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  • ECONOMIC & MARKET ANALYSIS - June 1, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.9%.

    S&P 500 Index - The Index finished at 2107.39, down 0.9% from last week.

    US Dollar Index - The Index finished at 96.89 up 0.8% from last week.

    Gold - Gold finished at 1191.40, down 1.1% from last week.

    Commodities - Spot Prices finished at 332.19, down 1.5% from last week. 

    Government Bond Index - The Index finished at 2108.78, up 0.8% from last week. 

    New Residential Homes - In April, the value of new single-family homes sold rose 30.0%.

    Case Shiller Price Index - In March, the Index of home prices rose 4.0%.

    Durable Goods Orders -   In April, new orders fell 1.6%.

    Let's start with some strong news.  First, the value (average price x volume) of new homes sold in April, on a 12-month rolling basis, rose a very strong 30.0%.  That's the strongest figure since June 2013, and it's quite solid.  However, there's a subtlety built into the figures that deserves your attention.  Most of that gain came from volume, not from price appreciation.  The average price rose 5.3%, which is mildly respectable, but what it shows you is that the all-in figure is misleading.  In other words, the demand for housing is there, but willingness to bid and fight and drive prices up?  Not so much.

    The story in Case-Shiller is similar to the story for average prices of new single-family homes.  As you will hopefully recall, Case-Shiller is a remarkably accurate index of the price values of homes that have been previously owned.  That figure rose 4.0% in March.  (A note of housekeeping: in the past we reported the Case-Shiller 20-Major City Index.  Going forward, we're going to report on the National Index.)

    In a strong way, the way the data falls this week reflects precisely one of the understandings we want you to have about the national economy.  What have we always said?  That while there can be no sustained expansion without an expansion in Real Estate, there can be no real contraction without a contraction in Real Estate, either.  That's why it's significant to see Real Estate holding up.  Our forecast has called for a significant softening, but not a contraction.  There need not be a contraction in Real Estate for a significant economic softening to occur.

    Could a significant downturn in Real Estate occur?  Yes, but we hope to be able to report that if we see it developing.

    And that's where we turn to the most significant data of the week:  Orders for Durable Goods, one of the most important of all economic indicators, as regular readers know. 

    Orders for Core Durable Goods (excepting transportation-related goods) fell 1.6% in April.  This is the seventh consecutive month that the figure came in weaker than the month before, and it's the second consecutive monthly decline.

    If we add in transportation-related goods, the picture is similar.  The figure shows a decline of 1.5% and the characteristics of the core figure are also true of the all-in figure.

    We understanding that economic forecasting--or at least having faith in economic forecasting--is a wooly pastime for many.  Orders for Durable Goods is a quite tangible indicator that all are wise to pay attention to.  To borrow a phrase, it's, in our view, probably the one indicator you want to watch if your goal is to figuratively keep your eye on the ball.

    Oh, and the Market...the Market was fairly hilarious this week.  We say that because we believe the Bond Market is getting it right, but the rest of the Market is simply out to proverbial lunch.  The Dollar rose a smidgen, ostensibly on continued loose talk about the Fed raising interest rates.  That, of course, send Gold lower, and of course the Stock Market isn't thrilled about the prospect of a stronger Dollar, absent economic data so strong as to compensate for a stronger Dollar.  And, that strong economic data is simply not there.  So, most of the Market, well...we've said it before, but sometimes you have to take the Market with a grain of salt and accept that one week's response is just one week's response. 

    But the Bond Market?  Both the overall Government Bond Index and 10-Year Government Bond rose.  In other words, Bond Traders are certainly not displaying much confidence that there will be an interest rate rise in the near future.  And we can't say we disagree with them.  Another instructive lesson in how to interpret weekly data...: you may remember that, last week, the yield on the 10-Year Government Bond jumped almost 0.20 percentage points.  This week?  It fell back 0.10 percentage points.  In other words?  Always take what appear to be dramatic moves with something like a grain of salt.

     
  • ECONOMIC & MARKET ANALYSIS - May 18, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2122.73, up 0.3% from last week.

    US Dollar Index - The Index finished at 93.23 down 1.7% from last week.

    Gold - Gold finished at 1220.50, up 2.9% from last week.

    Commodities - Spot Prices finished at 346.66, up 1.3% from last week. 

    Government Bond Index - The Index finished at 2104.78, unchanged from last week. 

    Business Sales - In March, Business  Sales fell 1.4%.

    Retail Sales - In April, Total Retail Sales rose 1.0%.

    We have only two key pieces of data this week, but if you're looking to how they dovetail with our economic forecast for a softening, they're right there. 

    First, Business Sales, the less important of the two, actually fell 1.4%.  It was the second consecutive month that total sales fell. 

    By far, the more important data point is Retail Sales.  Total Retail Sales rose 1.0%.  Does that sound good?  The first thing to say about that is that it is just a plain weak figure.  The second thing to say is that it's the lowest increase in eight months.

    But the picture is even worse than that. If we remove auto-related sales, the change was actually flat, with no increase at all.  And that's the worst result in five months.

    As for the Market, it was right there with the data.  The Equity Market rose a meager 0.3%, and it's important to remember in this context that, as long as interest rates remain at such a low level, the factors that encourage market investment tend to outweigh those than argue against it.  And while it's true that economic weakness is easily demonstrated by that decline in the Dollar, it's also easy to argue that the Market liked that weaker Dollar as a stimulus to exports.  In other words, it's wise, in this environment, to discount small market gains as hardly indicative of a strengthening economy.  And to cap it off, Gold rose 2.9%, much more than could be expected by that decline in the Dollar.  In other words, when you see a modest rise in the Stock Market, but a disproportionately large rise in Gold, you should be alerted to a phlegmatic turn in investor confidence.  A fundamental tenet of our analysis is that investors still tend to turn to Gold as a salve for weak economic developments that set the stage for currency devaluation.  

    The Global Scorecard will be updated next week.  

     
     
     
  • ECONOMIC & MARKET ANALYSIS - May 11, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2116.10, up 0.4% from last week.

    US dollar Index - The Index finished at 94.82, down 0.4% from last week.

    Gold - goldfinished at 1186.00, up 0.9% from last week.

    Commodities - Spot Prices finished at 342.27,up 0.7% from last week. 

    Government Bond Index - The Index finished at 2104.02, down 0.2% from last week.

    Construction Spending - In March, private-sector construction spending rose 3.2%.

    Labor - In April, the number of Net Newly Employed rose by 111,000 people.

    In the spirit of full disclosure, data on Construction Spending came out a week ago, last Friday.  We intentionally held off on reporting it because we knew that this week would be light on data.

    Construction Spending is one of the key pillars of economic expansion, being a key element of domestic investment.  And we report on and care about only the private-sector spending portion since it presents a truer picture of the economy.  So, in April spending did rise, by 3.2%.  That's not a bad figure, but it's not close to being strong.  In fact, it's the smallest increase in 15 months.  So yes, we consider this result in line with our forecast for economic softening.  We are characterizing the economy at the moment as having begun to soften, but still in the early stages of that slide.

    It does not surprise anyone, we're sure, to hear us say that the picture in Labor is critical to the larger economic picture.  It informs spending, inflation, and many other things.  Now, how did the data come out this past week?  Well, we'll look first at the Employment Rate.  It actually ticked up 0.1 percentage point, to 59.3%.  That's a new high in the wake of the Financial Crisis, but...that puts us 1.2 percentage points above the low, but 2.7 percentage points below a level we consider normal.

    The rest of the picture?  Not bad.  On a net basis, the economy added 111,000 jobs in April.  That's pretty good.  It really is.  So, it negates our economic forecast, right?  Not exactly.  This is the fourth consecutive month that the number of jobs created rose at a diminishing pace. 

    In looking at the data, it's very, very important to be able to distinguish the grayness between the blackness and the whiteness.  Week after week we're getting data that is neither great nor terrible, but denotes an increasing softening.

    As for the Market, the week's data present us with one of the toughest patterns to decipher that the Market has shown us.  The wild card in the mix is how bonds performed.  At the margin, when we have difficulty divining what the Market did, we look at the triad of Gold, US Dollar, and US Equities.   Remember: we're The Practical Economist, and we aver that the limited number of patterns in how those three variables perform tell you almost everything you need to know.  

    Now, Gold and Equities rose, specifically, on the Dollar's decline, which was in great part due to a less-than-inspiring labor report on Friday.  Now, this is where clear-thinking comes in handy: remember, a dropping Dollar is not an indication of growing economic confidence. And the stock market?  It merely responded positively to the fact that the lower Dollar is a boon to the exports of U.S.-based companies.  Almost all of the time, Gold rises on one or more of the following:  (1) a lower Dollar (2) Dollar devaulation based on monetary easing and (3) political/regional fears.  Gold can rise based on growing economic prospects/demand, but when that's the case, you should expect to see the Dollar rise, as well.  Get the picture?  What we got this week is not a picture of a market that's confident about the economy.

    The Domestic Scorecard was updated this week.  We encourage you to read it, precisely as it's depicting our economic slide exactly as it's happening.

     
     
     
  • ECONOMIC & MARKET ANALYSIS - May 25, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.0%.

    S&P 500 Index - The Index finished at 2126.06, up 0.2% from last week.

    US Dollar Index - The Index finished at 96.14 up 3.1% from last week.

    Gold - Gold finished at 1204.10, down 1.3% from last week.

    Commodities - Spot Prices finished at 337.31, down 2.7% from last week. 

    Government Bond Index - The Index finished at 2092.96, down 0.6% from last week. 

    Industrial Production - In April, Output rose 2.5%.

    Consumer Prices - In April, Inflation fell 0.1%.

    When you want a read on the present economic situation, in terms of activity, Industrial Output (or Production) is a pretty good way to go.  It's a vitally important economic indicator.  In recent months, this indicator has been flirting with very strong results.  Our data point for April, an increase of 2.5% is respectable, but no more than that.  This result is the fourth consecutive decline in the rate of growth, and it's the lowest result since April 2013.

    Now let's talk about Inflation.   There are two points we want to make about the data on Consumer Prices this month.  First is that while it's likely true that energy prices have already hit their low, energy inflation in April came in -19.8%.  In other words, the effect of that earlier plunge in oil prices is still being strongly felt.  And the other point is that we have a strongly bifurcated situation in Consumer Prices: while all-in inflation came in essentially flat, core inflation (excluding energy and food) rose 1.7%.  Yes, that figure is shy of the Fed's 2.0% target and yes, it's tame, but...it's not all that shy of the Fed's target and it's not very tame.  

    We have continued to hold to our view that the outlook for Inflation for the balance of the year is tame, but that's largely due to the lingering effects of that plunge in energy prices.  The fact is that the lingering effect of that decline in energy prices is not going to linger for very long and that the reality is that pressure is going to trend slightly upward.

    While we are strong believers that the Market's behavior, taken as a complete picture, can provide wonderful clues toward reading the economy on a deeper level, the key word there is "can."  There's a science to interpreting market patterns, but there's also an art to it.  On the surface, this week's market activity appears to show investors to be on the topic of the economy.  Equities and the U.S. Dollar up?  Gold down?  Check.  And to round out the picture somewhat, the Government Bond Index fell.  When bond traders demand more yield from bonds, that's usually a strong sign for the economy.

    But, the overall pattern, we'd say, is one of confusion.  Commodities fell.  And while the yield on the 10-year Treasury Bond rose, we have to keep in mind that Consumer Price data came out on Friday, and while Inflation continues to be tame, it's of signal importance to note that Core Inflation is very stable, and just a smidgen below the Fed's target.  In other words, don't be so sure that that downward movement in bond prices is a function of a sanguine outlook instead of a concern about rising prices.  Remember: to make a case that the market data is really a statement about confidence, you have to believe that the market believes that inflation will come in too low for a sustained period.  That's a tough bet to make.

    We will be quick to tell you if it turns out that our forecast for a downturn in economic growth comes about.  Despite surface appearances, this is not the week that that happens.

     
  • ECONOMIC & MARKET ANALYSIS - June 8, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2092.83, down 0.7% from last week.

    US Dollar Index - The Index finished at 96.34 down 0.7% from last week.

    Gold - Gold finished at 1164.60, down 2.2% from last week.

    Commodities - Spot Prices finished at 329.88, down 0.7% from last week. 

    Government Bond Index - The Index finished at 2076.35, down 1.9% from last week. 

    Private-Sector Construction Spending - In April, spending rose 5.0%.

    Disposable Personal Income - In April, DPI on a per-capita basis rose 2.8%.

    Consumer Spending -   In April, on a per-capita basis, spending rose 2.1%.

    Employment - In May, the number of Net Newly Employed rose by 104,000.

    If you're a regular reader, you know that we consider Construction Spending a fairly important leading variable, as it's part of what comprises business investment, a powerful economic input. 

    In April, Construction Spending in the private sector rose 5.0%.  How does that result rate?  Well, the best thing that can be said about that figure is that (1) it's above zero and (2) it's the highest it's been in two months.  However, it's not close to being a strong figure and, except for the prior month, it's the weakest result since December 2013.

    Income and Spending?  The story is not that dissimilar.  Disposable Income on a per-capita basis rose 2.8%...and that's the weakest rate since February of last year.  And Spending?  It rose 2.1% and that's the weakest result since February 2010.

    So far this isn't a picture that's at odds with our phlegmatic forecast.

    Now, let's talk about the Labor picture. 

