-adjusted data, but rather with the actual, raw data.  The beauty of this is that there is no room for interpretation: the data is the data.  And, unsurprisingly, when averaged over three months, the figures correlate very closely with our preferred method of looking at 12-month rolling average data.

    So, let's take a look at the raw data in Industrial Production.

    The Index for June 2015 was reported at 106.881.

    The Index for June 2016 was reported at 106.417.

    Now, you can do arithmetic.  Does that sound, to you, like Output increased year-over-year?  How does the Government conclude from that data that Output increased?

    Seasonality is not an issue because...: it is a measure of the same month year-over-year.

    So, what's going on with the Government's reporting?

    Stick with The Practical Economist.

  • EDITOR'S LETTER - October 10, 2016


    It's been many weeks coming, long last, if you have read the Domestic Scorecard, you will know that we have updated our formal forecast.

    About a year ago, we told you that we were about to embark on trajectory of economic softening.

    And that is, in fact, what we have had.  To those who are still in denial, we point to the fact that Industrial Output has declined for more than six consecutive months.

    And we point to the fact that Inflation is, low as as it is, the highest it's been in more than a year.

    And we point to the fact that Personal Income rose, in July, at the smallest rate in more than a year.

    But even while we pointed a softening, we stopped short of forecasting an outright contraction.  The data wasn't quite sufficient to support it.

    That has changed.  We are now forecasting a noticeable contraction.  We believe that the tone in the conventional press will begin to change by early November.

    What's going on?

    Those who are close readers know that, for us, the figurative sweet spot in economic forecasting is in credit spreads relative to inflationary pressure.  And that spread is simply too tight to allow for the kind of expansion that would even foretell stability and a continuation of the status quo.

    This is a good time to remind that we are getting no help from tax policy and corporate earnings are essentially flat year-over-year.  Does it sound as if we're pulling out economic indicators that are suited to a particular agenda?  No.  These indicators are important inputs to economic trajectory in our Model.  We encourage you to ask your colleagues to opine on the likelihood of economic expansion absent favorable tax policy and absent rising earnings.

    However, at the very heart of our Model is, perhaps, one economic indicator that is more important than any other: Capital Spending.  Capital Spending has declined for nine consecutive months.  To forecast anything even approximating stagnation in the face of declining Capital Investment is nothing less than madness. 

    We challenge every publicly-visible economist or commentator to explain how even economic stability is a remote possibility in the face of declining Capital Investment.

    We know what your next question is: how to align your investment choices.  Our first piece of advice: watch for updates to the Investment Outlook.

    Our second piece of advice: don't let your model for making investment choices lead with a requirement you think you have for minimum expected yield.

    Our last piece of advice (for today): do the opposite of what everyone else is doing.

    Part of being practical is recognizing that in numbers (masses of people and money, that is), there is also reduced yield expectation.

    Be practical.

  • EDITOR'S LETTER - September 5, 2016


    There's one thing that's become alarmingly apparent, and no, it's not that lay people have been coaxed into believing that the Federal Reserve is on a course to raise interest rates.

    It's that people have been led to believe the Fed is poised to raise rates because the economy is in healthy condition.  Of course, it's now been over a year since the Fed said that it was going to embark on a systematic, but persistent, plan of raising rates, and you see how far it went with that.  So, why hasn't the Fed stuck to its original statement?

    You may recall that, at the time, we said that the fundamental facts didn't support an interest rate increase.  And the situation hasn't improved since then. 

    Has the economy improved significantly since, say, three years ago?  Yes.  It's also true that, over the past nine months, the economy has slid a bit, but the purpose of this column is not to talk about direction, but the state of the economy.  Just how good are things?  Our fundamental point is that there is a lot of noise in people's heads distorting how they perceive things.

    Our goal with this column is to set the record straight, and obtain some clarity.

    Let's talk about Employment.  First off, let's remember that trends in Labor lag the greater economy.  Remember the Financial Crisis in September 2008?  It may surprise you to know that net hiring continued for several months after that event. 

    So, how does the Labor Market feel at the moment?  Well, in July, the ranks of the employed rose 1.7% year-over-year, so that's a good indication of why it feels relatively good to a lot of people.  However, if we look at the Employment Rate, the situation is different.  The Employment Rate is the most powerful measure of the labor landscape.  It measures what percentage of the total populace is working.  In 'normal' times, that figure should register around 62.0%  (In boom times, you should expect it to hit 64.0%)  At the height of the Financial Crisis, the Employment Rate 'only' went as low as 58.2%.  The Employment Rate in July was hovering at 59.0%.  This is not a picture of a strong and healthy labor market.

    How about Income?  Well, in July Disposable Personal Income rose 3.5% year-over-year.  That's pretty good.  It really is. 

    How does that stand relative to Inflation?  All-in Inflation in July was about 1.0%.  In other words, in aggregate, consumer prices rose 1.0% year-over-year in July.  Now, let's dissect that figure.  Energy prices fell 11.4% year-over-year, enabling consumers to save a bunch on oil and gas.  But Core Inflation?  Core Inflation, you will remember, is everything other than energy and food.  Prices for core consumer goods and services rose 2.2% year-over-year.  Does that sound good to you?  It's really not that great, is it, when you relate it back to how Income changed year-over-year?

    Now let's continue in a vein that's related to Income.  Disposable Personal Income rose 3.5% year-over-year.  Again, that's not bad at all.  However, the money supply, as controlled by the Fed, was grown by 6.5%.  What should you conclude when the Fed brings about an increase of 6.5% in the money supply (M2 as the Fed refers to the measure) but Income grows just 3.5%?   That ratio of growth in Income to the money supply in June was 64%.  In June 2006--by way of comparison--it was 138%.

    Precisely, there's a significant gap in the economic engine.

    What of the Stock Market?  A lot of people have made a lot of money--at least on paper--in the Stock Market, over the past few years.  From August 2012 to August 2016, the price index of the S&P 500 rose 56%.  In the earlier part of that four-year time period that we're using, the economy was still recapturing a lot of lost ground, rather than creating expansion, but over the latter part of that period, how much of why the Index continued to rise is because lay investors in particular, felt that they had nowhere else to go for yield?  (Never mind the critical point that investing in a security because you can't think of anything better is the worst possible thing you can do!)

    Something that lay investors often forget: the Stock Market is ultimately about EARNINGS.  Prices of companies' stock don't go up just for fun or automatically because the Fed pulls certain levers.  Prices should rise primarily because earnings are either going up or are expected to go up.  Simple enough, right?

    Well, in August 2012, the price/earnings ratio on the S&P 500 was 15.7 and average earnings were $88.00.  Fast-forward to July 2016 and the price/earnings ratio jumped to 24.9 but average earnings were $87.00.

    You have your answer, don't you?  Does it sound to you like the market is properly valuing this asset class?  Is it wrong to pay more for an asset if other conditions combine to make that asset more valuable?  We hope you will make us remember that lower interest rates make cash-producing assets more valuable.  But--how can you argue that earnings at roughly the same level are worth the same amount when interest rates have, if anything risen, over that time period? 

    Do you think the Stock Market is even close to properly valued?

    Penulimately, let's chat about the Deficit.  First, a little housekeeping: we don't measure the deficit (or budget balance) by debt as a percentage of GDP.  GDP is a ridiculous measure of growth--it measures spending, not output.

    We measure the budget balance in this way: the actual amount by which the government has a net deficit as a percentage of total revenue collected.

    That figure in July 2010 was incredibly enormous.  It was hovering at 70%.  It has come down tremendously since then.   It has come down to 16%.  That's terrific progress.  However, that is still a relatively high figure (you may remember that, in the mid-late 1990's, we began to run a surplus and that prices on long-term government bonds started to soar because traders were frightened that the bonds would become scarce as the government might have less need to borrow).  What if the deficit were this high but the Fed Funds rate were hovering in the 5%-6% range?  We'd be far less concerned.  Observers would know that, with interest rates in the 5%-6% range, there'd be plenty of room to maneuver down and likely drive the economic engine, which would result in climbing revenue to the government. see the problem: the deficit is still high, especially relative to how accommodative monetary policy is.  That is not a healthy state of affairs for the budget balance or for how sustainable the U.S.'s fiscal stature is.

    And that leads us to our final point, one of the cornerstones of understanding how healthy the economy is: real interest rates.  Simply put, strong economies have, other things being equal, higher real interest rates.  (When you think of what real interest rates are, you should think in terms of nominal short-term interest rates adjusted for inflation.  Thus, if the Central Bank has the short-term rate at, say, 4% and inflation is running at 2%, the real interest rate can be derived to be 2%.)

    Now, how to assess the situation?  Briefly put, you should view any real interest rate north of 1.0% as showing at least a moderate state of good health.  Anything north of 2.0% would denote an economy that is likely very sound.  And anything north of 3.0% would likely be found in an economy that had lately performed robustly but was poised to develop cracks; higher real interest rates tend to put a burden on borrowers and to put a damper on capital investment.  Low interest rates?  They spur capital spending on projects to ring about capital flows that are otherwise not available from investing in money-market type instruments.

    So, where are we?

    We're going to look at year-over-year changes for four different time periods, and we think the data is going to show you what you need to know.

    In June 1994, the Real Interest Rate (REI) was 0.53%, a function of the recession that the economy was only starting to come out of.  By June 1995, it had risen to 2.73%, a function of the Fed's having been able to raise rates after the previous years' ultra-low rates had stimulated investment and growth.

    In August 2000, the REI was 3.09%...a level that we consider not likely to be sustainable and likely to bring about softening.  By August 2001, it had fallen to 0.93%, as result of increased Fed accommodation to try to stimulate the economy.

    In September 2005, the REI had fallen to -1.07%, a function of the last lingering effects of the recession in the 2001-2003 time frame.  A year later, having benefited from several years of very low rates, the economy had begun to pick up and with the Fed's ability to tighten, had risen to 3.19%.

    And, for our last time period, in July 2015, the REI was hovering at -0.04%.  A year later it had fallen to -0.45%.

    Two observations about this recent data set: 

    1.  You will note that the REI in July 2015, even as the economy had begun to pick up speed, was significantly below the minimum threshold of 1.0% that we set as a loose dividing line that separates healthy economic states from unhealthy ones.

    2.  A year later, deep into an economy that many people have been lulled into thinking is relatively strong, the REI fell lower.

    When you think about a quick assessment of a country's economy, there are few indicators that are more compelling than knowing what the Real Interest Rate is...and, of course, the direction in which it is trending.  Starting from a weak position and going further south?  That is not what you want to see.