    Analysis is easy when the data comes in either strongly or weakly.  It's a bit more difficult when the results are less clear.  And that's what we have this month.  First let's get the Employment Rate out of the way...regular readers know that we consider the Employment Rate the broadest reliable measure of the health of the labor market.  And there we had a little good news on that front as the Employment Rate rose 0.1 percentage point to 59.1%. 

    Now, the fact is that the number of newly employed people (our measure for how the labor landscape is changing), on a basis adjusted for those leaving the labor force, was 104,000, and that's both respectable and moderately strong.  It's also the weakest figure in six months.  So, as an indicator of economic trajectory, it's not giving us particularly new or insightful information.  The way in which the Market worked with it this week is to make judgments about where Inflation is headed.  And it's interesting: the bond market sent the yield on the 10-year government bond up nearly 0.30%.  Yes, it's true that rising bond yields can be an excellent barometer of economic direction, but...a rise of 0.30% in one day?  We think that's completely a reflection of the market's belief about where inflation is headed.

    The Market has it roughly right, in our opinion.  But the Market is a little nutty on the topic, as well.  We fully expect bond prices to rebound a bit in the next week or two and see yields come down roughly 0.15%.  If you believe bond traders are justified in pressing the yield on the 10-year government up by 0.30% you've got to be betting on a pretty robust inflation picture (or robust economic picture), and it's hard to make that case.  Yes, the Labor picture continued to brighten this week...but only moderately and at a diminishing rate.  And yes, it's true that Industrial Output has been growing at a diminished pace.  Do the arithmetic.  Industrial Output and Income both continuing to rise at a diminishing pace, and, in our view, Output rising at a much smaller pace...and that translates to more dollars chasing incrementally fewer things, so to speak.  That is the classic set-up for rising inflation.

    As if to underline that point about Inflation, let's look at what happened in our "golden" triumvirate of variables as we consider them:  Gold, Equities, and the Dollar. 

    All three fell.  That is a very unusual scenario.   

    1.  A declining Dollar (a) does not portend investor confidence in a growing U.S. economy and (b) leans toward

         inflating the currency.

    2.  Other things being equal, rising inflation is not a positive input to stock prices.

    3.  The drop in Gold reinforces the sense that traders believe that the Fed continues to have a rate rise on its

         agenda...and, in our belief, in great part because of nascent rising Inflation.

     Sometimes being practical takes a bit of tortuous calculus, so to speak, but the truth is there in the data.

     
  • ECONOMIC & MARKET ANALYSIS - June 15, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.4%.

    S&P 500 Index - The Index finished at 2094.11, up 0.1% from last week.

    US Dollar Index - The Index finished at 94.91, down 1.5% from last week.

    Gold - Gold finished at 11682.80, up 1.6% from last week.

    Commodities - Spot Prices finished at 331.82, up 0.6% from last week. 

    Government Bond Index - The Index finished at 2076.76, unchanged from last week.   

    Business Sales - In April, Business Sales fell 1.8%.

    Retail Sales - In May, core Retail Sales rose 0.3%.

    The real number to focus on this week is Retail Sales.  It's a pretty good bellwether of how the Consumer is feeling, so that makes it fairly important.  Confident consumers spend.  It's really that simple.

    The Business Press is already misrepresenting the result as fairly positive

    Our key way of studying this data point is to take out the effect of autos since they're very large ticket items that can be volatile and skew interpretation.  So...looking at Core Retail Sales, we got an increase of 0.3% on an annualized basis.  This is, very plainly, a poor result.  To illustrate how poor it is, though one other month, 18 months ago comes close, this is the lowest increase in Retail Sales since November 2009. 

    To be fair, it is somewhat appropriate to see how the data changes if we add auto sales to the mix, but the result isn't significantly better.  Looking at all retail sales, we got growth of 1.5%.  This is still a very low figure and not quite what we'd characterize as "respectable" and indicative of 'real' growth.  Except for last month, this is the lowest increase since March 2014, so that should help frame this result for you.  It is not even close to a strong figure. 

    As long as we're bashing the Press that continues to deny the parade of dour data, this is a good time to point out that this is the third consecutive week that the four-week average of initial jobless claims rose.

    What did the Market have to say?  Well...the first thing to observe is that the yield on the 10-Year Government Bond fell, as we said it would...but it didn't fall anywhere close to where we thought it would.  It's only been o a week since it spiked to 2.4%, so....a few more weeks of observing are in order before we draw any conclusions, but...while we have been pretty consistent about saying that the risk is to higher rather than lower inflation, it may be that the Bond Market sees it coming faster than anyone else knows.

    Elsewhere, the Stock Market was essentially flat, and the Dollar fell 1.5%.  That, combined with an unsurprising rise in Gold, is not a picture of an optimistic market.  When the Dollar falls, but Equities are up, even if the Market is phlegmatic about economic prospects in the short-term, it often will respond well to the prospects of a lower Dollar for sales of exports.  When that doesn't happen, that signals a more serious concern about the economy.

    Next week, we're going to update the Editor's Letter.  We urge you to read it. 

    Earlier this year, we gave you a sort of informal scorecard with regard to how healthy the economy is.  Next week's column of the Editor's Letter is going to dive into that subject more deeply.  Is it possible to spend too much time on the subject?  Yes.  How will we know when we have spent too much time on the subject?  When people routinely pepper their conversations with understanding of how fundamentally rickety the economy is.

     
     
     
  • ECONOMIC & MARKET ANALYSIS - June 22, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2109.99, up 0.8% from last week.

    US Dollar Index - The Index finished at 94.06, down 0.9% from last week.

    Gold - Gold finished at 1203.40, up 1.7% from last week.

    Commodities - Spot Prices finished at 329.37, down 0.7% from last week. 

    Government Bond Index - The Index finished at 2087.81, up 0.5% from last week.   

    Industrial Production - In May, output rose 2.0%.

    Retail Sales - In May, core Retail Sales rose 0.3%.

    Inflation - In May, Consumer Prices fell 0.1%.

    The marquee data of the week--and one of the key pieces of data in any given month--is, of course, Industrial Production.  Even though many people don't primarily associate the U.S. with being an industrial economy, the fact is that the industrial sector is still quite large and is a great proxy for general demand.

    So, how did things come out?  Well, true to our forecast, things continue to slow down.  Output did rise, at a 2.0% annualized rate and that is respectable.  It's also the fourth consecutive month that output rose at a diminishing rate, and May's result is almost exactly half of the rate for February.

    We expect that you will begin to hear the fall-out from this in the Business Press sometime in early July.

    A related figure that's reported along with Industrial Production is Capacity Utilization.  Simply put, it's a great proxy for understanding stress on factories.  As such, strong and rising trends in Utilization correlate very strongly with rising inflation.  The Index now stands at 78.06, which is not associated with being strongly inflationary.  This is, also, the second consecutive month that the Index fell. 

    And that dovetails, of course, with where Inflation came in, in general, at an annualized rate of 0.1%.  But, that's an all-in figure.  The fact is that energy price levels fell at an annualized rate of -19.6%, so that should give you some idea of what non-energy performed like. 

    Core Inflation--the prices of non-energy and -food products--rose 1.7%.  Now, that's a tame figure, and it's below the Fed's target, but it isn't all that tame.  It's only 0.3 percentage points below the Fed's target, and, and, let's be frank: an annualized price increase of 1.7% is one that consumers feel as a dilution to their income. 

    And therein lies the point, as we have said before: only very limited observers of the economic scene would hold that the outlook for Inflation is more to the downside than to the upside.  To the extent that you hear the Fed Chair, Janet Yellen, continue to talk about putting a rate increase in place, the reason lies right there. 

    With every passing month, the Fed has a developing problem: declining economic activity coupled with rising prices.

    Granted, there's more to economy policy than monetary policy, so it will be more than interesting to see how the Fed responds if the situation becomes exacerbated, as we think it will, but...as we have said, we'd bet our last sou that Janet Yellen will not allow herself to be remembered as the Chair on whose watch Inflation became rampant...especially when the primary mandate of the Fed is not managing the economy, but managing price levels.  It's one thing when prices collapse along with the economy, but when price levels are showing strong and rising support in the face of a weakening economy, that's a situation in which we think you'll fast hear the Chair cling to the Fed's primary mandate.

    As for the Market this week, the most significant data point worth your time is one that we predicted would come about: for roughly two weeks, the yield on the 10-Year U.S. Government Bond spiked to around 2.40%.  This represented a rise of roughly 0.25% from where the yield had been hovering in May, and yes, we consider that order of increase over the course of a week to be a spike.  And it remained there last week.  We thought it a temporary aberration, and...it was.  The yield on that bond fell back about 0.14% this week to around 2.26%, a level much more in line with where it had been hovering. 

    It's always useful to make note of weekly changes in data points, certainly to look to confirm or negate trends in economic data.  It is, however, foolish, in our view, to attempt to draw conclusions based on changes in market data over the course of only a few weeks.  As a general rule, we believe you need to see a minimum of two months of data points before beginning to draw conclusions about trends.

     

     
     
     
  • ECONOMIC & MARKET ANALYSIS - June 29, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2101.49, down 0.4% from last week.

    US Dollar Index - The Index finished at 95.40, up 1.4% from last week.

    Gold - Gold finished at 1170.50, down 2.7% from last week.

    Commodities - Spot Prices finished at 333.64, up 1.3% from last week. 

    Government Bond Index - The Index finished at 2067.28, down 1.0% from last week.   

    Durable Goods - In May, Orders for Core Durable Goods fell 2.8%.

    Single-Family Home Sales - In May, the value of new single-family homes sold rose 25.8%.

    Consumer Spending - In May, Consumer Spending rose 2.4%.

    Disposable Personal Income - In May, Disposable Personal Income rose 2.7%.

    Last week we reported on the most recent industrial output data.  There really are few better indicators of current demand than industrial output.  But, looking forward, there are few better indicators of near- to medium-term demand than New Orders for Durable Goods.  It's worth repeating for new readers: Durable Goods are significant because (1) they are typically bigger-ticket items and (2) they are typically purchased, in part, on credit.  You add both factors together and you have a fairly potent indicator of economic direction.

    In May, we had what we will characterize as a significant result.  New Orders fell, on an annualized basis, by 2.8%.  Not only is this is the third consecutive month that New Orders declined, it declined at an accelerating rate for the third consecutive month.  There are only one or two examples you can find in which this indicator fell for three consecutive months by which it wasn't followed by an economic slump.  (Note that our analysis is for "core" durable goods, i.e. excluding transportation, because we believe it's the most meaningful.  However, i If you include all orders, orders still fell, by 2.4% and the other characteristics also hold true.)

    Now, the Housing market continues to be very interesting.  Look at some of these numbers.  The value of all new single-family homes sold in May, on an annualized basis, rose 25.8%.  That's a pretty strong figure.  Dissecting it we see some interesting things.  First off, while inventory rose only 6.4%, the volume of sales rose a very strong 23.3%.  That's suggestive of a continuation of strong upward movement for prices as demand appears to be exceeding supply.  But, it's interesting:  the mean price rose just 3.0%.  That's respectable, but...it's also the lowest increase in 11 months.  The point: the housing market appears to entering a period of flux.

    Now on to some bread-and-butter stuff...in the sense that this is stuff that plays well to the Press and TV viewers, but...Income and Spending aren't particularly strong leading indicators.  Nevertheless, they do tell some of the story. 

    And that story doesn't contradict our forecast.  In May, Consumer Spending rose 2.4%.  This is a figure that's on the low side of decent.  In fact, except for the past two months it's the lowest result since March of last year.

    And Income?  That story isn't better.  Income rose 2.7% in May, but that was the lowest increase since March, as well.

    On balance, a weak week, especially if you weight the data properly, meaning that you have to give a lot of importance to Durable Goods Orders. 

    What did the Market make of all this?  Well, the Market was very distracted by the mess in Europe involving Greece's finances.  What the tea leaves show is that the Market is...nervous.  Dollar up?  Presumably on worries that the Euro will struggle because a deal to save Greece is not being brought about easily.  And stocks down...because no one likes a higher dollar when they're looking for higher earnings.  And Gold fell...which is only natural if the Market is fearful of a stronger Dollar.

    Some weeks divining the Market's tea leaves is actually not that difficult.

     
  • ECONOMIC & MARKET ANALYSIS - July 6, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2076.78, down 1.2% from last week.

    US Dollar Index - The Index finished at 95.95, up 0.6% from last week.

    Gold - Gold finished at 1168, down 0.2% from last week.

    Commodities - Spot Prices finished at 336.06, up 0.7% from last week. 

    Government Bond Index - The Index finished at 2076.91, up 0.5% from last week.   

    Case-Shiller Housing Price Index - In April, nationally, prices for previously-owned homes rose 4.1%.

    Construction Spending - In May, Construction Spending in the private sector rose 8.9%.

    Labor - In June, the Employment Rate stayed unchanged at 59.4%.

    In terms of requiring discipline in interpretation, this week's data, taken together, is a great learning tool.  Why?  It can be very misleading to the superficial eye.

    First, let's talk about the Case-Shiller Housing Price Index, which is a great tool.  It's a great tool for a dual reason.  First, we consider its methodology to be very solid and what it measures is meaningful because previously-owned homes comprise the greater part of the residential market.  Secondly, Housing is a great window into the economy.  But, there's a caution.  We believe that economic contractions and expansions are unsustainable without commensurate reactions in Housing, but that Housing, alone, is not a reliable leading indicator, but rather better as a confirming indicator.