    We know that this is a lot of content, but we felt it important to do a comprehensive assessment that was understandable and accessible.  Read it again.  And, again, if you need to.  And let us know what your questions are.  We can anticipate that some may think we loaded the dice, so to speak, in terms of what criteria to choose, but...we disagree.  We think these criteria are, as a group, both comprehensive and important.

    And, of course, we think they're also...very practical.

  • EDITOR'S LETTER - October 3, 2016


    In our most recent Letter, we administered what you might regard as a stern physic with regard to making sure you're exercising discipline when you try to grade the soundness of the economy.

    With this current Letter, we are updating our formal economic forecast, and we intend to administer a mild physic with regard to how some of you might be failing to discern the difference between leading indicators and confirming indicators.

    When the economy is growing and your business and pocketbook are doing fine and continuing to improve, the factors that feed that increase to your wallet and account are confirming indicators.  

    When those indicators that immediately feed your pocketbook demonstrate decline, the status of those indicators doesn't change; they are still confirming indicators.  Those factors do not tell you directionality.  They inform you of where things are at the moment...and, of course, in the extreme short-term (think one or two months at best).

    The point behind leading indicators is that their effects are felt in the aftermath of those factors having demonstrated constricting forces.  

    This is where some lay people have been duped--and we're using that word advisedly--into thinking that trying to forecast the economy is nothing more than mumbo-jumbo.

    Unfortunately for the consumer, most of the economic patterns that the Big Press reports and tries to make you think are important are, at best, corollaries, but not true leading indicators.

    Let's take a look at the major inputs to our Leading Indicator Score...

    First, we're getting no help from Tax Policy, so that's not a negative factor, but rather a neutral one.  So far, so uninspiring.

    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 weak.

    Fifth, credit markets are demonstrating a tightening in margins, demonstrating a very phlegmatic outlook for growth.  

    Let's make this even simpler:

    If you're going to try to say that the economy is going to do anything other than contract in the face of nine months of declining capital spending, we'd very much like to hear that case.

    If you're going to try to say that the economy is going to expand in the face of rising commodity prices but stagnating growth in government bond yields,'re going to have to explain that to us.

    We are not going to mince words.  

    We are formally updating our forecast to state that we are expecting a moderately strong contraction to develop 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 including 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. 

    Of course, we will talk more about the developing picture in weeks to come.  But, if you've been reading all along, you know that we projected a significant softening around this time last year.  Were we wrong?  Let's see how some critical indicators changed year-over-year for the month of July:

    -  Industrial Output declined 0.7% for this year, contrasting with growth of 0.4% last year. 

    -  All-in-Inflation, which was hovering at 0.1% last year, rose to 1.0% this year.

    -  Personal Income rose at a 4.5% last year, but slowed to 3.6% this year.

    The forecast is no longer for continued softening, but for outright weakening and contraction. 

    You've been warned: we think the outlook is strongly negative enough that the tone in the conventional press will start to change color as soon as mid-November.

    Fasten your seat belts.


  • EDITOR'S LETTER - November 7, 2016


    This will probably be the last time for half a year that we're going to address the ongoing soap opera of the Federal Reserve crying "wolf."  It's been almost a year that the Fed has been insisting that rate increases are in the cards.  The rhetoric has been so persistent that everyone walks around, nodding knowingly, feeling smugly sure and smart that this is the way it's going to be.

    You tell us.

    Industrial Output has been declining for months.  Capacity Utilization has been declining for months.  Non-defense capital spending has been declining for months

    Do you really believe that inflationary pressure is heading north?  Are you able to separate the now from the prospective?  Prospective movement on consumer prices is anything but upward, and if you believe it is, you'll need to find a good reason to explain that.

    Has the Fed continued to make much of improvements in each months' labor landscape?  Absolutely.  And, we hope you know by now, that labor data occurs on a lagging basis.

    Could the Fed be looking to the labor data as an excuse for raising rates?  Yes. Yes, it's possible that a rate hike could be in the cards.  But it has less to do with strengthening economic data than Fed Governors' deep concern for structural disequilibria that are being created by continuing to leave short-term interest rates at ultra-low levels for an extended period. 

    And--is it possible that the Fed has political considerations behind continuing to fan the flames of belief in rising rates?

    We'll let you speculate on that.  But for now, we ask you this: if you ask the average person next to you what she thinks of the economy, she's likely to say that it's continuing to improve.  To what extent is her perception of the economy colored by the Fed's rhetoric around raising rates?  Again, we'll let you answer that question.

    Then ask your friend if she's aware that Output has been declining for months....that Capacity Utilization has been declining for months...and that non-defense capital spending has been declining for months.

    Ask her to put that in context of the Fed's continued rhetoric about raising rates.

  • EDITOR'S LETTER - November 28, 2016


    This will be among the shortest Letters we will ever publish.

    You may recall a while back, that we said that the one place we could determine with certainty that over-leverage was present and likely to grow into a problem was...the budget balance...the federal budget balance, of course, which is, of course in a deficit situation.

    You will remember our saying that the deficit has come down enormously from where it stood in the aftermath of the financial crisis of 2008.

    The first thing to remind is how we measure the deficit.  Our measure is the right one: we look at the gap between receipts and outlays at the federal level and measure that gap against total receipts.  That's how you measure a deficit.  (And yes, consistent with our customary methodology, we look at the raw data on a 12-month rolling basis.  The data is actual and real.)

    What you need to know, in context of every major media outlet telling you that the economy is strengthening...:  the budget deficit now stands at 18.0%.  

    Eighteen percent.

    The gap between receipts and outlays is 18% of receipts.  That's not a figure that can be remotely associated with health or expansion.  That is a figure that you should normally associate with being the worst that the deficit gets before a serious recovery gets under way.

    Eighteen percent.  And, that figure is the highest it's been since July 2014.

    In the context of everything else we have been telling you about the economy, does it seem likely that the budget deficit will be declining soon?  Or that this level of deficit is sustainable?


  • EDITOR'S LETTER - December 19, 2016


    The amount of exuberance over a perceived upward trajectory in the U.S. economy has become ridiculous.  If you ask the average person why they believe that the economy is on such a trajectory, it's doubtful that they can answer with anything approaching reason.  

    In this, our last Letter for the year, we're going to lay out as simply as we can why should be wary in the extreme of blithe optimism.

    Let's talk first about Industrial Production.  Output has now declined for 14 consecutive months.  That is a fact.  The most reading on the Industrial Production Index came in at 104.2.  That compares to a reading of 104.3 in August 2008.  You will recall that this was one month before the Lehman bankruptcy.

    Now let's talk about a very compelling leading economic indicator--arguably, the most compelling of all:  Capital Spending.  

    Capital Spending has now declined for 23 consecutive months.  That's nearly straight years of a drop every month in private investment.

    Now, let's talk about corporate earnings.  We derive our calculation of average corporate earnings from working with the S&P 500 price level against its Price-Earnings Ratio at a given moment.  Based on data from mid-October, earnings were about $88BN.  Not only is that figure a decline of 8.4% on an annualized basis, but except for September and July of this year, that's the lowest level of earnings since June 2013.

    Lastly, let's look at leverage in the commercial sector based on that level of earnings.   Our calculation of borrowing relative to earnings is now the highest since September 2010.  And the last time before that that it was this low was June 2008.

    We don't know how to make it plainer.

    Of course if trends in these key data points change in the near future that could change what your expectation could be.

    But in the face of these levels and trends, can you give us a reason to think the near- to-medium term outlook is strong?


  • EDITOR'S LETTER - January 23, 2017


    This past week, a friend of our Editor presented him with a verbalization of a common thought in minds of lay people who invest.

    The good news is that the Editor's friend is on board with the perspective that the domestic stock market is now overvalued.

    But, he protests....then....where to invest?

    Repeat to yourself: your conception of what yield you should earn does not confer on any asset class the obligation to return that yield.

    In addition, it does not confer on that asset class an obligation not to return a loss.

    Maybe one way to understand it is that if the primary (or maybe sole) reason you're investing in a class is because you don't know what else to do with your money, you should probably retreat (slowly) to cash or cash-like asset forms (or, of course, hard assets, which we are never against).

    Of course, if you are dollar-cost-averaging over a very long period of time and can be sure to commit to it, that's a different game, and it's okay with us (though it doesn't rob you of the obligation to re-visit your asset allocation).

    But if you're about rationalizing investing vehicles as the economic landscape changes, for goodness' sake, don't chase yield!  When you do, all you do is taking on more risk than you're going to get compensated for.

    And who wants that?

    Now, if you're not sure if you're chasing yield--if you're getting sufficient reward for risk--that's always a good question.  Our Editor's friend seems to understand that that is not the case at the moment. 

    If you think that it is, in fact, the case, write to us and tell us why you think the market is poised, say, over the next year, to return adequate return for risk.

    We can't wait to hear what you say.  And remember: the more words it takes you to say it, the more specious the argument probably is.


  • EDITOR'S LETTER - February 13, 2017


    We know that some of you are fairly sophisticated readers of the financial landscape.

    We also know that some of you have fairly simple understandings of the financial landscape.  And by "simple," in this context we don't mean "practical" but facile.

    It has become increasingly apparent to us that some of you have no better general barometer of where the economy is and is headed than....the stock market.

    The first thing to know is that the economy and the stock market are not the same thing. 

    The economy is a composite of real data points.  These are data points around volume of trade, around volume of investment in business formation, around the cost of capital, and so forth.

    The stock market is, on a simple level, a measure of how investors value publicly-ownable assets that are listed on a major exchange. 

    The problems around using the stock market as a proxy for the economy are several.  The first among them is that investors' appetite for premiums they will pay over earnings is elastic.  Investors will often pay higher multiples over earnings when interest rates are ultra low or when investors perceive other investment opportunities as being slim. 

    Of course, there's an obvious implied question there, isn't there?  If investors aren't sanguine about the business landscape in general, i.e. they're phlegmatic about capital formation, shouldn't that make you nervous about their willingness to pay higher multiples over earnings for existing businesses?

    Then there's the very real phenomenon of investors often buying stock in companies based on earnings' rises that are basically on the come...but have not been proven.

    And then of course there's the fact that there's a significant timing lag between performance in the stock market and the performance of the economy.

    Of course there's more, but these are a few of the salient points you need to consider when you decide that your primary gauge for the economy is the stock market.

    At the risk of being very unattractive, if your sole--or even primary talking point--when talking about the economy is how the stock market has moved recently, you really need to reconsider.  

    How your stock portfolio has performed in the last month gives you a partial picture at best of how the economy is performing.

    Remember: investors tend to pour money into the stock market when interest rates are at very low levels.  And can you tell us in what way very low levels of interest rates are indicative of strong and strengthening economies?

    As Joan Rivers would say, "Can we talk?"

    By the time the stock market has thrown off its best yield, the best months of an expanding economy are well behind it.

    Is this hard for people to grasp?

  • EDITOR'S LETTER - March 13, 2017


    We have told you that, among all of the leading economic indicators, there is one that is, a sort of king of the hill.  And that is ....the extent to which the private sector is over-leveraged.

    Now, if this term is unfamiliar to some of you, it's simple:  "leverage" refers to the level of debt relative to earnings.

    There are two key numerical thresholds around that ratio that concern us.  One is the higher end, a figure past which strong contractionary pressure grows.  The other is the lower end, a figure that is below the point at which contractionary pressure is very strong, but is just high enough that the potential for real economic growth is essentially nil and that, if the trend continues, tells you, indirectly, to gird yourself...financially, at least.

    And we are officially telling you now that with the passage of this past month, we have passed the lower threshold.  (And yes, we waited two see two months of data points before drawing this conclusion.)

    Know this: we are now certain that the potential for positive economic growth is now not possible, short of a reversal in direction of leverage.  That doesn't mean that there won't be economic indicators that come out that appear to signal growth.  What it does mean is that that appearance of growth is just that, that there will either be mitigating indicators elsewhere or that such growth will likely be reversed in short order.

    And, a few more months of current directionality and we will be flashing a neon sign that warns about  looming economic contraction.

    But it's early for that.

    But/and, you have been put on notice.


  • EDITOR'S LETTER - April 10, 2017


    We expect that most of you spend some time listening to the major media's commentators and observers of the business sector.  And, it's more likely than not that you've heard some opine that a greater case can be made for upward movement in the stock market....than otherwise.  It's also likely that you've heard a minority of observers state that the market, as a whole, is overvalued.

    You've heard us state the same thing.  Now, if we were to ask you to succinctly summarize the theses of those who are phlegmatic about the market's valuation, what would you say?  Our strongly-held view is that you haven't heard a lot of clarity of a quantitative nature.

    One of our major theses is that if something can't be made relatively simple and quantitative (both) then you probably haven't yet clarified your thesis about what's going on.

    We're going, in this column, to give you the very simple case for why you should view the market with great trepidation.

    Stock market valuation is all about earnings.  If you start saying, "But," stop and repeat that first sentence. 

    The lower that interest rates are, in general, the greater value a given/same stream of earnings has.  In other words, let's say you're being offered a stream of $100 cash a year.  That $100 has greater value in present terms if current long-term rates are 2% versus 3%.

    The point?  When you are being presented with a value of a given stream of earnings, there is an implied interest rate that the parties are arriving at.  Understanding what that implied interest rate is relative to general interest rates tells you everything you need to know about how the parties (or market) are valuing that stream of cash.

    Our general investment thesis is that the implied rate of return from equities must be 150% of the rate of return from the 10-year government bond.  That's simply a function of how much reward we think you need to be compensated for the risk involved.'s absolutely true that for most of the last four years, that implied rate of interest on the stock market (we're using the S&P 500 as our gauge) was well enough above the risk-free rate premium that the stock market was actually undervalued.

    Not only is that no longer the case...not only is the market now valuing the stream of income from companies in the S&P500 at a proper level, but it is actually overvaluing that level of earnings.

    That's right: that implied rate of interest is now hovering below the minimum reward level we need to see to believe that the stock market is properly valued.

    If this were the matter of one or two (or even three) data points (i.e. months), we'd hold back on such a bold proclamation.  But the data is at least four months in and the ratios are below (not actually at) where they need to be.

    Of course we will be monitoring this ratio every month.

    But, you have been warned.  Our belief: other things being equal, if you invest into this market, you can properly classify yourself as a greedy investor, i.e. one who has an unrealistic expectation of reward based on desire.

    Good luck.


  • EDITOR'S LETTER - May 8, 2017


    Let's talk about the big economic picture, the big domestic picture. 

    If you're a long-time reader you know that one of the touchstones of our model is the movement in both yield on the government's 10-year bond and in commodity prices.  Our goal today?  To make sure you know why that is the case, and secondly to make sure you understand what that data is telling us right now.

    Please understand that we are about to make several general statements.  The point is that these statements about market dynamics are generally accurate, especially over the medium- to long-term.  The fact that traders and investors occasionally "get it wrong" is irrelevant; over the medium- and long-term traders are never wrong.  As we have posited before, there are no people on the planet smarter than bond traders.  There just aren't.

    The first half of this equation has to do with those bond yields.  Generally speaking rising bond yields are an indication that the market expects upward pressure on the Fed to raise rates.  Now, there are two economic-based reasons that there could be upward pressure on rates.  One is commodities-based inflation.  The other is economic-based inflation....inflation, that is, that is derived from increased economic activity.

    To the extent that we can strip out commodities-driven inflationary pressure from upward changes in bond yields, we can detect upward movement in economic activity and...economic expansion.

    This algorithm, in theory, is elegant and it's not difficult to see, on paper, why it would be compellingly predictive.

    The challenge is in executing the theory.

    We will keep the methodology simple for you.  What we do is merely relate, numerically, the bond yield level to the commodities price index level. 

    Given an unchanging commodities price index but a rising bond yield, you should expect an expanding economy.

    And, given an unchanging bond yield, but a rising price level in commodities, you should expect downward pressure on the economy.  It is that simple.  And, this metric--that is, how the metric changes, is astonishingly accurate with regard to economic trajectory.

    Let's give you an example from the recent past.  In March 2014, the 10-year bond yield was roughly 2.71% and the commodity price index stood at 134.52.

    By March 2015, those two metrics moved to 2.04% and 98.12, respectively.

    You will notice how far down the bond yield fell.  But you will notice, as well, how steeply commodity prices dropped.

    When we compare the actual ratios of the March 2014 time frame to that of March 2015 we find that it rose 15 points.  That's a moderately bullish signal.

    If you were looking for a strong basis for understanding the moderate expansion that we experienced in the 2015-2016 time frame, it's right there for you to see.

    Now, let's contrast the March 2016 and March 2017 time frames.

    In March 2016 the 10-year bond yield stood at 1.89% and the commodity price index was at 78.83.

    In March 2017 the 10-year bond yield was at 2.60% and the commodity price index was at 84.50.

    You will notice that the bond yield rose rather dramatically.  You will also notice that commodity prices rose substantially.  How to balance the two movements?

    We look to our ratios, and what we find is that, year-over-year in March, that ratio rose just 1 point. 

    That's right, just one point.  Armed with that data understanding, would you expect the economy to continue to grow through the balance of 2017 and into the start of 2018?'s even worse than that, because that 10-year yield has fallen, over the last six weeks, on the order of 25 basis points while, in the same time frame, the commodity price index has remained roughly stable.

    This analysis and understanding of how to understand what the market can tell us is, to our mind, the most compelling early indicator of economic trajectory.  It's all already in our economic model  So, if you've been keeping up with the Domestic Scorecard, you'll have noticed that the Leading Indicator Score has been dropping.  This analysis, that we just went through on this page, is a is a big reason why.

    Consider yourself embarrassed if you're surprised by an economy that is found, come late fall, to have significantly slowed during the spring and summer. 

    You have been warned.


  • EDITOR'S LETTER - June 12, 2017


    We think that, to many readers, this current column may seem funny coming after the most recent content in which we laid out our simplest case why you should expect a slowing economy.

    In short, we want to talk about the case for an upturn in the economy.

    Please remember: it's about time-frames.  We have consistently said that we cannot use the podium of our forecasting voice to make anything like definitive statements about the economy more than three to six months out.  Anyone who says that they can is someone you should listen to with great caution.

    But we're not averse to theorizing about time frames that are further out, based on what we would call ultra-macro economic data points and perspectives.

    Did you read the current Investment Outlook?

    If you did, you know that we laid out our case for why you should expect long-term interest rates to begin turning north in the medium-term (think six to 12 months' time).  This is a critical juncture to remind that the effects of the factors that create momentum in long-term rates are not felt for at least 12 months' time. 

    So, that raises the obvious question: what do rising interest rates hold for us, in terms of the general economy?

    It's too easy to simply say that rising interest rates are associated with expanding economies.  Not only is that true, but it's also not necessarily true that the two go hand-in-hand.  As in solving problems of probability, sometimes it's helpful to solve for the opposite of the problem you want the answer to.

    If you buy into the scenario that has long-term interest rates rising, under what scenario would you see that happening in conjunction with a downturn in economic conditions?

    Again, we're The Practical Economist; anything can happen, but let's stick to the most likely scenarios.

    We could see long-term rates rise because inflation begins to rise at a rapid and sustained pace.

    We could see long-term rates rise because the creditworthiness of the United States Government drops considerably.

    We could see long-term rates rise because of a severe credit and capital crisis that makes the availability of capital severely restricted....a very dear commodity, so to speak.

    (We are discounting the scenario in which long-term rates rise because of accelerating demand for commodities due to the outbreak of a protracted military conflict.  Such scenarios do result in inflation, but they are also accompanied by expanding economies.)

    And if you're a regular reader, you do know that we have a very large long-term concern about the sustainability of the fiat currency system.  If such a crisis were to occur within the next two to three years, we argue that you'd see other key touchstones indicating larger problems that are looming.  And we do not see those at this time.

    How about hyperinflation?  In the context of a central bank that not-long-ago raised short-term interest rates?

    We argue that, in context of an economy that has been improving, and a budget deficit that is still large but significantly down from where it was four years ago, a severe decline in the creditworthiness of the United States is possible, but unlikely.

    A capital crunch?  Again, we think that there will be signposts indicating that such is afoot, and there is nothing particularly amiss in terms of the economy running "business as usual."

    You are permitted license to believe that there are ominous forces that will drive long-term rates high in the two-three year time frame, but it is very difficult to form a sound and reasoned argument for believing that such is going to be the case.

    And so, as you would do to solvee a probability problem, we ask to solve now, for 1-X, where "X" is the set of scenarios under which long-term rates rise for inclement reasons. 

    What you are left with is a case for understanding that the more likely scenario in the longer time frame is toward an expanding economy, with a sounder currency as its base.

    That is our longer-term "soft" forecast.  It is theoretical in nature rather than being driven by the data that informs our economic model.