    With all of that background, what do we think of the result that came in for April?

    Well, it's solid and good.  It's representative of growth.  But it's a figure that you should associate with only moderate growth.  This is not a figure we associate with expansion in Housing. When you think about expansion in Housing, you should think about annualized growth figures that flirt with the 10% level.

    Dovetailing with Housing, Construction Spending in the private sector rose a fairly strong 8.9%.  This is the highest percentage increase since June of last year.  Does that figure appear to contradict our economic forecast?  Hold onto your hats and wait for the punchline, below.

    On the Labor front, the Employment Rate remained low at an unchanged 59.4% from last month.  The Employment Rate is our best metric for understanding the state of how employed the nation is.  Our best metric for understanding trajectory is Net Newly Employed, the number of newly employed people adjusted for changes to the labor force.

    That figure, technically, came in at 114,000, which is a pretty strong figure.  In fact it's higher than last month.  So, what's the hidden problem there?  Well, that figure is benefiting from our averaging formula and is bringing in stronger figures for the two previous months.  In other words, the trajectory in Labor is exactly on target with our forecast:  unadjusted, meaning unaveraged, the number of Net Newly Employed in June was 82,000.  Except for March of this year, that's the lowest figure since last September.

    So, we have three data points to work with here.  Let's look more closely at them.  Of the three, the Construction Spending piece is clearly strong.  Is this at odds with our forecast?  While Construction Spending is fairly classified as belonging to that sector of the economy that can move the needle up or down, it is only one input to that sector...and here's the point: one of the biggest "secrets" that the layperson doesn't know is that the construction field, particularly construction toward building residential and commercial rental space is, figuratively red-hot at the moment.  The reason is not, ironically, a good reason.  It is not part of a general upward economic opening, but rather a response by investors to stagnating growth.  In periods of economic stagnation or very low growth, especially in an environment of equity and bond markets that are both highly-valued, one of the few investment classes that can yield returns that can reliably be counted on to beat inflation and the returns in other major investment classes is....rental real estate.  Remember how bond investors began becoming stock investors four years ago because of low yields in bonds?  Well, low yields in stocks are now problematic for equity investors, so...the frontier continues to move.

    That reasoning doesn't apply to Housing prices, in general, however.  So...how does that Housing result dovetail with our general forecast?  It's all about context.  That result of 4.1% is real.  It's also not close to a figure we associate with expansion.  When we're talking about Housing and expansion, you should expect to see a figure that's flirting with a double digit percentage increase, as we explained above.  In other words, the result in Housing is demonstrating what nearly every other indicator is demonstrating these days: growth, at a diminishing rate..

    On the Labor front, we've already let the proverbial cat out of the bag.  On paper, our model will "benefit" from our averaging technique and points to a figure that's actually fairly strong.  Even if you choose to interpret the data as it appears on the surface, the first point, is, of course, that it's just one data point in context of the Scorecard and by itself, isn't enough to lift the economy up.  The second point, of course, is that you need to look at the trajectory.  Unless next month's labor data comes in significantly stronger than this month's did, next month's input to the Scorecard will start to strip away the averaging that, first, is necessary, to keep a sense of direction and second, superficially masks real direction in the short-term.

    And the Market?  Hewing to our paradigm of trying to keep it simple, traders demonstrated increased appetite for bonds and less appetite for stocks while the Dollar rose and Gold fell.

    The first point to notice is that stocks fell while the Dollar rose.  Taking the first three factors into consideration, that's a picture of a Market that views the economy as weak.  One way to understand this: yes, a rising currency "hits" earnings, but...to a properly strengthening economy, that factor becomes less important...to the extent the stock market is viewed as relying on the currency, the economy is demonstrating weakness.  And, at the same time, rising demand for the 10-year government bond?  That just reinforces the first point.

    In the context of this picture, it's instructive to study why it is that Gold fell. Yes, for the most part here, Gold's movement is a reflexive reaction to the opposite movement of the Dollar and nothing more.  Remember: Gold is largely a reflection of either strengthening or dilution of the currency.

    The Domestic Scorecard will be updated next week.

  • ECONOMIC & MARKET ANALYSIS - July 13, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2076.62, unchanged from last week.

    US Dollar Index - The Index finished at 95.78, down 0.2% from last week.

    Gold - Gold finished at 1159.30, down 0.7% from last week.

    Commodities - Spot Prices finished at 327.65, down 2.5% from last week. 

    Government Bond Index - The Index finished at 2074.44, down 0.1% from last week.   

    This would have been a great week for us to be off.

    It was one of those rare weeks in which no major economic data was published, so...we're going to take the opportunity here to briefly indulge ourselves in a few points we want to reinforce.

    First, if you have not yet read the current column of the Editor's Letter twice, do so.  We're not sure how many other topics in Economics are more important to you than the solidity and purchasing power of your currency, but there shouldn't be too many.  Your currency has been diluted at a pretty fair pace.  And you need to be educated about it.

    Next, it's startling to us how any people continue to be in blithe ignorance of the economic slide that's underway. And there are two points therein: (1) what are the triggers that make people aware of a personal understanding that things are deteriorating?  (2) if economic data such as three consecutive months of accelerating declines in Orders for Durable Goods doesn't awaken people to a change in the economic landscape, what will?

    Presumably the average lay person understands the point of leading indicators...precisely that they are showing the way in advance of actual direct consumer effect.  We say "presumably."  After all, the average person seems to sell into stock market routs and buy into stock market rallies, and inevitably buys high and sells low, so, there you go.  It would appear that the average person does not believe in the concept of a leading indicator...that, unless you can see it or feel it, it doesn't exist.  And that, of course, gives us fodder for thought: that average person who doesn't appreciate the concept of leading indicator...what does that person need to see or feel to accept a change in the economic situation?

    The Domestic Scorecard has been updated, so take a look at your leisure in the next few weeks.  We are not amending our formal forecast, but, as we tell in the Scorecard, there are early indications that we may need to downgrade the forecast, that the softening may be more significant than we thought.  And therein lies something disturbing for you to contemplate: there's not a lot of gas left in the tank in terms of stimulating the economy.  Consider: while it's true that, up to two months ago, the experience of the most recent half year in Industrial Output has been fairly strong, that's also come at the "expense" of monetary policy being as accommodative as it can be.  If Output begins to slide, as it has begun to do, where does that put us?

    Our feeling--and it's just a feeling at this point--is that a tough time of it could, indeed, be around the corner.

  • ECONOMIC & MARKET ANALYSIS - July 20, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2126.64, up 2.4% from last week.

    US Dollar Index - The Index finished at 97.96, up 2.3% from last week.

    Gold - Gold finished at 1132.80, down 2.3% from last week.

    Commodities - Spot Prices finished at 321.72, down 1.8% from last week. 

    Government Bond Index - The Index finished at 2083.18, up 0.4% from last week.   

    Retail Sales - In June, Retail Spending rose 0.2%.

    Business Sales - In May, Business Sales fell 2.8%.

    Industrial Production - In June, Output rose at an annualized rate of 1.5%.

    Consumer Prices - In June, prices were flat over May.

    Capacity Utilization - In June, Utilization fell 0.9%.

    Does that result for Retail Sales scare you?  Well, it should.  Our primary point of reporting is core sales, that is, sales excluding autos and related products because we think it's more indicative of the consumer landscape.  This is, of course, a frighteningly low result, and it contrasts with 3.6% six months ago.  This is a useful comparison because 3.6%, itself, is not a very strong figure.

    If we add in automobiles and related products, the result was mildly better at 1.6%.  Again, this is a very low figure and not indicative of expansion in spending.  It also can be usefully contrasted with six months ago, at 4.4%.

    Unfortunately, in terms of timing, Business Sales are reported on a one-month lag, but in this case, there's enough of a trend to be sufficiently phlegmatic.

    Business Sales declined...by 2.8%.  It's the fourth consecutive monthly decline, with each month's decline coming at an accelerating rate.

    Now, how about some real marquee data?  Industrial Output?  We hope that readers understand two things about Industrial Output:  (1) it is probably the great single indicator of the current state of the economy (2) its directionality in recent months can be an excellent leading pointer to the direction in which the economy is headed.

    So, what happened in June?  Well, Output rose 1.5%.  That's a mildly respectable figure, but hardly pulse-pounding.  But it's worse than it seems because of the directionality issue.  June is the seventh consecutive month in which Output rose...at a declining rate.  To put this in perspective, that 1.5% increase in June contrasts with 2.3% in April, 3.5% in February, and 4.5% in December.

    Now, let's talk about Inflation, which has become a sort of a star in economic circles simply because it has been in a great deal of flux and a lot of analysis and thought has been going into handicapping where it's headed.

    Not very surprisingly, Inflation came in flat in June.  But it's how the components worked that make the data interesting.  First, energy prices actually rose slightly in June, but...food prices rose extremely tepidly, in fact at the slowest pace in over a year.  But the best is yet to come: core prices rose 1.8%, which is mild, though not very subdued, and is, in fact, the highest rate since September 2014 and can give fuel to the argument that the Fed wants to raise interest rates.

    However, here's the greater point: the rate of increase in core prices has not varied by more than .02 percentage points since February of this year.

    What did we tell you a minute ago about the importance of looking at trend in the numbers as well as the raw numbers?

    This latter point is particularly germane when we look at Capacity Utilization.  If you're a regular reader, you may know that we have changed our position recently on Inflation.  We think the bias is probably now to the downside, and Capacity Utilization is backing us up. 

    You'll be extremely hard-pressed to find a time frame in which directionality in Capacity Utilization didn't correlate almost perfectly with economic activity.  And...the fact is that Capacity Utilization has now declined for two consecutive months. As we mentioned to a colleague, you'll have a difficult time getting us to bet against declining prices in the face of declining Utilization.

    And the Market?  If you're a regular reader, you may know that we often say that you sometimes have to take a particular week's data with a grain of salt.  This is one of those weeks...in which the results are not necessarily chock full of insight.

    First, let's talk about the Dollar.  That was a nice little upward jump, but it doesn't mean a lot.  The Dollar responded strongly to two factors, one being the mess in Europe that isn't remotely concluded and to remarks from the Fed Reserve Chair affirming her hope that a rise in short-term interests would be in the cards in the near future.

    The Equity Market performed nicely, but it was less a response to macroeconomic factors than it was to a slate of good earnings reports. 

    Finally, and most significantly, Bonds rose a smidgen on precisely the factors that we have described in this column as disinflationary indications.

    It's going to be an eventful fall, we fear.

  • ECONOMIC & MARKET ANALYSIS - August 2, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2103.84, up 1.2% from last week.

    US Dollar Index - The Index finished at 97.19, unchanged from last week.

    Gold - Gold finished at 1098.40, up 1.1% from last week.

    Commodities - Spot Prices finished at 302.65, down 1.6% from last week. 

    Government Bond Index - The Index finished at 2097.31, up 0.3% from last week.   

    Orders for Durable Goods - In June, New Orders declined 2.9%.

    Case-Shiller Housing Index - In May, the National Index of Prices rose 4.8%

    We hope that, by now, regular readers know that New Orders for Durable Goods is a very reliable forward-pointing indicator.  The good news for our Model is that the data is coming in consistent with what we have expected!  The bad news is that New Orders declined by 2.9% in June.  This decline was not quite as bad as last month's, but it is, nevertheless, the fourth consecutive month that orders declined.  Please know that this figure is for "core" durable goods.  That means that it strips out transportation-related items, buying for which can be very volatile.  However, for the record, even if we include transportation-related goods, new orders declined, as well...by 3.0%, so the distinction in this case is not meaningful.

    It's very difficult to overstate the relevance a four-month consecutive decline in New Orders has for knowing, with near certainty the direction in which the economy is headed.  

    Last week we reviewed the latest data on Sales of New One-Family Homes, and what we found was that, while volume of sales hasn't changed very much, there's been some pressure on prices.

    It's somewhat reassuring, at least in terms of painting the picture, that the story from the Case-Shiller Price Index is not very different.  Slight softening in price growth?  Yes.  But remember: we have consistently said that Housing is not a leading indicator with regard to the economy, at least not with regard to volume and prices.  To a great extent, our view is that it's, at best, a confirming indicator, or, often a following indicator.  

    Now, what about the Market?  We'd like to believe that our readers understand that often, the way the Market leaves things at week-end isn't particularly insightful.  This is the most often when the Market over-reacts to one particular development or investors are deeply confused about a lynchpin development...or there's a lynchpin development still in process. 

    That's not the case this week.  The first thing to say about this week is that Gold rose.  As a general role, Gold rises for one of three reasons:  (1) the Dollar is being devalued or is expected to be devalued (2) the Dollar fell or (3) political tensions are driving investors to the safety of Gold.

    In the case of this week, investors were responding to, what was for them, the most significant point...clues from the Federal Reserve about the direction of monetary policy.  In a nutshell, the Fed reinforced its goal of normalizing policy and rates, but...continued to stretch out its language and timing for raising rates until such time as the economic data completely supports it. 

    Investors responded by sending Equities higher, but also understanding that deferring a tightening of policy may begin leading to more dilution over output.  To reinforce that last point, those who are remotely sanguine about the economic outlook are encouraged to note that investors sent the yield on the 10-year government bond down.  Mind you, the yield only fell 0.05 percentage points, but the point is hopefully understood.  If you can make a case that a yield of 2.22% on the 10-year bond, representing a drop in yield week-over-week, is supportive of the view that the economy is going to pick up, we'd like to have a long talk with you. 