    Of course, if such topics are of no interest to you, there is no compelling obligation to find them so.  But if the answer is an important input to your activities, we argue that it's folly, at the least, to abdicate your responsibility to create an understanding of how you should be forming and altering your investment strategy.

    In short, what is the reasoned argument for the contrary position?  We don't think there is any.


  • ECONOMIC & MARKET ANALYSIS - April 6, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 4.9%.

    S&P 500 Index - The Index finished at 2066.96, up 0.3% from last week.

    US Dollar Index - The Index finished at 96.74, down 0.7% from last week.

    GoldGold finished at 1198.50, up 0.2% from last week.

    Commodities - Spot Prices finished at 324.19, up 0.3% from last week. 

    Government Bond Index - The Index finished at 2132.24, up 0.3% from last week.

    Case-Shiller Housing Price Index  - The Index rose 4.3% in January.

    Construction Spending - Spending in the Private Sector rose 4.4% in February.

    Disposable Personal Income - Income rose 3.5% in February.  

    Consumer Spending - Spending rose 2.6% in February. 

    Employment - The number of Net Newly Employed rose 128,000 in March.

    Housing is certainly not what we'd consider a leading indicator.  But it is a very important indicator, firstly because, of course for those who are invested in it already or thinking of investing in it (or divesting it), it's useful to know where it's trending.  But it's also useful because, as we have often said, Housing does tend to mirror the general economy. 

    In January, the Case-Shiller Index of the prices of previously-owned homes rose respectably, by 4.3%, but...that's a figure that's unchanged from last month.  The last time the improvement in prices was this low was in November 2012, more than two years ago. 

    On the other hand, spending on Construction is one of our key components of Business Investment, and does tend to act as a leading indicator.  So it makes sense to pay attention to what's doing.  February's result?  Spending by a respectable amount of 4.4%, but it was the lowest rate in 14 months.

    Now, how do those figures on Income and Spending look to you?  The good news is that Income was pretty good, rising 3.5% and that's the highest it's been since October 2013.  However, Spending rose just 2.6%, the slowest rate since May of this year.  What does that mean?  It means that consumers saved at a pretty fast clip, an annualized rate of 18.2% increase in saving, the fastest since March 2014.

    It bears saying: high rates of saving over several consecutive months correlate very strongly with negative consumer sentiment and an economic downturn.

    Now, while it's probably not fair to say that the nail in the coffin of our formal forecast was created with the arrival of the labor data this past Friday, it is fair to say that it puts the forecast we were intending to publish anyway on firmer footing.  (We'd be the first to say it takes guts to  even hint at committing to a slowdown without a significant change in labor data.)

    So what about the labor data?  The first thing to say is that the Employment Rate (much more meaningful than the Unemployment Rate) remained unchanged from February, at 59.2%, a very low rate. 

    The next thing to say is that the number of Net Newly Employed is strong, though it's the weakest in four months.  If you're new to our methodology, "Net Newly Employed" measures how many individuals were freshly employed, adjusted for how many individuals entered and left the labor force.

    Now, as for that strong's the thing: it's misleadingly strong.  To smooth out transitory events, we average the figures over three months.  So, averaged over three months, the number of Net Newly Employed is 128,000.  However, the raw figure, for March is a mere 34,000.  This is the weakest increase in six months.  To really put it in perspective, that raw figure of 34,000 in March is a drop from a figure of 113,000 in February. 

    It really was a tough week.  And the Market didn't think much of it, either, although it's important to understand that the Market's reaction was cut short because the Labor data came out on Friday, a day that the Market was closed.  Having said that, the S&P 500 rose 0.3%, but we think that was a result of investors taking heart in a declining Dollar rather than a strengthening domestic or global economy.  You will note that Gold rose.  A rising stock market combined with higher Gold?  There's only one pattern that makes that happen, and that's concerns about economic easing that will be supported by monetary accommodation.  To underline it all, of course, investors drove government bond prices the face of rising commodity prices, so it's impossible to make the claim that investors were reacting to lower inflationary pressure based on commodity prices.

    Yes, it was a tough week.

  • ECONOMIC & MARKET ANALYSIS - April 13, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.9%.

    S&P 500 Index - The Index finished at 2202.06, up 6.5% from last week.

    US Dollar Index - The Index finished at 99.35, up 2.7% from last week.

    Gold - Gold finished at 1207.35, up 0.7% from last week.

    Commodities - Spot Prices finished at 324.90, up 0.2% from last week. 

    Government Bond Index - The Index finished at 2129.13, down 0.1% from last week.

    It's one of those rare weeks in which there wasn't a release of even one major data point that we consider a major economic indicator.  What should you do with your extra time?  Well, we think you'd be smart to spend it with the Domestic Scorecard, which was updated this week.  After many weeks of hinting, we're finally issuing a a major forecast announcement.

    It's always useful to try to read the tea leaves and divine what the Market is telling us what it thinks.  This is, of course, where Common Sense, is important.  And one of the rules about Common Sense?  Don't force a meaning where there isn't one. 

    Very often, lately, the Market has demonstrated patterns of behavior that, taken together, are unusual.  This week, it's it's very least on the surface.  First, the Government Bond Price Index fell....but it fell by 0.1%.  We don't have too much difficulty beginning to draw conclusions based on percentage moves of 0.2%, but 0.1% is too small a move to make a meaningful inference.  For all intents and purposes, we consider that "unchanged." 

    Then we look at Commodities.  The Commodities Spot Price Index 0.2%.  It's not that we want to shy away from a move that small, it's that all of that was really moved by a price move in Crude Oil, which was a function of gyrations in supply....and that, alone, is not terribly meaningful. 

    What are we left with?  The Dollar, Equities, and Gold all rose.

    Now that's a slightly unusual picture.  Under what circumstance can you imagine Gold rising along with both the Dollar and Equities?  We'll tell you:  it's a scenario in which the Dollar is being influenced heavily by troubles in the Japanese and European Currencies, investors are continuing to be pulled by the lure of ultra-low interest rates (rather than the prospect of economic strength), and investors believe that low rates will be sticking around for a while. 

    Equities and the Dollar can move for a variety of reasons.  Upward movement is not necessarily indicative of domestic strength, and downward movement is not necessarily indicative of domestic weakness, but...Gold?  Investors don't move into Gold just for fun.  If Commodities are up across the board, a nominal move by Gold is normal and doesn't mean much.  But when the Dollar moves down and Equities move down, but Gold also loses, investors are sending you a strong signal about where foreign currencies stand against the Dollar and what they think of interest rates (too high perhaps).

    But when the Dollar wins and Equities rise, a northerly movement by Gold is abundantly counter-intuitive.  Remember, we're The Practical Economist:  you want to know what investors think of prospects for the monetary base and the budget deficit?  Look at where they're sending 10 year government bond rates and where they're sending the price of Gold.  Bond prices unchanged, but higher Gold? Watch out.  

    You may remember that we began the year by stating that we predicted that Gold will be the stand-out investment of the year.  We're standing behind that prediction. 

  • ECONOMIC & MARKET ANALYSIS - April 20, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.1%.

    S&P 500 Index - The Index finished at 2081.18, down 5.5% from last week.

    US Dollar Index - The Index finished at 97.45, down 1.9% from last week.

    Gold - Gold finished at 1203.35, down 0.3% from last week.

    Commodities - Spot Prices finished at 334.69, up 3.5% from last week. 

    Government Bond Index - The Index finished at 2140.42, up 13.2% from last week.

    Retail Sales - In March, non-auto related Retail Sales rose at an annual 0.8% rate.

    Business Sales - In February, Business Sales rose at an annualized rate of 0.2%.

    Industrial Production - In March, Output rose at a 3.2 annualized rate.

    Capacity Utilization - In March, Utilization rose at a 0.3% annualized rate.

    Consumer Prices - In March, Inflation fell 0.1%.

    This week, let's start by looking at the Market...what did it think of the week?  Well, we are living in curious times, the Market, this week, having displayed one of the rarest of combinations of patterns you will ever see, that pattern consisting of Commodities and Bonds rising, but Gold, Equities, and the Dollar falling.  That is a very rare pattern.  To give you an idea, that pattern has not occurred since we began this site.

    In this specific case, it's proper to put the emphasis in two particular places: falling equities and rising bonds.  Consider: government bonds are already screamingly priced, yet the Market pushed the U.S. Government Bond Index up 13.2% in just one week.  That, combined with that 5.5% drop in Equities, tells you precisely what investor sentiment is with regard to the economic landscape.  It's not, of course, a sanguine outlook, but it does dovetail with our forecast as we published it recently in the updated and current Domestic Scorecard.

    Now, as for the week's major economic data...

    In February, Business Sales rose at an annualized rate of 0.8%, and that's the lowest increase since April 2013.  And, in March, core Retail Sales rose 0.8%, the lowest increase since March of last year.  If we include autos and auto-related products, the result was better, 1.9%, but that's still the lowest rate of growth since March of last year.

    Of course, one of the touchstone measures of current economic activity is Industrial Production.  And, in recent months, activity has been pretty robust.  Now, readers of the current Domestic Scorecard know that last week we issued a formal forecast for a fairly significant downturn over the next six months.  Therefore, it's somewhat timely that the most recent report of Industrial Production, through March, shows that while Output rose at a 3.2% annualized rate, which is very respectable, it's the lowest rate of increase since October 2013, a year and a half ago. 

    In commensurate fashion, Capacity Utilization, a fairly reliable indicator of domestic inflationary pressure, rose a scant 0.3%.  Not only is the Index, at 79.17, still just below the level at which we consider the indicator to flash strong inflationary signs, the rate of increase in the Index is the slowest since July 2013.

    Of course the current Inflation picture is nothing if not interesting.  Taking food and energy out of the equation, prices rose at a 1.7% annualized clip.  That's the highest rate since last October.  And that points to an increasing bifurcated Inflation picture since, all-in Inflation fell by 0.1%.  What drove that decline?  A 19.2% drop in energy prices.

    The story in Inflation, going forward, for at least the next nine months, we think, is going to be more interesting than most observers think.  We're solidly in the camp that says Inflation will remain tame, but we also believe that that bifurcated picture will become more, rather than less, prominent.  Here's the problem: even if prices for core goods remain tame and become tamer, it's extremely difficult to make a case that food prices remain so.  And while the short-term outlook for energy prices is stable and tame, it's hard to make a case that energy prices continue to decline.  

    What we're trying not to say is that there's a possibility that the Fed could be facing a very interesting and thorny situation if economic activity doesn't begin to pick up steadily after the downturn that's on the horizon.  With any luck that downturn won't last more than six to nine months and if that's the case, the Fed will be able to breathe relatively easily.  But if economic activity remains suppressed beyond that time frame but prices begin to inch up, the Federal Reserve will have a serious problem on its hands.  Is it likely?  Probably not, but it's one of the very most important factors to keep an eye out for in coming month.

    If you haven't yet done so, read the updated Domestic Scorecard.


    Economic & market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2108.29, down 0.4% from last week.

    US Dollar Index - The Index finished at 95.21, down 1.7% from last week.

    Gold - gold finished at 1175.95, down 0.6% from last week.

    Commodities - Spot Prices finished at 339.88,up 1.8% from last week. 

    Government Bond Index - The Index finished at 2107.87, down 1.2% from last week.

    Case-Shiller home Price Index - The Index in February rose 4.5%.

    Disposable Personal Income - In March, DPI Per Capita rose 3.1%.

    Consumer Spending - In March, spending by consumers, on a per-capita basis, rose 2.4%.

    It was a moderately tough week.  The Case-Shiller Home Price Index, the index of previously-owned homes--the single-largest category of homes--rose 4.5%.  That's the first rise in the rate of growth in 15 months.  That's good news, but it's also the best news this week. 

    Disposable Personal Income, on a per-capita basis, rose 3.1% in March.  While that's a perfectly respectable increase, it's also on the low side of respectable, and is the lowest rate of increase since December.

    Similarly, Consumer Spending came in tepidly, up 2.4%.  Not only is that the smallest increase since March 2014, it's the fifth consecutive monthly decline in the rate of growth.

    And what did the Market say?  Sometimes the Market's word is not very helpful.  In a figurative word, the Market's primary concern appeared to be with the direction in which the Fed would take interest rates.  With the Fed not committing to a time frame, but verbally committing to such action, the Market sent Gold lower, quite logically.  And the Government Bond Index also fell.  Who wants bonds in the face of the prospect of rising interest rates?

    Of course the stock market didn't like it.  The S&P 500 fell 0.4%.  And here's a word to the wise:  any time the Stock Market doesn't think Equities can sustain a rise in interest rates, that's a bad sign. 

    Of course, a great deal of the problem, of course, is the increasingly amorphous nature of the Fed's rhetoric.  The Fed continues to insist that rate tightening is on its agenda.  And it continues to say that the timing for such action will be "data-dependent."  Well, we have two questions for you, Gentle Reader:

    1.  Do you believe that the Central Bank was planning to never raise rates again?

    2.  Why would you expect the Fed to raise rates if the data didn't suggest it made sense?

    We live in odd times.  Stick with The Practical Economist.

  • ECONOMIC & MARKET ANALYSIS - April 27, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.6%.

    S&P 500 Index - The Index finished at 2117.69, up 1.8% from last week.

    US Dollar Index - The Index finished at 96.86, down 0.6% from last week.

    Gold - Gold finished at 1183.00, down 1.7% from last week.

    Commodities - Spot Prices finished at 333.94, down 0.2% from last week. 

    Government Bond Index - The Index finished at 2133.29, up 13.2% from last week.

    Budget Balance/Deficit - In March, the Deficit increased to -17.5%.

    Sales of New Single-Family Homes - In March, the value of new homes sold rose 26.0%.

    Durable Goods - In March, New Orders for Core Durable Goods fell 0.7%.

    Before you have a brain hemorrhage over that Budget Deficit figure, if you're not a regular reader you need to know that we do not measure the Fiscal Budget in the way conventional observers, including the Government, do.  The conventional measure is a ratio of the gap between monies the government takes in and what it spends against Gross Domestic Product.  Gross Domestic Product is primarily a measure of the nation's spending.  It really is nothing but a stupid way to measure something like a spending deficit.  Our measure is very clean.  It is, very simply, a measure of that gap in spending against revenue taken in.  In other words, it answers the question, "What percentage of the government's cash inflows is that spending gap?"

    The good news is, as hopefully everyone knows, the Deficit has come down very significantly since 2009.  The bad news?  It's stagnating, at what we'd term an "uncomfortable" figure.  That gap is now 17.5%.  Not only has that gap not appreciably moved in nine months, it's now higher than any time since last July.  Remember: this is supposed to have been a minor economic boom we've been living through.

    How about a little good news?  Well, here it is: it's those sales of new single-family homes. That 26.0% annualized increase in the value is a pretty strong number.  If you want to say that we wouldn't be bothering to poke at that figure if we weren't committed to a slightly gloomy economic forecast, you might be right, but that's not going to stop us.  That is a strong number, but if you tear it apart, it's interesting to note that the price portion of the value calculation rose only 4.5% on an annualized basis.  That's the smallest increase since June of last year.  In other words, almost all of the strength in that figure is coming from volume of homes sold.  In other words, what the detail is telling you is that consumers are being extremely cautious about home buying...about bidding home prices up.

    Yes, we obviously need to exercise choice in the order in which we discuss the week's economic indicators,'s more than merely a convenience with regard to our forecast that we come to Durable Goods Orders last.  It reflects the manner in which you should be weighting how to view the week's data, given the great importance of this data point  

    Taken as a whole, Durable Goods Orders, technically, rose.  They rose by a mere 0.1%.  That's up from being flat last month, but hardly material, really.  However, when we exclude the effect of transportation-related goods to get to our view of core goods, New Orders actually fell by 0.7%.  It's the sixth consecutive month that Orders either rose at a declining rate or just simply declined.  And it's the worst result since April 2013.

    A lousy result like this for one month hardly is sufficient basis for making a call for a contraction, doesn't hurt, in terms of dove-tailing with our forecast last week.  We think you should prepare for more such data results in coming weeks.

    The most significant market development this week was that the Dollar fell, by 0.6%, and...equity investors liked that, sending the S&P 500 up 1.8%.  Don't associate the rise in the stock market with a general feeling of optimism for the economy in general.  For one thing, if that were the case, the Dollar would have risen.  For another, yields on the 10-year government bond would have risen, but they remained unchanged week over week.  And that is never a sign of investor optimism.

    All around, not a great week.

  • EDITOR'S LETTER - April 28, 2014

    Editor's Letter

    This week, we want to take ourselves back to a more traditional focus on the economy (and away from investment classes), but...before we do, we want to add an addendum to the subject of advantaged investment classes for the medium-term that we covered last column. 

    Look around you walk around the block, to work, or to your bus stop.  If you're observant, maybe you've seen it.  Or maybe not.  There's a mini real estate boom in construction, renovation, and repurposing going on all over.  You can reject the idea that Real Estate is not the preferred investment class of choice for the time-being, but to do so, you're making an unstated argument that sophisticated investors are completely clueless.

    Okay, enough of that for now.  What we want to draw your brain cells to is the bigger economic picture, the global picture.  We've been pretty strenuous in our insistence that it's very foolish to assume that two major economic zones, in particular, Japan and Europe will (1) not get their economic acts together and (2) that, even if they do get back on track, that they will lag the United States.  It's extremely foolish.

    Now, on Friday, April 25, Standard & Poor's downgraded Russia's sovereign credit rating, even as Russia raised its short-term rates.  Everyone was surprised at the rate hike.  We weren't.  Why?  Well, you'll have to read to the end of this column to find out why. 

    This is going to be one of those columns in which we're going to make some very definite statements about the near- to-medium-term.  We expect you to hold us to them.

    In our view there's a chasm in how the major developed countries will fair in the near term.  We went through the exercise this week of segmenting major economies into four categories: those that are likely to see economic acceleration, those that will see steady improvement, those that we think will remain troubled for the time-being...and those in which growth will be extremely modest.

    Our methodology is simple, and will be familiar to regular readers.  Our most significant indicator of near-term direction is the amount of net monetary stimulus that each economic zone is receiving as a result of central bank policy, combined with existing conditions. 

    Based on this, we think that two countries are poised to see fairly significant economic acceleration over the next few months:  they are Turkey, and--hold onto your hat:  Japan.  Yes, Japan.  The bias in the popular press is terrible, really.  The untold story in Japan (not dissimilar to the story in Turkey) is that, even as the Yen has strengthened considerably over the past four months (subsequent to the Bank of Japan's pushing down of the Yen) industrial activity has rebounded very significantly.  

    On the other hand, we expect struggles ahead for Denmark for most of this year.

    In between, we have countries where we expect moderate improvement and then those in which economic growth is likely to be very modest.

    Guess into which category the United States goes?  You guessed it:  the latter.  For several months, we have insistently beat the drum that economic growth is slowing.  We are not veering from that view now.  Great Britain also falls into that category.

    It may surprise, but there's a long list of economic zones in which we think economic growth will pick up speed just enough to be more than respectable, though shy of outright expansion, but better than the U.S.  Leading this list is....the Euro Zone.

    We are standing firmly in the camp that says the pictures in Europe and Japan will be very different in, say, July of this year compared to July of next year.  And that will dovetail perfectly into our prognostication that the Dollar will begin to come under pressure and that Inflation will become a marquee topic of discussion in the third quarter of this year.

    What does that mean for currencies you ask?  You'll have to wait a few weeks for an update in the Investment Outlook for that.

    But especially given the list of countries that have struggled the past few years, the number of countries that join the Euro Zone may surprise you. Here, in no particular order, is our list:  Canada, the Czech Republic, Hungary, Norway, Russia, Sweden, Australia, India, Singapore, Taiwan, Thailand, Brazil, Chile, Colombia, Mexico, Israel, South Africa, and New Zealand. 

    Do you now understand why Russia's rate hike should have been unsurprising?  If we're right, nascent economic growth there is going to shortly lead to rising prices along with rising industrial activity. If there were ever an indication that the popular press doesn't "get" how to analyze economic trends, this is it.

    Probably the most important takeaway from all of this is the disconnect in growth between the United States and most of the rest of the developed world.  Should it scare you?  Yes, a little, because it will lead to ramifications for inflation, jobs, equity markets, and bond markets, among other should be thinking here of rising inflation and more reason for investors to put their money in foreign markets, leading to downward pressure on the domestic stock market and rising bond yields here at home.

    And this, then, is the perfect time to draw your attention to this month's Commentary, in which our regular writer has taken more license than in the past to be aggressively critical of U.S. economic policy.

    We would like to hear one person give one rational basis for expecting U.S. economic growth to move toward anything like expansion.

    We don't recommend that you hold your breath.