    And if you're a regular reader you know that we caution you to bet against Bond Traders at your peril.

    Not an encouraging week.

  • ECONOMIC & MARKET ANALYSIS - July 27, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.4%.

    S&P 500 Index - The Index finished at 2079.65, down 2.2% from last week.

    US Dollar Index - The Index finished at 97.20, down 0.8% from last week.

    Gold - Gold finished at 1086.80, down 4.1% from last week.

    Commodities - Spot Prices finished at 307.61, down 4.4% from last week. 

    Government Bond Index - The Index finished at 2083.18, up 0.4% from last week.   

    New Single-Family Home Sales - In June, the value of new home sales rose 20.3%.

    Just as it was a fortnight ago, this was a slow week for economic data.  The only significant data we have to report is on the sales of new single-family homes.

    We like this indicator for analysis.  It's such a simple data point but it tends to correlate pretty strongly with describing what else is going on in the economy.  And it makes sense. Demand of people to buy new single-family homes?  Yes, it makes sense.

    And this month's data is mighty interesting, actually.  The good news is that the total value of sales rose 20.3% in June.  That's a nice, strong, healthy figure.  But, as usual it fails to tell the entire story.  And what it leaves out is mighty important.  Here's the thing: the volume of sales rose a nice 19.6%, but the mean price paid rose just 1.4%.  That contrasts with an increase last month of 4.3%.  In other words, prices being paid are seizing up as we write this. 

    That's particularly interesting because while inventory has been on the low side, historically, it did rise, in June, by 4.2%.  In other words, we're seeing a distinct and marked downward pressure on prices.

    Why is that important?  Because as we implied above--and have said before--it's tough to see the economy change direction without demand for new single-family homes following suit.  And here we have an illustration that dovetails beautifully--if unfortunately--with our economic forecast.

    If you haven't been keeping up with our forecast, we suggest you spend some time with the Domestic Scorecard.

    The market data this week was interesting, but not particularly insightful.  Gold, stocks, the Dollar, and 10-year yields all fell.  What's that the picture of?  This, friends, is a picture of a market that is becoming extremely phlegmatic about the prospect for any kind of inflationary trends on the horizon. 

    Falling equity prices don't necessarily relate to investor sentiment about inflation.  However, when you see both Gold and Equities fall, you'd better be able to conclude that it's a result of the Dollar having risen.  When you see the Dollar fall, as it did this week, this is not a good sign.  If investors aren't excited about a cheaper Dollar, you know that their concerns about a slow down are trumping their hopes for rising export sales.

    This is particularly good time to remain awake to data as it comes in because, folks, we are smack-dab in the middle of the economic slide that we predicted.  This is not a good time to be complacent and fall asleep, so to speak.

    The Global Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - August 10, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.4%.

    S&P 500 Index - The Index finished at 2077.57, down 1.2% from last week.

    US Dollar Index - The Index finished at 97.56, up 0.4% from last week.

    Gold - Gold finished at 1093.50, down 0.5% from last week.

    Commodities - Spot Prices finished at 298.35, down 1.4% from last week. 

    Government Bond Index - The Index finished at 2099.95, up 0.1% from last week.   

    Disposable Personal Income - In June, DPI rose 2.6%.

    Employment - In July, the Employment Rate moved up 0.1 percentage point to 59.2%.

    Non-Defense Capital Spending - In June, total spending fell 5.0%.

    It may be tempting to hang your hat onto an indicator like Income because it's something everyone can relate to, but...be sure that movement in Income is more of a confirming indicator than a leading indicator.  It tells you nothing about where Income is headed and next to nothing about where the economy is headed.  It's a lightly useful indicator, but only when understood for what it is.

    Now, in June, somewhat in line with economic direction, Income did rise, but at a tepid pace.  Disposable Personal Income rose 2.6%, which is what we'd characterize as being on the "low side of moderate."  It is most definitely not close to being a strong figure.

    How about Employment?  Well, the results were respectable, and holding on a little better than we expected.  First piece of good news: the Employment Rate edged up 0.1 percentage point to 59.2%.  Second, the ranks of those employed rose 1.8%. 

    However, while the results are a little better than we expected, they are far from consistent with the rate of growth we were experiencing six months ago.  If we take apart the latter indicator, the "net newly employed," the result bears a pattern similar to last month.  The effect of averaging is making the figure look better than it really is.  Looking at raw numbers, the number of the net newly employed in July is the smallest figure in four months. 

    And, if we further parse the figures we find (1) that the figure by which the ranks of the gross number of employed rose is the second-smallest figure in the past ten months and (2) the figure by which those not in the labor force grew is the second-largest figure in the past ten months.

    Please, take your time digesting this.  If we were to try to cast a summary of the labor results in language Janet Yellen would use, we'd say, "Continuing improvement in labor markets continues to be achieved, but at a more moderate pace."  In other words, the result wasn't weak, but it's showing diminished strength. 

    And now for one of the cornerstones of our economic model:  Non-Defense Spending on Capital Goods.  Spending in this area fell, in June, by 5.0%.  Not only is that a figure that on its face is unfortunate being both a decline and a decline on the order of 5%, it's the seventh consecutive month that this indicator has declined. 

    We often tell you that the single best way to understand the present situation is to look at Industrial Production.  And we have told you that the single best input to future economic direction is Business Investment.  Well, that is precisely what Non-Defense Capital Spending captures. 

    Does this sound like the picture of an economy into which the Fed is likely to raise interest rates?

    And the Market?  Another interesting week.  The Market's gyrations are decipherable, but...there is a small contradiction for us to look at.  You will note that Gold fell, the Dollar rose, Equities fell, and Bonds rose.

    Let's examine this.  It's reasonable to conclude that Gold fell mainly on the Dollar's rise.  What fueled the Dollar's rise?  Well, it's hard to make the case that it rose on strong economic prospects, especially with Equities falling.  It is easy, however, to make the case that some investors deluded themselves into believing the continuing rhetoric out of the Federal Reserve that short-term interests are on schedule to be raised shortly.  In fact, the key point in this pattern of data is that bond prices rose even though the Dollar rose.  That's an apparent contradiction, but at the margin, the edge in market intelligence goes to bond investors.  In fact, it's worth noting this week, that comparing 10-year government yields from two months to now, they have fallen roughly 0.25%.  The yield on the 10-year government bond ended the week at 2.17%.  Please, do yourself a favor, and take a good long think about that.  Bond investors are willing to part with 10-year money for a yield of 2.17%, which also represents a decline week-over-week...into a scenario in which the Fed is supposedly going to raise rates?  Does that suggest to you that currency investors are getting the picture right?

    We don't think so.

  • ECONOMIC & MARKET ANALYSIS - August 17, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2091.54, up 0.7% from last week.

    US Dollar Index - The Index finished at 96.59, down 1.0% from last week.

    Gold - Gold finished at 1118.25, up 2.3% from last week.

    Commodities - Spot Prices finished at 299.38, up 0.3% from last week. 

    Government Bond Index - The Index finished at 2096.71, down 0.2% from last week.   

    Retail Spending - In July, Retail Spending rose 1.1%.

    Business Spending - In June, Business Sales fell 2.5%.

    Industrial Production - In July, Output rose 1.6%.

    It wouldn't be hard for some people out there to lead themselves astray based on likes of the data we have this week.

    Let's look at Retail Spending.  Last month, total spending rose 2.2%.  But we're more interested in "core" spending, which excludes auto-related sales.  Before excluding autos, that result of 2.2% is sort of respectable, and we really mean "sort of."  It's not close to a strong figure.  Take away autos, and the increase falls to 1.1%.  That's a positive figure and it's actually the highest result in five months, but it's still not what we'd call "good."

    With regard to those of you who are keeping score, this is the right time to remind you that an indicator like Retail Spending is descriptive of the current environment far, far more than a leading indicator of where the economy is headed.  If you want to make the case that strong and rising results in Retail Spending can be suggestive of expansion, you'll get no argument from us.  But that's not close to what the picture is showing.

    Unfortunately for purposes of analysis, Business Sales are reported on a one-month lag, but the results are still helpful in terms of coloring in the picture.  In some ways, Business Sales is a better leading indicator than Retail Sales, since it's related to investment and business owners' confidence. 

    In June, Sales fell 2.5%.  Disregarding a 0.1% decline (which we think is generous of us), this is the fourth consecutive month that Sales declined.

    And now of course for Industrial Production, one of the cornerstones of our Economic Model.  It's great because, of course, the actual annualized result tells you tons about the current economic condition.  And, the direction in which Output has been trending tells you tons about where the short-term is likely headed.

    The good news?  Output was up....by 1.6%.  That's a modest result.  July was the sixth consecutive month in which Output rose at a diminishing rate.  This result for July is actually half the rate increase for March.

    In similar fashion, reflecting declining demand and continued prospects for extremely low inflation, Capacity Utilization fell 0.5%.  That's the second consecutive month the Index declined.  It now stands at 78.32.  If you're keeping score at home, while that figure isn't exactly deflationary, it's not inflationary either....and a declining Index is certainly consistent with a move toward a deflationary trend.

    And this is one of those weeks in which you don't want to put much by in terms of insight from the week-ending market data.  The Dollar fell, but the most important takeaway here is not what informed its decline, but how inherently weak the Dollar really is on a long-term basis.  Despite months of commentators observing strength in the Dollar, that strength was simply relative to the Yen and the Euro.  The Dollar hasn't been at or above parity (100.00) on the US Dollar Index in years.  This point cannot be overstated.

    The stock market?  It had a nice week.  We can safely conclude that that's in part to the declining Dollar, rather than a strong economic week.

    Given how small the movement in government bonds was, we don't think there's anything to conclude there.

    We do want to say a word about Gold.  Our positive orientation toward Gold should be well known, but...Gold, like everything else, is subject to rules about valuation and trends. 

    In our view, while we are bullish on Gold long-term as a function of what we think will be significant deficit-building situations in the major economies, Gold is not undervalued at the moment.  However, Gold does not have to continue to experience significant drops in price to become attractive.  Our view is that if, by keeping your eye on the figurative ball, you keep waiting for a significant drop to occur, you may miss the opportunity that will likely come about. 

    Gold is far less likely to experience, say, a 200 point drop over the next 18 months than major governments' budgets are to experience a rise in deficits, thus making Gold much more attractive on a price basis. 

    This is an important point we want you to be awake to as we continue to report market data over the next two years.  Do not be surprised if Gold experiences a small climb in price.  It is not necessarily indicative of a march away from fair valuation.  If we are right--and we think we are--Gold will rise in price at a proportionately slower rate than deficits will.

    We will write more on this later.  We have been accused of often being early on trends.  When we said, in January, that Gold was likely to be The Investment of the Year, we were clearly early, as it's now August.  But that's the point.  We were early.  We still believe that we were correct, directionally.

    The Domestic Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - August 24, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 2.1%.

    S&P 500 Index - The Index finished at 1970.89, down 5.8% from last week.

    US Dollar Index - The Index finished at 94.80, down 1.9% from last week.

    Gold - Gold finished at 1147.70, up 2.6% from last week.

    Commodities - Spot Prices finished at 295.65, down 1.2% from last week. 

    Government Bond Index - The Index finished at 2107.79, up 0.5% from last week.  

    Inflation - In July, Retail Spending rose 1.1%.

    When attempting to handicap the direction in which the Federal Reserve is likely to send short-term rates forward-looking inflationary pressures are far more important than the present level of inflation, despite what the Business Press may sometimes lead you to believe.  Nevertheless, the current trend does inform directional understanding as well as the present economic climate.

    For some months now, Inflation has been fairly subdued, but there has been a bifurcation in the major input to the overall result.  Yes, all-in inflation has been subdued, but...that's a composite of Energy-related prices, which have been falling on an annualized basis and an inflation level in non-food and non-energy items that is very close to the Fed's target.

    On an all-in basis in July, Inflation came in at roughly 0.1% on an annualized basis.  Energy Inflation?  That showed an annualized decline of 17.6%.  Yet, Core Inflation rose 1.8%.

    Based on this superficial data, it's not necessarily difficult to make the case for the Fed raising interest rates.  To do so, all you have to do is point to the fact that Core Inflation is very close to the Fed's target and then make a case that energy prices have likely just about bottomed out.

    The problem with that analysis?  It's not forward looking.  We remind ourselves that rates of Industrial Output have fallen roughly 50% from four months ago.  And we remind ourselves that levels of Capacity Utilization began declining two months ago.  And, of course, we remind ourselves that Business Investment continues to decline.

    Oh, and that Core Inflation result?  This is a good time to remind that while it's close to the Fed's target, the rate of core inflation we got in July was flat over June.

    Our money says that that there will be no interest rate hike by the Fed in the near future.

    In terms of the Market, this week just past was a textbook example of what you expect to see if the economic picture is becoming less rosy.  To start with, Gold and 10-Year Bonds were the big winners.  And that's not a good sign.  Investors flock to fixed income and to Gold when real output and activity are softening and the outlook for continued monetary accommodation becomes more stable

    Tie that together with a decline in the stock market accompanied by a decline in the Dollar, and that's a pretty consistent picture of investors being phlegmatic about prospects.  Remember: a declining Dollar can signal positive prospects for exports.  When investors don't see it in that light, they're sending a powerful message.

    How many months has it been since we told you to take a close look at your equity investments and divest yourself of those positions that are either not intended for the long-term or are not in sectors that we think will benefit from the changing climate?