  • COMMENTARY - April 28, 2014

    Keep Your Eye on the Ball

    It's easy to get distracted.  American Business Press is all about copy, not about comprehensive analysis.  It's all about picking and choosing stories that have a flair for grabbing a viewer or reader's attention.  We'd also be pretty stilly if we ignored the political element to how editorial boards choose stories.

    There are a few themes that are so significant and comprehensive in their impact that you can count on us to come back to them no less frequently than once a quarter.  One of them is governmental policy.

    We are somewhat critical of some tactics that the Federal Reserve has taken in an effort to stoke economic growth.  But, to be fair to the Fed, short of completely overhauling the Government's approach to the economy, the Fed has to work with the framework it's given and it certainly doesn't want to upset financial markets.  Within that framework, the Fed has worked pretty aggressively to make monetary policy consistent with growth, and, you could easily argue it has gone further than you would expect it to...arguably to compensate for other aspects of policy, beyond its control, that are holding back growth.

    We don't believe in re-inventing analysis.  Former Fed Chair Bernanke said it as properly as anyone could:  Fiscal policy is going in the opposite direction of Monetary Policy.

    That's a fact.  If you can name one significant cornerstone of Fiscal Policy that's an encouragement to job growth or economic stimulation in any way, we'd like to hear you name it.

    Fact is, the most significant element to Fiscal Policy is Tax Policy.  The past several years we have seen increasing layers of taxation.  Higher levels of income taxation are negatively associated with Capital Formation and Job Growth.  If you look hard you can probably find someone (probably a Nobel Prize winning economist--you know which one we mean) who will argue the contrary...but, if you look at that argument closely, what you'll probably find is that it looks to justify current tax policy based on an overriding agenda, not that it can be justified as a policy to engender economic expansion.

    For the longest time, we demurred from touching remotely on matters that will resonate as if we're attempting to promulgate a political agenda.  No.  Our new editorial approach is to touch on any matter that is economic.  If you care to associate the economic agenda with the political agenda, that's your doing.  Our goal is to shine a light on the economic scene.

    As we have said before, JFK, Reagan, Bush I, Clinton, and Bush II all stoked economic growth by cutting taxes. The current Administration seems to be populated with a new brand of geniuses.

  • ECONOMIC & MARKET ANALYSIS - April 28, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.5%.

    Durable Goods Orders - The 12-month rolling average rose 0.3% in March.

    Value of Single-Family Homes - The 12-month rolling average rose 0.4% in March.

    Not a lot of indicators this week, but pretty important stuff, and it's significant that, taken together, the week's data is a bit contradictory, which is an appropriate commentary on the economy.

    Let's start with a strong, felicitous statement.  Durable Goods Orders for March alone came in fairly strong.  Month-over-month, we got an increase of 0.7%, which is consistent with what we'd expect during a period of expansion. 

    However, a one-month data point is neither an expansion itself nor an indicator of an expansionary trend.

    If we do a three-month average of the most recent data points (which is our convention and which especially makes sense if you subscribe to the hypothesis that adverse weather took a toll on the economy and likely resulted in pent-up demand), the three-month average is just 0.3%, a level that we consider closer to sustaining the status quo than being expansionary.  In fact, working with the three-month average, except for last month, that 0.3% increase is the lowest result we've gotten since April 2013.

    If we exclude the impact of transportation-related items (which can skew how the data is interpreted since transportation-related products usually have much higher ticket prices) to look at core orders, the three-month averaged figure came in at 0.2%, a figure we associate with maintaining a level of economic growth just above idling, so to speak. 

    Trends in Durable Goods Orders are among the most reliable in identifying correlation with economic expansion.  If we get two months of data points that show month-to-month growth like this past month, we would be inclined to revise our perspective on the economic picture, but too many factors compel us to believe that that is not a likely outcome.

    More sobering is the data we got on sales of new single-family homes.  To blend the effect of volume of sales and price, we look at the value of homes sold (volume x average price).  That figure, in March rose 0.4%, which is respectable, if not associated with expansion.  However, two important points must be made:  (1) that increase of 0.4% is the lowest since May 2011 and (2) looking at the month-over-month change (instead of the three-month average, the figure fell 0.2% and that's the first decline since April 2011.  

    If there is anything that's interesting in the way the figure is arrived at, it's that the mean price remained roughly stable last month.  It's the volume of home sales that drove the slowing the most; it's the first decline in volume of sales since September 2011.  Frankly, this is not surprising to us.  This is more of a "gut feel" than based on statistics, but...we have a strong sense that the inventory of homes for sale is shrinking.  In our opinion, that's largely because the fallout from the Financial Crisis, in terms of dislocating people, is largely over.

    This was definitely what we'd call a mixed week.  Even that result in Durable Goods Orders was an isolated point, it was pretty strong...and it raises our estimation...grading the week, we'd give it a B.

  • ECONOMIC & MARKET ANALYSIS - April 21, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.5%.

    Retail Sales - The 12-month rolling average rose 0.2% in March.

    Business Sales - The 12-month rolling average rose 0.3% in February.

    Industrial Production - The 12-month rolling average rose 0.3% in March.

    Capacity Utilization - The 12-month rolling average rose 0.1% in March.

    Consumer Prices - The 12-month rolling average in prices rose 0.12% in March.

    A lot of data this week...let's start in with Inflation.  Inflation is always a significant economic indicator; what's perennially interesting about it is how accessible it is as a concept to the average consumer because the average consumer can feel its impact.  Now, we've been telling you to expect Inflation to rise at a higher rate.  And, we got a taste of that this past month, but not for the reason we're expecting.  We are expecting downward pressure on the Dollar to develop shortly and that will result in higher prices of goods that we import.  However, while the Dollar has remained under control, Energy prices spiked in March...and pretty badly, too.  For five consecutive months, the 12-month rolling average has declined.  In March, energy prices spiked 2.5%.

    However, core inflation (prices of everything except for food and energy) continues to remain subdued, at a 0.13% increase in March.  The 12-month rolling average in core price increases has hovered between 0.13% and 0.15% for 12 consecutive months.

    All of this combined to result in a 12-month rolling average increase of 0.13% in March.  That sounds moderate and in line with core inflation, right?  Well, know this: That 0.13% increase is up from 0.09% in FebruaryThat change in increase is the largest since August of last year.

    Business Sales are of moderate interest, but precisely just that, moderate.  The three-month average of the 12-month rolling average rose 0.3% in February.  What does it mean?  Well, that's a very moderate level of growth...certainly not associated with expansion...and it has remained unchanged for three consecutive months.

    Especially if you read last week's column, you know how important Retail Sales are to us.  If you paid any attention to the general business press last week, you probably heard every commentator remark to the effect that Retail Sales surprised to the upside.  We hope you took those comments with a grain of salt.  Get ready for the truth.

    The 12-month rolling average came in higher than last month, but: (1) except for last month, it is the lowest it's been since March of last year and (2) the increase was not enough to push the three-month rolling average higher than it's been any time since December 2009.  Think about that a little.

    In addition, if we remove the effect of auto-related sales, the 12-month rolling average increase of 0.08% is actually below last month's increase of 0.09% and is also the lowest it's been since November 2009.

    And now, we get some better news:  Industrial Output rose nicely in March, by 0.34% over the previous month.  That's a pretty strong result.  Is it consistent with expansion?  Well, don't be shocked, but while we wouldn't call it expansionary, it is on the lower threshold of being expansionary   The question is whether it will continue.  We think that smart money says "No" based on myriad other factors.  Remember this: Industrial Production rose nicely in March, yes, but did so with nominal short-term interest rates at essentially 0%.  So, think about that for a while.  If you're looking for a reason, we wouldn't look very far from the obvious: that things ticked up partly based on pent-up demand from a light suppression in January and February based on the weather.

    Lastly, and perhaps of greatest interest, Capacity Utilization continues to rise in a very consistent fashion.  The Index now stands at 79.2, the highest it's been since June 2008.  This is a level that we consider on the lower threshold of being inflationary. 

    When you think about inflationary factors, you should think primary about two things: Capacity Utilization and the direction of the U.S. Dollar.  We have repeatedly said what we think the prognosis for the Dollar is for the balance of this year.  Capacity Utilization is confirming that direction for Consumer Prices.  Again, to sound like a broken record, if you believe that the Dollar's strength is going to continue you have to believe that either Japan and Europe will not continue to improve or that the U.S. will improve at a faster rate than the other two. 

    That's not a bet we want to take.

    There were some bright spots this week, clearly.  But there are enough mitigating factors that, if we grade the week, we give it a B-.


  • EDITOR'S LETTER - April 14, 2014

    Editor's Letter

    So, we have made an attempt to articulate how perilous a broad-brush approach to investing in the stock market is at this point, given the environment.  We hope we have been somewhat successful.  Our fear is that we have not been successful enough.  Why?  Late this week, a friend of The Practical Economist was musing that now the time might be right to focus on higher-dividend paying stocks.

    We were left shaking our head.  If you've been reading all along, you know that roughly two months ago we said with some emphasis that, excepting your own particular long-term strategy, the only companies it makes sense to invest in right now are those that are undervalued and those that are, yes, higher-dividend payers.

    The same individual mused to us about the tactic of focusing on preferred stocks.  We couldn't shake our head fast enough.  Investing in preferred stocks across the board because you're looking to hide?  Trust us:  there is no place to hide in the stock market if you're afraid.  So, you ask yourself about a preferred stock:  is the level of dividend payments more likely to stay stable?  Yes.  But these are companies that have the same financial factors as any other company.  If the fundamentals aren't right you will eventually face a problem.  If you buy when the stock is overvalued, you'll have a problem when the time comes to sell...and we presume that, if you're buying you're also looking ahead to the day you'll be selling the stock.  If you can make a case that the fundamental valuation of a preferred stock is going to go up in these economic conditions, great!  But, across-the-board, it's extremely foolish to think that preferred stocks will be immune to the challenges that will be buffeting corporate earnings. 

    Now, some of you are undoubtedly trying to make sense of how you should be viewing the market's decline this past week.  Some think it's a mere correction, a slight cooling-off.  Some think it's about profit-taking.  We think it's much more than that.  We have not forecasted a significant decline in the Market and we are not doing so now.  Our position is clear: if conditions that are favorable to corporate profits continue to be challenging, you will continue to see a bumpy road for the Market. 

    If you recall, we said that one of the main factors that is making the Stock Market, on a broad basis, unattractive on the basis of reward to risk, is the prospect for rising Inflation.  We have been as clear as we can be, the General Press to the contrary, that the greatest risk the economy is facing is not Deflation, but rising Inflation.  What has kept Inflation in check is a Dollar that has been moderately strong.  And the Dollar has been moderately strong because of concerns about conditions in Japan and Europe.  We have said, over and over, that it's foolish to think that Japan and Europe would not get their figurative acts together--for a number of reasons we have enumerated previously (and which we won't repeat now out of space considerations).  But, the plain fact is, the economies of Europe and Japan are starting to show improvement.  Couple that with Europe's strong-inflation bias and the investing community's extremely strong preference for the Yen as a safe haven, you do not have an environment that's propitious for a strengthening Dollar.

    This week, the U.S. Dollar fell 1.2%.  That's the largest move it's made in either direction since early November, last year.  If you want to invest broadly into an asset class that's facing challenging prospects for earnings combined with rising Inflation, that's your business.

    A word to the wise is sufficient.

    Last week, we said that we would follow up with a statement about where you should look for appropriate risk-reward ratios.

    Before we go there, let's remind ourselves: the array of investment classes has no obligation to provide you with an investment class that does meet appropriate reward-risk ratios.  Put another way, your need to invest in something that does provide a sufficient reward for risk does not incur on the Universe an obligation to make such an investment available.  In our opinion, many sophisticated investors are continuing to invest broadly in the Stock Market, a function of poor investment analysis and also reflecting a reaching for yield, ignoring the insufficient reward for risk.  Fortunately, however, we don't have to have the discussion of what to do with your money in an environment in which no class meets our criteria.

    Okay, no more suspense.  It's....drum roll, please...:  Real Estate.

    That's right--from a strictly price perspective, the sweet spot for investing in Real Estate, if, 25 years from now, we look back on the previous 50 years will end up having been the 2010-2011 timeframe.  It was a time of great fear, and, it was sufficiently after the Financial Crisis such that financing had started to become available.

    However, it's easy to argue that, from a complete perspective, the sweet spot for Real Estate exists right now, and is likely to continue for at least 18 months.

    Partly what makes 2014 different from 2011 is the wider availability of financing.  Because there has been some recovery, particularly in the Housing Sector, all of the mechanisms that contribute to making any deal work are working now even more fluidly, including the availability of financing.

    But, there are two points that are particularly critical: 

    1.  Because the general economic recovery continues to be muted and can reasonably be expected to continue so for some time, overall demand for buying residential homes is likely to be far below, for the next 10 years or so, what it has been in recent history predating the Financial Crisis.  Demand for Residential Rental Real Estate housing is going to be far stronger over the next 10-15 years than at any time in the past 50 years.

    2.  The housing recovery we experienced in 2012-2013 was a real phenomenon, but...and this may surprise you, we are nowhere near the valuations in Housing that we had prior to the Financial Crisis. 

    If you think that Real Estate, and specifically, Housing, is the not the asset class of preference for the time-being, you need to be able to convince yourself that (1) Real Estate is overpriced and (2) the prospects for personal income are negative.

    Here's a fact:  From January 2008 to January 2013, the Case-Shiller Housing Price Index declined 8.4%.  Over the same time period, Disposable Personal Income rose 17.0%.  In other words, the ratio of price to income is still very favorable.

    In the coming months, we will continue to come back to these themes of risk and reward and how changing conditions are affecting the desirability of major investment asset classes.

    However, we have lived with--and you have observed--the movement of the risk frontier of bond buyers to the stock market for long enough.  If you are putting fresh money into equity investments that are not meant to be long-term or into anything other than high-divided/undervalued players, we recommend that you have a serious talk with yourself about continuing to fund a habit in what we would term speculation rather than investment.

    We think these themes and conclusions are sufficiently important that we will leave this Letter up for two weeks.

  • SCORECARDS - April 14, 2014

    Current Scorecard - Domestic

    April 2014

    Quick View:

    Weighted Average: 0
    Current Month:     13

    Consumer Confidence

    Current Month:    19
    Last Month:          18

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago





    Leading Indicators




    Confirming Indicators








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

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

    We were hoping that we might see data this month that would begin to reverse the trend we started to see, but that didn't happen.  If anything, the picture that we previous painted is solidifying.

    Let's start with this: Consumer Confidence.  The figure, this month, stands at 19.  That's a moderate figure that, translated into English, tell us that people are just slightly more positive than feeling ho-hum about things.  At 19, the indicator is up one notch from last month at 18, but, except for last month, it stands at the lowest level it's been since September 2012.  That generally weakening trend is completely in line with the direction the economy has taken.

    Our Leading Indicators continue to be positive, but moderately so…and, only because of the performance of the Equity Market. 

    We've been telling you for a couple of months that our measure of net stimulus to the economy has been shrinking.  Well, this month it has reached a new low.  At this point, absent a Deus ex machina event, it is impossible to forecast anything approaching accelerating growth for the balance of this year. 

    It is for this reason that we are completely unsurprised that, at the start of the month, Fed Chair Yellen moderated her remarks with regard to the Fed's future actions on monetary policy, speaking about a longer period of accommodative tactics. 

    Let's talk specifics for a minute, looking at this past month.  The good news is that Inflation and its short-term prospects are under control.  The bad news?  Lending continues to be very muted, Disposable Personal Income came in slightly negative, Consumer Spending is barely stable and sufficient to maintain the status quo, and durable goods orders came in slightly negative. 

    The economy has received terrific benefit from the strong Equity Market, but how long can that go on?  It's true that, because of Monetary Policy (i.e. ultra-low interest rates), investors are being given a very strong incentive to push investment dollars toward riskier asset classes (read: stocks).  The problem, as we see it, is that the domestic Equity Market has become very overvalued.  In other words, based on valuation, the projected reward (yield) is not sufficient to compensate for risk.  Add in the fact that diminishing net monetary stimulus is bound to hit growth in corporate profits, and we think that it's a matter of time before less-than-satisfactory results affect investors' sentiment.  The timing?  Our guess is that it will become a matter of eventuality in the third quarter.

    Current Scorecard - Global

    April 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago





    Leading Indicators




    Confirming Indicators








    As last month, the Scorecard is not much changed from the previous month.

    You may choose to interpret this is as sign that things are not deteriorating; you may also choose to interpret it as a sign that things aren't picking up, either.

    And, that, in a nutshell, is the right description of where things lie.

    You would have more reason to be sanguine if either the Leading Indicators were significantly higher than the Confirming Indicators...or if the Leading Indicators were simply more robust.  At a figure of 15, our Model is telling us that the outlook for the foreseeable future isn't a collapse, but it isn't strong, either. 

    It's time to face the music: the reason that there has been any recovery, globally, at all, is due to two factors: (1) rising equity markets and (2) net monetary stimulus.

    If there's any bright spot, it's that, even though, Equity Markets are largely highly-valued, monetary policy all over the globe continues to push money into that asset class and that's helping to prop things up.  In addition, even if the net benefit from the stimulus is very weak, it has been strong enough to bring about some small improvement, not just in industrial output, but in job growth.  Do not overemphasize the word, "improvement," however: the focus here should be on the word, "small."

    One bright spot: Public Debt.  The weighted net Budget Balance, worldwide, is starting to show real improvement.  We would like to not have to add a "but" to that, however, with waning prospects for growth, we don't want to get too excited about that, either. 

    The upshot for the month?  Globally, the industrial and retail sectors are essentially unchanged, with the outlook extremely modest. 

    Understanding the Scorecards

    Domestic Scorecard

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

    The components:

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

    The grades:

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

    Global Scorecard

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

  • ECONOMIC & MARKET ANALYSIS - April 14, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.5%.

    It happens only two or three times a year: a week in which no major economic data is released.  To be sure, there's always new data coming out, but we're The Practical Economist; we elect to keep things simple for both you and ourselves by focusing on only what we think is the most important data.

    We're going to take two minutes this week to help you navigate how to think about the economy and the key data we report.

    There are three contexts you generally want to focus on:  (1) How strong the economy is?  (2) How strong the economy is growing?  (3) Where is the economy headed?

    Let's talk about #1 first.  When you're trying to make sense of how strong or weak the economy is, there are three ratios you want to think about:

    1.  The change in Industrial Output relative to Interest Rates.

    2.  The change in Industrial Output relative to change in the value of the US Dollar

    3.  The change in Industrial Output relative to change in Inflation.

    There is so much richness in these ratios that you run the risk of sounding like an economist if you engage in conversation with your colleagues on this basis.

    Generally speaking, other things being equal, lower real interest rates equate to revving up the economic engine.  Monetary Policy Management is all about more accommodative interest rates (i.e. lower rates) when economic growth is sputtering.  This is a very powerful tool that the Federal Reserve uses.  Now, consider this: when real interest rates are on the high side and Industrial Output is also high, what does that tell you?  It should be telling you that you're looking at an economy that is fundamentally very strong.  The converse is also true.  When you have an ultra-low interest rate environment (as we have now) combined with a level of Industrial Production that is hovering around a level that's mediocre, you're looking at an economy that is fundamentally ill.

    Something similar Is true between Industrial Output and the U.S. Dollar.  Lower currency levels are associated with stoking economic growth (think higher export sales as domestic products become cheaper to foreign buyers).  So...when you have a currency/U.S. Dollar that's relatively high, but an Industrial Output level that is at least moderately strong, that's a sign of a pretty strong economy.  But, when you have a relatively low Dollar (as we have today (the U.S. Dollar Index is hovering roughly 10 points+ below par) combined with a mediocre level of Industrial Production (versus a roaringly robust level that would be expected), again, something very amiss is afoot.

    Lastly, the relationship between the level of Industrial Production and Inflation is similarly important.  The ideal:  high Industrial Output combined with low Inflation.  More commonly you will experience a fairly strong direct correlation between the two, with Industrial Production leading the way, i.e. when industrial activity is strong, Inflation will generally be rising. 

    What about #2, measuring economic direction?

    This is pretty simple stuff, actually.  (It really is.)  You look at the direction and size of change in Industrial Output.  You do the same with Retail Sales.  And then you do the same with Inflation.  Obviously, you want to see stronger and rising growth in Output and Sales versus Inflation.  Again, the ideal here: a strong increase in Industrial Output and Retail Sales and a declining rate of growth in Inflation.  What you get more often is some modest growth in either Output or Sales (or maybe both) and some level of rise in Inflation. 

    Measuring economic direction is all about measuring the amount of change in each of these indicators are arriving at a harmonized perspective.

    Talking about #3 in a way that will seem as "friendly" is more difficult.