    It's not too late: read the Investment Outlook.

  • ECONOMIC & MARKET ANALYSIS - August 31, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1988.07, up 0.9% from last week.

    US Dollar Index - The Index finished at 96.15, up 1.4% from last week.

    Gold - Gold finished at 1135.00, down 1.1% from last week.

    Commodities - Spot Prices finished at 296.07, up 0.1% from last week. 

    Government Bond Index - The Index finished at 2093.93 down 0.7% from last week.  

    Sales of New Single-Family Homes - In July, the value of new homes sold rose 18.1%.

    Disposable Personal Income - In July, Per Capita DPI rose 2.7%.

    New Orders for Durable Goods - New Orders for Core Durable Goods fell 5.4% in July.

    NOTE THAT WE WILL BE ON VACATION NEXT WEEK, LABOR DAY

    We have consistently said that, while the total value of new homes sold is not close to being the soundest of leading indicators, it's not close to the worst, either.  What's interesting is that on the surface, the result for July is quite good.  Really.  What's interesting is when you look at the components of the figure.  The volume of sales rose a very healthy 17.6%.  But the mean price paid?  It rose a scant 1.0%.  That compares to 5.8% a year ago.  So that should tell you something about the health of the market.

    How about Income?  The good news is that Disposable Personal Income, on a per-capita basis, rose in July...by 2.7%.  That is a very modest result and is, in fact, the second-lowest result in nine months.

    Now let's talk about Durable Goods.  Stripping out transportation-related goods, we get a result of a decline of 5.4% in new orders  This is the sixth consecutive monthly decline.  If you want to understand the result in a dramatic way, year-over-year the figure declined a whopping 28.0%.  Taking into account transportation, the figures are not much different, with orders declining 10.1% and 20.5% year-over-year. 

    To really refine the data and scare you, when we look at New Orders for Non-Defense Capital Goods, New Orders declined a whopping 26.8% (and 4.2% year-over-year).  This is the eighth consecutive monthly decline for that category.

    These are startling results.  If you had to pick one--and only one--leading indicator for the economy, you really couldn't do better than New Orders for Non-Defense Capital Goods.  It's hard for us to imagine that anyone believes, at this point, that the economy is not going to continue to soften.

    As for the Market, the pattern of data we got is very consistent, at least.  It's consistent with being a picture of a Market that's...optimistic.  The clincher there is that bonds sold off, a sure sign of optimism.  But, we take comfort in calling the Market misguided when we look at where bonds ended up, despite having sold off.  The yield on the 10-year government bond did rise, but it rose very little.  And the fact is that the yield is still 25 basis points below where it was roughly two months ago. 

    In other words, it's not a week in which we think the Market displayed much insight.

  • ECONOMIC & MARKET ANALYSIS - September 14, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1961.05, up 2.1% from last week.

    US Dollar Index - The Index finished at 95.18, down 1.1% from last week.

    Gold - Gold finished at 1101.25, down 1.5% from last week.

    Commodities - Spot Prices finished at 295.44, up 0.8% from last week. 

    Government Bond Index - The Index finished at 2097.66, down 0.2% from last week.  

    Case-Shiller Housing Price Index - In June, the index of previously-owned homes rose 4.8%.

    Money Supply - In July, the nation's primary money stock rose 6.8%.

    Employment - The Employment Rate in August was unchanged from July, at 59.2%.

    Let's start by talking about the Case-Shiller Housing Price Index.  For those who don't think a lot about these things, this Index is a pretty useful input to understanding not just what it precisely denotes, which is strength in price growth of housing prices, but the economy as a whole.  Housing, itself, does not lead the economy, but as we've often said, there can be no general expansion without an expansion in Housing, and there can be no general contraction without a contraction in Housing.  And this Index measures prices of previously-owned homes, which is the largest component of the Housing market.

    So what have we got?  Well, in the most recent data, for June, prices, in aggregate, rose 4.8%.  That is a rather respectable figure.  But, consider this: it contrasts with an annualized growth rate of 8.8% last year at the same time.  In other words, growth is coming at a greatly diminished rate, and that's perfectly consistent with the general economic trajectory of a significant slowdown.

    We sometimes wonder if we should continue to report Construction Spending.  You may have noticed that we have ceased to report it on a regular basis. Why?  Our fear is that readers will be misled too easily by the data.  In theory, Construction Spending is an important input to the economy.  It informs capital formation...business investment.  The problem is that the total figure is not, on an ongoing basis, a significant percentage of total business investment, so it's important to understand it not as a major input, but that the aggregated categories of Durable Goods and Capital Spending are far more meaningful.  This month, however, we want to tell you how it recently came in because it does shed light, ironically, on an important aspect of the investment landscape.

    You see, in July, Construction Spending in the private sector rose a whopping 15.3%.  That's the strongest result since December 2012.  Even so, it's still not what we'd characterize as a significant input to changing economic direction.  But, what this figure helps us confirm is, to some extent what "smart money" is doing.  The fact is that, even as growth in Real Estate is slowing, it's one of the key segments that still bears, absent an actual contraction, a reliable way to earn a modest return on investment.  It's also true that, at this moment, the factors that make Real Estate a good reliable place for a built-in return are peaking as valuations in that sector are peaking and spiking.  If our forecast about the economy is accurate, you shouldn't expect to see continuing spiraling rises in construction spending in coming months.  We shall see.

    Likewise, we don't always report on the results in how the Money Stock changes.  Why?  Our reasons are different than for Construction Spending.  For the most part, the change in the past few years has been fairly stable and so, as a result, monthly changes haven't been very meaningful for understanding economic changes.  This month, however, it's worth talking about.  In July, M1--the measure of currency in non-interest bearing bank accounts--rose 6.8%.  In "normal" times, that would be a fairly generous increase, yes.  However, here's the interesting contrast to consider.  That 6.8% compares with 9.2% in January and 10.7% a year ago.  In other words, the nation's stock of money is growing at a declining rate.  Now, what does that mean for how to interpret it?

    It is perfectly normal for the growth in the money stock to slow or even contract during times of economic expansion.  However, consider this: In July of last year, Industrial Output rose 4.3%.  In January that figure was 3.9% and this past July was just 1.6%%.  In other words the money supply is growing at a diminishing pace even as output is growing at a diminishing pace.

    This is completely counter-intuitive, and if you're opining that this kind of change in monetary policy argues for contraction rather than expansion, you are correct.  You will recall that one of our common recent refrains has been that the Fed is not providing sufficient stimulus. Here is your evidence.

    Now, let's dive into a big significant economic indicator...especially for attempting to divine the direction of Fed monetary policy.....:  Employment.

    Let's start with the "empty glass" side of things.  First off, the Employment Rate was unchanged from July to August.  What that's telling you is that the percentage of the entire population that was employed remained unchanged.  Even as there was a net addition of jobs in August, the fact remains that an equal number of people joined the population who are not working. 

    So what's the good news?  Well, the number of net newly employed people (i.e. new employees adjusted for those leaving the labor force) rose 97,000.  That's a very respectable number and incorporates the fact that the ranks of the employed rose 1.7% in August.  Is there a "however?"  You bet there is.  It's not big, but it's there.  First off, that rise of 1.7% in the ranks of the employed is the slowest rate since September of last year.  Secondly, that increase of 97,000 in the ranks of the net newly employed?  That represents a decline in the net number of additions by 17,000 from last month, and, in fact it's the smallest increase since December 2014.

    This is the kind of result that can be interpreted either way by Federal Reserve Governors, but...to be objective, the point is that while employment gains continue to come (and they do continue to come at a respectable pace), that pace is declining. 

    How about the Market?  Well, the Market was nothing short of funny this week.  Gold prices fell.  Bond prices fell.  Right there, alone, that's a picture already of a Market that's feeling sanguine about things.  Heck, the Stock Market rose.  But then you look at the Dollar...and you see that it fell.  Of course the Market likes a falling Dollar.  That is not the way you want to see the Stock Market rise.  You want to see the Market rise on a rising Dollar...as a demonstration of faith in what is plainly an expanding economy.

    The overall picture?  Definitely one in line with our forecast, though, we will be frank: though the Labor market is holding up better than we thought, the Labor market is, indeed, slowing, and monetary policy is not advancing the cause of economic growth. 

    The Domestic Scorecard was updated this week.

     

  • ECONOMIC & MARKET ANALYSIS - September 28, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.3%.

    S&P 500 Index - The Index finished at 1931.34, down 1.4% from last week.

    US Dollar Index - The Index finished at 96.25, up 1.2% from last week.

    Gold - Gold finished at 1146.65, up 0.5% from last week.

    Commodities - Spot Prices finished at 294.51, up 0.9% from last week. 

    Government Bond Index - The Index finished at 2099.84, up 0.5% from last week.  

    Single-Family Home Sales - In August, the Value of New Single-Family Homes sold rose 16.7%.

    Durable Goods Orders - In August, Core New Orders for Durable Goods fell 5.0%.

    The good news?  The economic slowdown that we have said is upon us is proceeding at a slow pace.  The bad news?  It's easy to miss it.  But he slowdown that we have forecast is of sufficiently large size that it's impossible for the Housing sector not to get hit and it's starting to show up there.

    In August, the sales of new single-family homes rose by a nice figure....by 16.7%.  That's a good figure, but it's a misleading figure because that "strength" is all volume.  The mean price in August fell by 2.1%.  That's the second consecutive monthly decline in average price.

    And now for one of our marquee data points: Durable Goods Orders.  Of course our focus is on "core" orders, those that strip out transportation-related items, which often have very large price tags and the demand for which can be volatile. 

    Regular readers know that we (and all economists) hold this indicator in high regard.  Items that are expected to have longer "lives" typically have larger price tags, thus giving more impetus to the economic engine.  And because of their price tags, these purchases are also frequently paid for, at least in part, with credit, another expansionary force on the economy.

    In August, Core Orders fell 5.0%.  While this decline is not as bad as last month's decline, it is the sixth consecutive month that New Orders did decline.

    Regular readers know that we like to try to make sense of the week's Market gyrations and tea leaves, when it makes sense.  This is one of those weeks for which it's foolhardy to try to read too much into what the Market did.  For example, the Equity Market fell, and you could argue that that's mostly on the back of the higher Dollar, and that's not at odds with Gold moving higher, but then you find that bond prices generally moved down (lower bond prices is a sign of investor optimism), so we'll content ourselves to view the Market's maneuverings as not particularly meaningful, but...there is one takeaway we want to share.

    One of the most interesting developments to observe and comment on is the fact that the spread between the yield on 10-year government bonds over two-year government bonds has fallen 30 basis points in about four months.  We don't view that magnitude of change in that period of time as insignificant. 

    Let's remember what we're looking at.  We're looking at the yields that investors are demanding for lending money to the government for those periods of time.  So, from June to September, what we see is that, holding the yield on the two-year bond constant, investors are settling for roughly a third of a percent less on 10-year bonds. 

    Think about that for a good minute.

    Of course investors are demanding a higher yield on 10-year bonds than on two-year bonds, but...the yield on those 10-year bonds is falling.  What does that tell you?  This may be the single-most important data-point takeaway you'll take in this month, if not this year.  And we're not kidding. 

    What it's telling you is that investors are increasingly phlegmatic about the long-term prospects for inflation and economic growth.

    Think about that a long while.

    There's a reason we're The Practical Economist.

  • ECONOMIC & MARKET ANALYSIS - October 5, 2015

    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 1951.36, up 1.0% from last week.

    US Dollar Index - The Index finished at 95.92, down 0.3% from last week.

    Gold - Gold finished at 1140.75, down 0.5% from last week.

    Commodities - Spot Prices finished at 292.51, down 0.7% from last week. 

    Government Bond Index - The Index finished at 2115.65, up 2.2% from last week.  

    Case-Shiller Housing Index - In July, the Price Index rose 4.3%.

    Energy Consumption - In June, consumption of energy from all sources fell 0.5%.

    Labor - In September, the Employment Rate remained unchanged at 59.5%.

    How does that annualized increase of 4.3% in the prices of previously-owned homes strike you? (Case-Shiller Price Index) The first thing that should strike you is that it's a decent increase.  The second thing that should strike you is that it's pretty far below the level of increases that we had during the 2013-2014 time frame.  This contrasts with an increase of 7.1% July of last year, for example.  An increase is an increase, of course, but that's a pretty big difference to ignore.  In other words, growth in the Housing market?  It's slowing pretty fast.

    Now, one of our most basic of economic indicators is change in direction of energy consumption and the ratio of consumption to production.  The first thing you want to know this month?  In June, energy consumption contracted 0.5%.  The second thing you want to know?  This was the sixth consecutive month that total domestic energy consumption fell.  The third thing to know: the ratio of production to consumption rose to 0.91.  This is the highest ratio in more than two years.  The point there: rising production against consumption is, at a minimum, disinflationary and possibly a deflationary sign.

    How about some more "big" data?"  In point of fact, we don't consider trends in employment as leading an indicator as many others do.  To our mind, such trends are confirming indicators of what early indicators tell us.

    But, as such, trends in Labor are important for confirming our forecasts and for giving us clues to the Federal Reserve's next move. If you're a regular reader, not only do you know that we've been pretty consistent and strong on calling for a significant economic slowing, but that we've been a little surprised at the resilience in the labor market so far, even as the growth in employment has been slowing very gradually. 