    We have said it before: our belief is that the single-most important factor in establishing the medium-term direction of the economy is the amount of net monetary stimulus that the economy is receiving as a result of Monetary Policy.  We have our own formula for measuring this.  For those of you keeping score at home, the simplest way to get at it is to apply what you arrive at in deriving #1 to what you arrive at in deriving #2, i.e. layering the recent direction of the economy to how strong the economy is.

    If you are a regular reader, you know that deciphering the whole picture is a little more complicated.  We hope, though, that the foregoing is helpful to you in orienting your head in digesting the data week after week.

    The Global Scorecard was updated this week. 



  • EDITOR'S LETTER - April 7, 2014

    Editor's Letter

    What kind of investor are you?

    Most people fall into just a couple of categories.  The key point for most people is that they hate to feel as if they're missing out on something.  Unless you're the kind of investor who tends to be a long-term dollar-averaging type and who, consequentially isn't checking your portfolio's value every month, you probably jump into the Market when it starts to pick up steam...and you probably dump your holdings as the Market starts to tumble.

    That's a heck of a way to invest.

    We have no beef with the long-term, dollar-averaging approach to investing, as long as your investments are such that they are truly investments and not speculative trades.  Not that there's not a place for trading in the context of a larger portfolio like this, but you certainly want to be clear about what you're doing.

    For the rest of you, we need to spend a minute to clarify a recent position change.

    If you're an active trader, you need, at least monthly, to be able to make a case for your each of your investments.  If you can't, you have to seriously call into question what you're doing.

    Regardless of where the economy is, there is almost always a case to be made for some stock in some company.  Almost always.  But the broader market...right now?  The facile approach would say that the Market has enjoyed a terrific run and is constantly flirting with new highs.  How much further can it run?  That is, of course, a facile argument because it's circular reasoning, certainly.

    Our approach is simple, but not facile.

    There are two points that are important to every rational investor in the broad market.  One is the level of the Market's valuation.  The second is the prospects for corporate profits.  

    The near- to middle-term prospect for corporate profits is not particularly good.  We point to two measures by way of making this point.  First, by our measure, the amount of net monetary stimulus to the economy at this point is not negative, but it's also just barely positive.  That is not a recipe for driving economic activity and as a result it is not a recipe for driving corporate profits. 

    Remember: when you think about insistently higher stock market prices you should think about primarily one thing: the ability of corporate earnings to beat estimates.  That's right, a corporation's earnings must beat the analysts' estimates.  Keep in mind that at any one time, a corporation's stock price already incorporates the consensus as to what earnings will be.

    Now let's talk about valuation.  Most commentators, observers, and analysts talk about valuation in terms of stock market price levels to other measures of economic activity.

    That's not what we do.

    We care about the approximate level of return we can expect from the market and whether that return justifies the risk we take.

    How do we calculate the level of return we can expect?  That's a function of three things: the price-earnings ratio on the broad market, the income we can expect from dividends, and the inflation rate.  Sounds simple, no?  It is.

    Now, understand that, as the Inflation rate bounces around, your expected return does, as well.  Based on recent data, we estimate the adjusted real return from the market to be around 6.4%.  Does that sound satisfactory to you?  To be fair, this is a figure that hovers on the low side of being a fair return.  In other words, it is not a scandalously low return.  But it's not a return that we consider solid return for risk.  And, if Inflation rises as much as half a percent, that return will be solidly into unsatisfactory territory.

    Do you want to bet that corporate profits are going to completely shatter everyone's expectations, thus bringing about a greater yield on the nominal return front?  We've already explained why we think that's a foolish expectation.

    Or maybe you want to bet on a declining Inflation rate that will give more purchasing power to the returns you do get from corporate earnings? 

    If it's the latter, we hope you're not serious.  Inflation is already very muted.  To bet on further Disinflation, you've got to be betting on a Dollar that's going to continue to rise and/or a Fed that's going to tolerate an Inflation rate that goes much lower.

    Good luck with both propositions.  The Dollar's very recent strength?  We consider that a function of noise around the Fed's intention to pull back on some forms of monetary stimulus.  The Market has over-read the Fed's intention...and further, the Market has not handicapped the economic pictures in Europe and Japan, which we think are starting to turn around.

    Warren Buffett is famous for one of his axioms: that you should get cautious when people become greedy.  We think that the expected yield from the Market, at this point, points to people having become greedy.  And that dovetails into one of our axioms:  never buy something for more than it's worth. 

    Now, it would be foolish to manufacture a reason for investing in any asset class to reach for yield simply because you feel you have a need for greater yield.

    Next week, we will discuss what we think your best options are for the medium- long-term.

    The Domestic Scorecard was updated this week.

  • SCORECARDS - April 7, 2014

    Current Scorecard - Domestic

    April 2014

    Quick View:

    Weighted Average: 0
    Current Month:     13

    Consumer Confidence

    Current Month:    19
    Last Month:          18

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago





    Leading Indicators




    Confirming Indicators








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

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

    We were hoping that we might see data this month that would begin to reverse the trend we started to see, but that didn't happen.  If anything, the picture that we previous painted is solidifying.

    Let's start with this: Consumer Confidence.  The figure, this month, stands at 19.  That's a moderate figure that, translated into English, tell us that people are just slightly more positive than feeling ho-hum about things.  At 19, the indicator is up one notch from last month at 18, but, except for last month, it stands at the lowest level it's been since September 2012.  That generally weakening trend is completely in line with the direction the economy has taken.

    Our Leading Indicators continue to be positive, but moderately so…and, only because of the performance of the Equity Market. 

    We've been telling you for a couple of months that our measure of net stimulus to the economy has been shrinking.  Well, this month it has reached a new low.  At this point, absent a Deus ex machina event, it is impossible to forecast anything approaching accelerating growth for the balance of this year. 

    It is for this reason that we are completely unsurprised that, at the start of the month, Fed Chair Yellen moderated her remarks with regard to the Fed's future actions on monetary policy, speaking about a longer period of accommodative tactics. 

    Let's talk specifics for a minute, looking at this past month.  The good news is that Inflation and its short-term prospects are under control.  The bad news?  Lending continues to be very muted, Disposable Personal Income came in slightly negative, Consumer Spending is barely stable and sufficient to maintain the status quo, and durable goods orders came in slightly negative. 

    The economy has received terrific benefit from the strong Equity Market, but how long can that go on?  It's true that, because of Monetary Policy (i.e. ultra-low interest rates), investors are being given a very strong incentive to push investment dollars toward riskier asset classes (read: stocks).  The problem, as we see it, is that the domestic Equity Market has become very overvalued.  In other words, based on valuation, the projected reward (yield) is not sufficient to compensate for risk.  Add in the fact that diminishing net monetary stimulus is bound to hit growth in corporate profits, and we think that it's a matter of time before less-than-satisfactory results affect investors' sentiment.  The timing?  Our guess is that it will become a matter of eventuality in the third quarter.

    Current Scorecard - Global

    March 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago





    Leading Indicators




    Confirming Indicators








    As last month, the Scorecard is not much changed from the previous month.

    You may choose to interpret this is as sign that things are not deteriorating; you may also choose to interpret it as a sign that things aren't picking up, either.

    And, that, in a nutshell, is the right description of where things lie.

    You would have more reason to be sanguine if either the Leading Indicators were higher than the Confirming Indicators...or if the Leading Indicators were simply more robust.  At a figure of 9, our Model is telling us that the outlook for the foreseeable future isn't strong. 

    It's time to face the music: the reason that there has been any recovery, globally, at all, is due to two factors: (1) rising equity markets and (2) net monetary stimulus.

    The difficulty worldwide on the second point is similar to the domestic situation: that net monetary stimulus is diminishing with every passing month.  And, with it, the prospects for corporate profits are diminishing, as well.

    One bright spot: Public Debt.  The weighted net Budget Balance, worldwide, is starting to show real improvement.  We would like to not have to add a "but" to that, however, with waning prospects for growth, we don't want to get too excited about that, either. 

    Expect to hear more and more statistics of slowing growth worldwide in the weeks and months to come. 

    Understanding the Scorecards

    Domestic Scorecard

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

    The components:

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

    The grades:

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

    Global Scorecard

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


  • ECONOMIC & MARKET ANALYSIS - April 7, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims was unchanged.

    Money Supply -The 12-month rolling average of the change in the Money Stock was an increase of 0.7% in February.

    Commercial Lending - The 12-month rolling average of lending by domestically-chartered banks rose 0.2% in February.

    Employment - The 12-month rolling average of people employed rose 0.1% in March.

    What It Means

    Not that it means a lot at this point, but M1, the stock of money in bank transaction accounts rose 0.7% in February.  Yes, this is, on a historical basis, a high increase, but it's relatively low in context of the last few years.

    One of the things we predicted should be an outgrowth of the cutback in the Fed's bond-buying program would be an increase in lending.  Well, so far that hasn't happened, but to be fair, it's only been a few months since the Fed began cutting back on its bond-buying program.  In fact, that increase of 0.2% in February?  That statistic is identical for all banks here, not just domestically-chartered banks.  And, Consumer Lending rose exactly the same.

    What significance does that figure have?  Well, it's extremely modest.  We hesitate to strongly characterize Lending as a leading least not the level of Lending...but change in the level of Lending is very suggestive of economic direction.  The unfortunate fact is that there has been no change in the growth in Lending for quite some months.  That's not a signal indication of any kind of economic acceleration.

    And, of course, the marquee data for the week is Employment.  First, the good news:  the number of people employed rose 0.1% in March.  That's a figure that's consistent with recent experience; it's modest, but good.  Where does it put us in context?  Well, the number of people now employed is the highest it's been since October 2008.  However, at the same time, the percentage of all persons employed is hovering at 58.7%.  This is both a historically low figure and the fourth lowest it's been since March 2010.

    So, how do we explain that apparent disconnect?

    Well, in November 2008 there were approximately 144.6 million people employed.  In March 2014 that figure was 145.1 million.  The percentage increase is roughly 0.3%, not a very large increase.  In November 2008 the population (including those both in and out of the Labor Force) stood at 234.2 million while in March 2014 it stood at 247.3 million.  That's a 5.6% increase in the number of people in the population.  In other words, while the population grew 5.6%, only 0.3% more of them were put to work.  That's a problem.  In other words a much smaller percentage of the population was working in March 2014 than in November 2008.  That is not a touchstone of a strong economic recovery.

    Grading the week?  We'll give it a B-, in recognition of labor gains in the right direction, accompanied by a Lending picture that was not positive, but not negative, either.