    Well, this is the month we've all been waiting for, in a dark sense.  First off, the Employment Rate is now unchanged for two consecutive months.  And for those who are new, that rate of 59.5% is still fairly weak...we consider a rate of 62.0% to be consistent with "normal" times.  How might you define "normal" times?  For our purpose, the best definition is an environment that can sustain real interest rates above 0%.  That is not what we have at the moment.

    Secondly, the number of net newly employed individuals rose 30,000.  You will hopefully remember that "Net Newly Employed" is our measure of net labor gains--those freshly employed adjusted by those who have left jobs or who need to join the ranks of the employed, in order to keep things measured on a consistent basis

    That figure of 30,000?  This is the third consecutive month that gains in the Net Newly Employed slowed.

    Third, we need to remind that when we cite statistics from our model, they are almost the result of smoothing out and averaging out the last three months so as to obtain more reliable trends.  If we look at the data without averaging, the Net Newly Employed figure in September is actually....NEGATIVE, representing a loss of 19,000 jobs.

    In other words, the labor picture is worse than the Business Press is characterizing it to be.

    What about the investment market? Not a lot of surprises.  On the strength of a weak Labor report, the Market took heart that the Fed would likely not raise interest rates soon, and drove the equity market higher.

    Remember, a Market that's reliant on low interest rates rather than growth is not working with strong fundamentals.  Next, based on that supposition, the Market also drove the Dollar down. 

    However, the big news this week was in the Credit Market. 

    The yield on the 10-year government bond fell...by 0.17 percentage points...or by 7.90% to just below 2.0%.  Please think about that for a while.  Traders are willing to accept a yield of 2.0% for money that's being lent for 10 years.  Really give that a long think.  Before you dismiss that, please tell us the number of times, over the last quarter of a century, that bond traders, over the course of, say, two months, mis-handicapped where the economy and rates were headed. 

    We've said it many times: there are no smarter people than bond traders.

    Perhaps even more startling, however, is behavior around yields on investment-grade corporate bonds and high-yield bonds.  In just one week, the spread widened by 0.6 percentage points.  And that yield difference has now widened by 33% over three months.  That is a huge difference. 

    In other words, it's almost as if the bond trading community is holding up before your eyes an enormous neon sign that is flashing the word, "WARNING."

    We believe that, over the next two months, you're going to continue to see a number of "alert" indicators signaling that the economy is contracting fast.

    If you have been smart, we think that you've been paying attention to our early forecasts so that you won't end up being caught unaware.

    The Domestic Scorecard will be updated next week.

  • ECONOMIC & MARKET ANALYSIS - October 12, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2014.89, up 3.3% from last week.

    US Dollar Index - The Index finished at 94.89, down 1.1% from last week.

    Gold - Gold finished at 1151.55, up 0.9% from last week.

    Commodities - Spot Prices finished at 304.89, up 4.2% from last week. 

    Government Bond Index - The Index finished at 2108.91, down 0.3% from last week.  

    You really get a big break this week as there was a complete lack of major economic indicators released this past week.  Instead, we're going to suggest you spend more time than usual with the Domestic Scorecard, which was updated this week.  We are, at this very moment, going through enormous change, change that will result four months from now in people asking, "What happened?"  If you want to know then what happened, we urge you to pay attention to what's happening now.  Our Model is well beyond flashing warning signs.  Our Leading Indicators are no longer pointing to a big slowdown.  Our Leading Indicators are now in SOLID negative territory.

    Secondly, we cannot urge you to much to read the Editor's Letter.  A generational opportunity is precisely like that.  True great opportunities in investing don't come along often, perhaps on average once every four or five years.  We're at that crossroads now.  Don't tell us in three years how frustrated you are that you didn't take our recommendations more strongly.

    Third, this might be the right time to point out that the yield on the 3-month Treasury Bill is now flirting with a yield of 0%.  The last time that happened?  The immediate aftermath of the Lehman bankruptcy in 2008.  This is big stuff and does not reflect well on economic direction.  Bond traders don't accept a yield of 0%--for any period of time--for no reason.

    Lastly, let's talk quickly about the week in the markets.  It wasn't a particularly interesting week.  Perhaps the most interesting thing is that bond prices settled back a little, reflecting what you have to conclude is a little more calmness, but...keep in mind that while the yield on the 10-year government bond rose about 10 basis points, the yield, except for one week in August, is still the lowest it's been since April. 

    The other thing we want to draw your attention to is that the Dollar fell, by 1.1%.  Maybe we haven't said it enough, but...it's very hard to be strongly bullish on the Dollar for the medium-term.  Currencies in emerging markets have been collapsing, but the Dollar continues to show stability at best and, in weeks like this, underlying weakness.  The Dollar is not nearly as strong, across the board, as investment pundits would have you believe.

    Lastly, you'll notice that Commodities' prices rose, in aggregate, by 4.2%.  We have cited Crude Oil and Natural Gas as being among the rare generational investment opportunities.  That door may be closing soon.  Please note that, this week, Crude Oil rose a very strong 9.5%.

    We are not given to exaggeration and theatrics.  We hope that you, Gentle Reader, understand that when we say something, we do mean it.  And when we take the trouble to be a little louder, that means that it's something we think you'd be foolish to not put a lot of weight on.

  • ECONOMIC & MARKET ANALYSIS - October 19, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.8%.

    S&P 500 Index - The Index finished at 2033.11, up 2.1% from last week.

    US Dollar Index - The Index finished at 94.73, down 0.2% from last week.

    Gold - Gold finished at 1180.85, up 2.5% from last week.

    Commodities - Spot Prices finished at 303.93, down 0.3% from last week. 

    Government Bond Index - The Index finished at 2118.29, up 2.2% from last week.  

    Retail Spending - Core Retail Sales rose 1.1% in September.

    Business Sales - Business Sales fell 2.2% in August.

    Consumer Prices - Core Inflation rose 1.8% in September.

    Industrial Production - Industrial Output grew by 1.1% in September.

    If you want to stretch the limits of good news, you could try to hang your hat on the fact that Retail Spending rose in September.  Core Retail Spending (all retail sales with auto-related spending taken out) rose 1.1%.  Given how low all-in inflation is, that figure might make you think it's better than it is.  The problem is that Core Inflation is actually not that low (hovering around 2.0%).  In other words, Retail Spending is extremely weak; for all intents and purposes, the Consumer stopped spending in September.

    Business Sales?  Don't look in that direction for much help.  In August, Sales fell by 2.2%, and that's the seventh consecutive month they fell.

    And speaking of Consumer Prices, we hope that college economics professors are making the most of the landscape we have in Consumer Prices, as a teaching tool.  We do have a rare conjunction that's been developing and is now starting to bloom, so to speak.

    First off, All-in-Inflation barely moved in September, up a mere 0.1%.  However, even as Food prices rose 1.6%, Energy continued to lag, falling 18.5% on an annualized basis.  Now, if you strip out Energy and Food, what you have is Core Inflation, which rose 1.8%.  That figure is awfully close to the Fed's target and it has hovered there for about four months.

    This makes for an interesting picture, low All-in-Inflation, but Core Inflation that is sorely temping the Fed to raise interest rates.  Here's the problem: Inflation is very much a lagging indicator.  The effects on Inflation from the economy can come as late as a year later (or later).  The fun way out here is to opine that, even as the economy sinks, core inflation continues to rise, thus presenting the economy and the Fed with a thorny problem.  However, that development is extremely unlike to come about.  What is far, far more likely is that, as the economy continues to soften and demand declines, Core Inflation will fall, as well.  At the very least, while Core Inflation is, indeed, close to the Fed's target, it isn't quite there, and doesn't show a lot of signs of inching up further.  Until that happens--and we are practically guaranteeing it won't--you can bet your last sou that there will be no hike in interest rates by the Fed this year.

    As if the foregoing data didn't paint a clear enough picture, let's look at the week's marquee data, Industrial Production.  The rate of output grew in September, by 1.1%.  That's a very modest figure, to be sure.  The real problem with it, however, is not its absolute size, but how it contrasts with previous data.  This is the eighth consecutive month that output growth came at a diminishing rate and it is now nearly 1/4 of the size of the increase in January 2015.

    Providing some confirming substance to that conclusion is Capacity Utilization, which on its Index came in at 78.18, representing a 0.7% decline and is the fourth consecutive monthly decline...a decline that, incidentally, has been accelerating each month.

    And what did the Market say?  By far, the most significant thing about this week's market movement is that the yield on the 10-year government bond continued to drop. 

    At this point, demand for that bond is ridiculously high.  The yield only dropped five basis points, but it's now down to 2.04%.  In a historical context, especially absent a government bond-buying program, that is extremely low, or conversely that its price is extremely high. 

    We now have a situation in which bond prices are screamingly high and the stock market is very high as well.  Looking at the ratio of one against the other can be instructive.  Even though both are very high, the key point is that bond prices, relative to stock prices, have reached a level that should be alarming.  If there's a signal point that the general business press is missing, it's precisely that.  In other words, either bond investors or stock investors are wrong.  Which group do you want to bet on?

    If that doesn't scare you, here's something that will or should: the yield on the three-month Treasury bill has dropped to 0%.  ZERO PERCENT.  The last time that happened was in the immediate aftermath of the Lehman bankruptcy.

    The point?  It is no ordinary economic weakening that's coming.

    This column will be on vacation next week.  However, the Global Scorecard will be updated.

  • ECONOMIC & MARKET ANALYSIS - November 2, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2079.36, up 0.2% from last week.

    US Dollar Index - The Index finished at 96.91, down 0.1% from last week.

    Gold - Gold finished at 1148.60, down 1.6% from last week.

    Commodities - Spot Prices finished at 295.96, unchanged from last week. 

    Government Bond Index - The Index finished at 2107.74, down 0.4% from last week.  

    Sales of New Single-Family Homes - The value of new home sales rose 13.9%.

    Durable Goods Orders  - New Orders for Core Durable Goods fell 4.3% in September.

    Disposable Personal Income - DPI, in September, rose 3.5%.

    Consumer Spending - Spending, in September rose 3.4%.

    Let's dispose of those Income and Spending figures quickly.  The good news is that the results showed an increase.  The bad news?  Those are very mediocre increases.

    How about some good news about that new home sales figure?  Simply, the good news is that it's pretty good.  It's also the smallest increase in 11 months, probably the best example of the creeping nature of the slowdown that's under way.

    We feel like there should be some kind of flashing light on your computer those Mondays after a week in which key economic data has come out.  New Orders for Durable Goods falls into that category, since it has its directionality tells you a lot about where the general economy is headed.

    Stripping out volatile-transportation related products, the dollar volume of New Orders for Durable Goods fell by 4.3% in September.  That's a poor enough result on its own, but it's now the seventh consecutive month that new orders have fallen. 

    There's a subcategory of Non-Defense Capital Spending, which is, to our collective mind, arguably an even stronger economic indicator because it speaks to business investment and capital formation.  That figure?  Spending came in down 30.8% on an annual basis.  It's extraordinarily difficult to overstate how poor that figure is.

    And the Market?  The Market behaved rationally this week...in a way.  Equities moved up, largely not on economic strength, but on news that the Fed is going to continue, for now, to keep interest rates where they are.  That's hardly the picture of a sound economy.  The most interesting thing about the market data is that the price on the 10-year government bond fell slightly.  Is that optimism?  We think not.  Here's a piece of data that you should find instructive.  This past week, data for domestic consumption of fossil fuels came out for the month of July.  Consumption rose at a 0.9% rate in July.  That increase comes on the heels of three months of declines.  Our very early speculation?  That minor rise in bond rates is presaging rising prices. 

    But we will see.

  • ECONOMIC & MARKET ANALYSIS - November 9, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.4%.

    S&P 500 Index - The Index finished at 2099.20, up 1.0% from last week.

    US Dollar Index - The Index finished at 99.15, up 2.3% from last week.

    Gold - Gold finished at 1106.30, down 3.7% from last week.

    Commodities - Spot Prices finished at 288.53, down 2.3% from last week. 

    Government Bond Index - The Index finished at 2087.61, up 1.0% from last week.  

    Employment  - The Employment Rate remained essentially unchanged in October at 59.6%.

    Only one major release of economic data this week, but it's one that's generally eagerly anticipated: the labor picture.  This is a good time to remind that trends in labor are truly leading indicators of anything other than perhaps partly of Inflation.

    True to what we have been expecting, the labor data continues to come in consistent with the rest of the economic data.  Unfortunately for the Consumer, the release was treated as mildly positive in the Business Press.  And that treatment was misleading.

    First the good news:  the good news is that workers joined the ranks of the employed at an annualized rate of 1.5%.  That's quite respectable and not bad at all.  What's unfortunate is the rate at which workers left the labor force, diluting that effect.  In fact, what happened was that our metric of Net Newly Employed rose a mere 3,000 in October on an averaged basis.  That's down from 30,000 last month and 63,000 the month before.  In fact, October's result is the weakest in 15 months.  Really let that sink in while you're still processing "news" from conventional business outlets that are trying to make you believe that the Fed is poised to raise short-term interest rates.

    The broader measure, the Employment Rate, was essentially unchanged, at 59.6%.  The good news is that this rate is up 1.4 percentage points from the low in the wake of the financial crisis.  The bad news?  It's 2.4 percentage points below where it should be in "normal" times.  Related to the Employment Rate is another metric we use, the ratio of those employed to those not in the labor force.  Why is this a useful metric?  The lower the ratio, the greater the economic pressure on the nation as those not working and not looking for work start to rise relative to those who are working.  Here's what's interesting.  That ratio, in October was 1.58.  In other words, there were 158 people working for every 100 who were neither working nor looking for work.  That ratio is the lowest since November 2014

    Please, really think about that a long time before you gleefully (or ruefully) conclude that it's a foregone conclusion that the Fed is going to raise short-term interest rates this year.

    One last point about the Fed.  While the Fed does look to the trends in employment, it also looks very closely at trends in industrial output and capacity utilization.  And, it looks closely at trends in commodity prices.

    If you're a regular reader you know that trends in industrial output and capacity utilization have been to the downside.

    We are not budging from our economic forecast.  And to be fair to us, so far everything's falling in line.  The case that growth in the U.S. economy is picking up is very difficult to make.

    As we said the most important data this week lay elsewhere, and it's in what the Market did.  For the most part, the Market responded by taking the Fed's language to heart, though if you listened closely to the Fed Chair, you'll have noticed that she did not commit to a view that the economy was picking up, but that she wanted to see how the data continues to come in.

    The two pieces of market data that deserve your attention:

    1.  The yield on the 10-year government bond rose.

    2.  Commodity prices fell, in aggregate.

    With regard to the former, there are three possible constructions.  The first is that a one week data point is simply a data point and not part of a trend that will continue.  The second is that it's reflective of investors' belief in a growth picture.  The last is that it's reflective of bond traders' view that inflation is picking up.

    Let's dwell on that last point for a moment.  With crude oil falling week-over-week and commodity prices falling, in aggregate, is it likely that investors believe that inflation is in the offing?  Of course not.

    Could that decline in price reflect a belief that growth is about to accelerate?  Yes, it's possible to partly dismiss the decline in commodity prices if that decline came about due to the higher Dollar, but...let's be frank:  you can't really talk about a healthy growing economy in the context of declining commodity prices.  A truly healthy, growing economy will put on display both a rising currency AND rising commodity prices, reflecting growing demand.

    Our view: don't put too much stock in that one-week data point.  Suspend judgment for now.  While we're second to none in our faith in bond traders, yes, even they occasionally get a moment in time wrong.

  • ECONOMIC & MARKET ANALYSIS - November 16, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.9%.

    S&P 500 Index - The Index finished at 2023.04, down 3.6% from last week.

    US Dollar Index - The Index finished at 98.80, down 0.4% from last week.

    Gold - Gold finished at 1087.40, down 1.7% from last week.

    Commodities - Spot Prices finished at 280.95, down 2.6% from last week. 

    Government Bond Index - The Index finished at 2092.20, up 0.2% from last week.  

    Business Sales  - Business Sales fell 3.1% in September.

    Retail Sales - Core Retail Sales rose 0.6% in October.

    Only two major data releases this week, but they're a pretty good set-up for the big data that's coming shortly that's likely to strongly inform the Federal Reserve's decision in December.

    There's not much to say about that figure for Business Sales.  Remember that that data is reported on a one-month lag, but...the trend is too compelling to ignore.  On a 12-month rolling basis, averaged over three months, business-related sales fell 3.1% in September.  It was the eighth consecutive monthly decline.  That's pretty poor.

    Let's turn to Retail Sales.  On an aggregate basis, including auto-related sales, sales rose in October, by 1.8%.  The good news, if you want to call it that, is that the figure is positive.  However, not only is this figure very low, it is tied for third lowest result since January 2010, more than five years ago.

    However, auto sales can definitely skew how we interpret and understand the truth of the economic picture.  Taking those out, we arrive at Core Retail Sales, which showed an increase of a lesser amount, of just 0.6%.  As with the all-in figure, this is the lowest result since January 2010.  And this is a very significantly low rate.

    We are the first to tell you that Retail Spending is not a strong leading indicator.  But it's a very good indicator of how the Consumer feels at the moment.  You can be sure that the Fed is eyeing this release with great trepidation.

    Now let's take a look at the week's market data, which shows us two distinct things.

    First, you must note that both the Dollar and commodities, in aggregate, fell.  You must realize first how unusual a combination this is.  This is not a picture of a growing economy.  Normally, commodities rise in price as the Dollar falls.  So, consider the converse: a rising Dollar on rising commodity prices?  That is a picture of a fast growing economy.  This is not that picture.

    Next, please notice that the price of government bonds rose.  More specifically, the yield on the 10-year U.S. government bond fell about 0.5 percentage points.  Again, rising demand for long-term bonds is not an indicator in favor of a growing economy.  When bond investors believe that the economy is expanding faster rather than slower, the last thing they want is to tie up money in instruments that pay a fixed yield.  And, of course, the U.S. equity market also...fell.

    However, you will note that the price of Gold fell.  This is not a development you associate with a slowing economy.  There are multiple facets to what drives the price of Gold, and while, over time, if you're a regular reader, you will absorb them all, by far the greatest driving factor behind Gold is the direction in which investors believe the Central Bank will send...the currency. 

    Tighter money/higher interest rates = currency that is less diluted

    Looser money/lower interest rates = currency that is being devalued

    The Dollar's movement this week?  It is completely consistent with the conventional view that the Federal Reserve is set to raise interest rates in December.

    We are all but declaring that the Fed will not move to raise short-term interest rates in December.  To believe that the Fed is going to raise rates in December requires that you believe that the next releases for Industrial Production and for Labor are both going to come in at least as strong as the most recent releases.  Two points:

    1.  It is highly unlikely that either release will come in at least as strong, based on our leading indicators and based on other current data.

    2.  It is extraordinarily unlikely that both data points will come in at least as strong.

    If you think that the Fed is going to raise rates if either Output or Labor comes in less strong than its more recent release, you are abdicating your responsibility to make an objective appraisal of the landscape over noise in the business press.  Remember: the business press has been trumpeting a Fed rate hike for at least four months.  And, every Fed meeting has disappointed.

    There is nothing wrong with agreeing with the conventional press...when the press has data to back up its view.  There is no such support at the moment.

     

  • ECONOMIC & MARKET ANALYSIS - November 23, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2089.17, up 2.1% from last week.

    US Dollar Index - The Index finished at 99.61, up 0.8% from last week.

    Gold - Gold finished at 1082.60, down 0.4% from last week.

    Commodities - Spot Prices finished at 2877.51, down 1.2% from last week. 

    Government Bond Index - The Index finished at 2096.28, up 0.2% from last week.  

    Consumer Prices  - All-In-Inflation rose 0.1% in October.

    Industrial Production - In October, Production rose 0.9%.

    One of the most interesting developing data stories is that of Inflation.  All-In Inflation barely moved in October, up just 0.1%.  However, true to the recent trend, Core Inflation (which excludes food and energy) rose 1.9%.  Not only is this essentially at the Fed's target, but it's the highest point since July 2014.  Of course, what has been dragging the All-In number down is Energy, which is down 19.2%.

    If you like to make wagers on interesting propositions, here's one to consider:  either energy inflation is going to pick up, or core inflation is going to cool down in a big way.  Which will it be? 

    While long-term we are bullish on Energy, based on our core economic forecast, it's hard not to wager that Core Inflation is going to cool down very quickly and by a lot.  Our prediction: the picture in Core Inflation is going to look significantly different with the arrival of the December data in January.

    And so, by way of providing support for that perspective, let's look at Capacity Utilization (tied to Industrial Production), which fell in October by 0.8%.  It was the fifth consecutive monthly decline, bringing the Index down to 78.15, which is roughly neutral, and certainly far from inflationary.  (We want to see the Index above 80 and climbing before we can feel intelligent about calling for any kind of sustained and rising Inflation.)

    And, Industrial Production, itself?  Production did rise in October....by just 0.9%.  That's the weakest increase since February 2010.  Does this sound like the kind of environment in which the Fed would raise interest rates?

    What did the Market have to say?  Well, Equities rose, but...the movement in the Stock Market doesn't mean much these days: if the economic data appears to be positive, that gives investors reason to believe that an interest rate hike is warranted and makes investors sanguine.  And, if the economic data appears to be weak, that gives investors reason to believe interest rates won't be moving.  Money managers are finding reasons, therefore, to like both. 

    Now, the Dollar rose again this week, and while it's doing particularly well against the currencies of emerging market economies and is now flirting with the par level of 100.0, it's important to remember that the Dollar still hasn't crossed that par level.  Of course it's not terribly surprising that the Dollar is exhibiting strength; as long as investors believe that it's more likely than not, that the Fed is on a course to raise interest rates, this gives investors reason to believe in a sounder (read: scarcer Dollar). 

    And, of course, following the lines of a stronger Dollar, Gold weakened this week.  It's important here to remember that Gold responds inversely to the movement in the Dollar.  But it's also important to remember that Gold responds, just as much, inversely to the perception in the direction in which the Dollar is headed.

    But, we look to the Bond Market for confirmation and that's where we get tripped up.  The price of the U.S. 10-year government bond rose--not by a lot, but it did rise.  And when you see investors showing a preference for buying more rather than selling more fixed yield instruments that is not a strong indicator that the economy is strengthening. 

    Do we believe that bond traders "get it right" every week?  No.  In fact, in our view, bond traders can be wrong as long as three--maybe four--weeks, but NEVER longer than that.  Bond traders never get the big picture wrong.  

    Now read the updated Domestic Scorecard.

  • ECONOMIC & MARKET ANALYSIS - November 30, 2015

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims was unchanged.

    S&P 500 Index - The Index finished at 2090.11, unchanged from last week.

    US Dollar Index - The Index finished at 100.08, up 0.5% from last week.

    Gold - Gold finished at 1071.00, down 1.1% from last week.

    Commodities - Spot Prices finished at 276.40, down 0.4% from last week. 

    Government Bond Index - The Index finished at 2099.97, up 0.2% from last week.  

    Disposable Personal Income - On a per-capita basis, Income, in October rose 3.3%.

    Consumer Spending - On a per-capita basis, Spending rose 2.4%.

    New Single-Family Homes - The total value of new homes sold in October rose 6.7%.

    New Orders for Durable Goods - Orders for Core Durable Goods fell 4.7% in October.

    How about a little good news?  That result for Disposable Personal Income is modest, but...in context of results over the past year, it's actually respectable, especially since it's a figure that is where it without adjusting for inflation.  In context of the the last 18 months, if adjusted for Inflation, the figure would be even more impressive.   

    The surprise, though, is in Spending, which rose 2.4% in October.  That's the smallest increase since May 2014.  When consumers cut back on spending, that's a huge warning sign.  Consumers are often smarter about the economy than people think, especially when the Consumer doesn't think too hard but simply behaves in accordance with her "gut."  In times of economic pressure, one of the first things Consumers do is to dramatically increase their saving.

    We have long said that, though looking at the change in the total value of new single-family homes sold is, seemingly, a crude way to measure the economic winds, the fact is that it's a pretty good economic bellwether.  What happened in October is that the total dollar value (price x volume) rose 6.7%.  That number looks perfectly respectable.  What you probably can't guess is that that figure is the smallest increase in 16 months.  What's dragging on the figure?  It's not volume of sales nearly as much as price.

    Now, for the data-set that's the most important of the week: New Orders for Durable Goods.  First, let's remind that, our second favorite way to look at this data is to view total dollar volume of orders with transportation-related goods excluded.  The problem with such goods is that they include aerospace-type items, sales for which are highly volatile and not helpful in terms of identifying trends.  Compounding the problem is that things like airplanes are, on a per-item basis, much higher in price than the typical dry goods item and can thus can seriously skew the results in terms of identifying a trend.  Now, on to the data, then...

    Subtracting out orders for transportation-related items, new orders, in dollar volume, for durable goods, fell 4.7% in October.  Not only is any decline significant by itself, but this is the eighth consecutive monthly decline.  (Including transportation-related goods, Orders declined, but only by 2.4%, but it was still the eighth month in a row they fell.) 

    However, if you're a regular reader you might know that we like to parse the data yet a second way: identifying and putting in a group those items that constitute Non-Defense Capital Spending, or NDCS.  Why is this sub-category of Durable Goods Orders so important?  There is simply no closer leading indicator of economic trajectory than capital, or business formation.  The direct outshoot of this activity is spending to start such ventures, spending to conduct a venture's business activity, which has a multiplicative effect on income and spending in the immediate environment.  And the result:  Non-Defense Capital Spending fell 7.1%.  And that is the 11th consecutive monthly decline. 

    The importance of that result in context of other diminishing economic data cannot be stressed too much.  If you have a disagreement with our persistent economic forecast, you have to reconcile your perspective with that data fact.

    And the Market this past week?  Well it was more entertaining than anything else.

    The Equity Market was essentially flat, but the Dollar rose, and Gold fell.  It's not hard to argue that the Dollar rose largely on near popular certainty that the Fed is poised to raise interest rates...and that Gold fell for the same reason (Gold tends to move in inverse rhythm with the way interest rates move.)

    However, the yield on the 10-year U.S. government bond fell, not by a lot, but it did fall.  What you end up is a picture of investors, in aggregate, essentially keeping interest rates unchanged even as they believe that the Fed is going to raise interest rates.  Does that sound like a picture in which bond investors believe that the Fed is legitimately raising rates on a strong belief in economic growth? 

    Of course not.  If bond investors believed that the economic picture was brightening, investors would eschew long-term bonds just enough to push the yield up, even a little.  And instead, they pushed that yield...down.  Instead, they pushed the price of that bond up.

    Does that sound like a picture of a Market that's on board with a move to raise interest rates?

    With every call and certainty that the Fed was going to raise rates, we have waited for the earliest moment we could say with certainty what the outcome would be.  Especially on the heels of last week's results for Industrial Output last month, we are predicting that the Fed, once we get to December, will end up declining to raise rates.

    If the Fed did move to raise rates would it be the first time the Fed got the economic environment wrong and either raise rates prematurely?  Absolutely not.  All we can do is make a judgment based on the data that should inform the Fed's decision, particularly that of the Fed Chair.  In this regard, if we have a piece of advice, it's this: when you listen to FedSpeak, do precisely that.  Don't listen for the big statements that focus on intent and policy.  Listen to the entirety of the statement.  It's not difficult to understand why the Fed wants very much to normalize monetary policy, and 80% of the Fed's language is centered around justifying monetary policy.  But at the margin, the Fed always leaves the door open a little for flexibility because the data has not yet solidly supported such a policy movement.

    We're pretty sure that our regular readers will be among the few that will either nod their heads in unsurprise when the Fed declines to raise rates in December...or, should the Fed choose to take an action that is against reason, be among the few that will be able to counter smug postures with sound data-based reasons for why the Fed is acting foolishly.

    The Domestic Scorecard was updated last week, and the Global Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - December 7, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2091.69, up 0.1% from last week.

    US Dollar Index - The Index finished at 98.25, down 1.8% from last week.

    Gold - Gold finished at 1055.45, down 1.5% from last week.

    Commodities - Spot Prices finished at 278.46, up 0.7% from last week. 

    Government Bond Index - The Index finished at 2096.62, down 0.2% from last week.  

    Case-Shiller Housing Price Index - This Price Index of previously-owned homes rose 4.8% in September. 

    Labor Market - The Employment Rate remains unchanged at 59.4%.

    If you're looking for a reason to deny what the most heavily weighted leading indicators of the economy are saying, the Case-Shiller Index wouldn't be a bad place to start.  It's true that the upward trend in home prices has leveled off quite a bit, still...that 4.8% increase is very respectable, especially for an economy that, in our opinion, is on the verge of being widely acknowledged as being in trouble.

    By far, the most significant data release of the week was the labor report on Friday.  Coupled with last month's industrial output release, it's easily the most significant input to the Fed's upcoming decision on whether to raise rates.

    The upshot?  November's labor report came in ever-so-slightly better than we thought it would, but it was, directionally in line with diminishing improvement.

    The first thing to tell you is that the Number of Net Newly Employed rose 9.7% in November.  That's not a bad result.  But it's also the worst result in six months.  Keep that in mind.  The situation is not hard to understand.  While job gains continue to come at a decent pace, even if that pace is slowing, the situation is being undermined by the number of people who are leaving the labor force.  Let's look at some numbers, just so you understand it.  As recently as six months ago, the ranks of the employed were rising at an annualized rate of 1.9% and the rank of those no longer in the labor force rose by only 1.0%.  

    Now fast forward three months, and the directionality of those figures starts to change.  The ranks of the employed rise by 1.8%, but the number of those leaving the labor force rises by 2.1%.  And it's slightly worse for the current month in which those employed rose by 1.4% and the ranks of those no longer in the labor force rose by 2.0%. Do you see the trend?

    Do you believe the Fed is going to raise interest rates?  The problem the Fed has is that it has now created so much expectation around an interest rate rise, and that that expectation was built around rhetoric of a growing economy.  For those reasons, it's quite possible the Fed will raise rates to save face, figuratively speaking.

    But, ask yourself if there's a sound basis for doing so and whether there's not at least as much argument for not doing so.

    Remember: the Fed's primary mandate is price stability. 

    1.  Commodity prices are in the figurative basement.

    2.  The U.S. Dollar continues to exhibit strength and is now at multi-year highs.

    3.  Growth in Industrial Production continues to come at a diminishing pace.

    4.  Growth in the labor market continues to come at a diminishing pace.

    If you were the Fed Chair, what would be your greater concern over the next 12-18 months, Inflation or Disinflation?

    There is a big "however."

    Commodities prices are in the figurative basement.

    As much as the Dollar has strengthened, keep in mind that it is only flirting with par of 100.0 and is unable to sustain that level.

    Core domestic inflation is already hovering around 2.0%.

    In other words, it's very hard not to be persuaded that, based on the current situation, there would be a sound call for heading off higher inflation.  However, we want to remind that going into the Financial Crisis of 2008, core inflation was not low either and that low commodities prices are not a guarantee of the time frame in which they will rise.  And we remind ourselves of this given the fact that Capacity Utilization is declining, Industrial Production is rising at a diminishing rate, and that the bond market continues to be phlegmatic about growth.

    Let's ask that question again: if it were up to you, does this seem like the right time to raise short-term interest rates?

    We have our answer.

  • ECONOMIC & MARKET ANALYSIS - December 21, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2005.55, down 0.3% from last week.

    US Dollar Index - The Index finished at 98.72, up 1.1% from last week.

    Gold - Gold finished at 1049.40, down 2.9% from last week.

    Commodities - Spot Prices finished at 267.52, down 1.6% from last week. 

    Government Bond Index - The Index finished at 2099.00, unchanged from last week.  

    Business Sales - In October, total Business Sales fell 3.5%. 

    Retail Sales - In November, Core Retail Sales rose 0.8%.

    Consumer Prices - In November, All-In-Inflation rose 0.2%.

    Industrial Production - In November, Output was flat.

    Not in the vanguard of our leading indicators, Business Sales still have a tale to tell.  And what's funny is that it doesn't get more attention in the general business press than it does.  It basically get no attention.  Now, in October, total Business Sales fell, for the ninth consecutive month.  And no matter how you slice it, this is a negative.

    What about Retail Sales?  Total Retail Sales rose 1.8% in November, and while that figure is technically positive, it's barely enough to be considered enough to be representative of an economy that has steam in it.  To make things worse, if you strip away sales related to automobiles, sales rose a paltry 0.8%.  These are figures that would give the average consumer more concern if they were reported in the Press. 

    While, in terms of monetary policy, the forces that inform Inflation are more important than current Inflation, itself, we certainly want to take a look at where we are at present.  And it's an interesting picture.  On the one hand, Energy prices have continued to decline, but Core Inflation has continued to hover just under 2.0%.  Know that the All-In-Inflation of 0.2% contrasts with 1.5% a year ago.  And Core Inflation is at 1.9%.  It can be mildly argued that this issue forms some of the support for the Fed's decision this past week to raise short-term interest rates by a quarter of a percentage point. 

    Of course the "big" data for the week is Industrial Production, and it's a figure that's dovetailing too well into our economic forecast.  Output in November was basically flat.  This is the worst result since January 2010.  And Capacity Utilization (think of it as the extent to which factories are put to work) declined 1.6%.  That's the sixth consecutive monthly decline, with the Index now standing at 78.00, which is not remotely inflationary.

    To say that we're disappointed with the Fed's move to raise rates is a gross understatement.  Despite the latent forces that were informing strengthening core inflation, the reality is that these forces/indicators show their effects 12 - 18 months out, not immediately.  Given the recent trend in hiring (slowing down), given the declining trend in capacity utilization, given stability in the Dollar, and given low and falling commodity prices, we think it's patently ridiculous to believe that the forces that drive rising inflation are gathering steam.

    How much was made of the fact that the Fed's announcement and move were timed to an anniversary of when rates were slashed?  A lot.  To our eyes, the move was political in every single way and is not representative of a move intended to keep a lid on an expanding economy.

    From the perspective of the Market, perhaps the signal takeaway from the week is that that ratio of bond prices to commodity prices continued to widen.  While the U.S. Government Bond Index was essentially unchanged week-over-week, commodity prices, in aggregate continued to fall.  In this regard, refer to the Editor's Letter.  What we have is a great disequilibrium that is being exacerbated.   Why do investors continue to pound bond prices...beyond where they should be relative to commodity prices?

    Yes, to the extent that declining commodity prices signal a softening economy, yes, rising bond prices make sense.  But the problem is that (1) prices have risen out of a natural range relative to commodities and (2) investors' behavior appears to be telling you to expect tougher and tougher times.  Does that dovetail well with the Fed's announcement?

    Read the Editor's Letter.  

     

  • ECONOMIC & MARKET ANALYSIS - December 28, 2015

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2060.99, up 2.8% from last week.

    US Dollar Index - The Index finished at 97.90, down 0.8% from last week.

    Gold - Gold finished at 1068.25, up 1.8% from last week.

    Commodities - Spot Prices finished at 271.08, up 1.3% from last week. 

    Government Bond Index - The Index finished at 2093.79, down 0.2% from last week.  

    Sales of New Single-Family Homes - In November, the total value of new single-family homes sold rose 2.

    Disposable Personal Income Per Capita - DPI, in November, rose 3.2%.

    Consumer Spending Per Capita - Spending, in November, rose 2.3%.

    Durable Goods Orders - In November, Core Durable Goods Orders fell 3.7%.

    You can probably count on one finger the number of times over the past two years that we led off with an observation about changes in the number of Initial Jobless Claims.  That's largely because we don't consider it among the more important economic indicators.  However, this week, it bears attending to: we ask you to note that the four-week moving average of initial claims rose, last week, by 0.6% to 272,500.  Now, you will hear numerous commentators remark that this level of claims is below a warning threshold.  We want you to know that this level of claims is the highest since mid-September.  Our point, of course, is that the economy is beginning to catch up with our forecast.

    Now, let's talk about the value of sales of new single-family homes (price x volume).  The good news is that total value rose in November.  It rose by 2.4%, however, which is a very modest figure.  Dissecting that figure, we find that the volume of new sales fell 0.8%, which is the first decline in volume of sales since June 2014.

    We can dispose of Income and Spending fairly quickly.  Essentially, there is neither good nor bad news.  Both rose respectably, but not in an expansionary fashion, and in fact, rose very modestly.  To put it in perspective, Spending rose at the smallest rate since May 2014

    Are you among those who believe that the economy is still on a moderately strong upward trajectory?  If so, we'd like you to explain how you reconcile that point of view with the latest results in Durable Goods Orders.

    In November, Core Durable Goods Orders (those excluding transportation products) fell 3.7%.  If you're grasping for some good spin, it is, to be honest, the smallest decline in six months, but...it's also a decline, and the ninth consecutive monthly decline.

    The picture for All Durable Goods Orders wasn't much different, with All Orders falling 2.4% for, also the ninth consecutive monthly decline, as well.

    The most important takeaway from this week's market data is something that very much deserves your attention, and it's not among the set of data that we regularly report on.  It's this:  the spread of yields on corporate bonds over high-yield bonds has widened 0.9 percentage points.  That may not sound like a lot, but it's a difference of 5.1% at present compared with 4.2% just two months ago.

    If that's not an important indication of how jittery bond investors are getting, we don't know what is.  We have already remarked--or rather underlined--how very high government bond prices are, and that should be sufficient warning.  This simply reinforces it.

    As one regular reader once observed, our forecasts tend to be on the early side.  That's certainly proving to be the case this time around.  There are plenty of warning indications on the horizon, though we did think that the economy would have declined further by now than it has.  However, to be fair to us, when we issue our forecasts, we do reinforce that the forecasts are not precise with regard to timing, but are roughly geared to a time frame that is three to six months out.  If you'll remember, we began issuing a a dour forecast sometime in late summer.  This puts us, certainly at the outer limit of that time frame.  Inconveniently long timing?  Maybe, but...to blow our own horn, it takes a lot more confidence in your economic model to predict an economic downturn when things are humming along.

    Stick with The Practical Economist.

    The Global Scorecard was updated this week.

     

     

  • ECONOMIC & MARKET ANALYSIS - January 11, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.5%.

    S&P 500 Index - The Index finished at 1922.03, down 6.0%. from last week.

    US Dollar Index - The Index finished at 98.38, down 0.3% from last week.

    Gold - Gold finished at 1091.40, up 3.0% from last week.

    Commodities - Spot Prices finished at 265.01, down 2.3% from last week. 

    Government Bond Index - The Index finished at 2106.49, up 0.7% from last week.  

    Employment - In December, Employment Rate remained unchanged from November at 59.6%.

    Even with taking last week off from writing and reporting, there's only one major economic indicator to report on this past week, though it's a pretty popular one, and that's the labor report.

    Of all the economic indicators we report, it's probable that the labor picture is the hardest to communicate easily.  And that's a function of the complexity of understanding the components of the labor market.  It actually takes more than 30 seconds to comprehend what changes in the components of the labor market are saying. 

    For newer readers, a little housekeeping may be in order.  For one thing, we do not work with seasonally-adjusted data, but rather with raw data.  At the very least, this prevents falling into errors associated with the government possibly not quickly detecting changes in seasonality.  Second, it's important to understand that the most widely reported metric, the Unemployment Rate, is not very meaningful because it doesn't take into account those NOT in the labor force.  The Unemployment Rate only measures the number of people not working among those who say that they are looking for work. 

    A far more meaningful metric is the Employment Rate, which measures the proportion of the entire population that is employed.  In healthy times that percentage hovers around 62.0%.  So, the first thing to know with this month's data release is that the Employment Rate is now unchanged for three consecutive months at 59.6%.  So, immediately you know that the labor picture in December was not materially and positively changed from November. (And, if you think that 59.6% is not very far below 62.0%, please know that the low to which the Employment Rate fell during the fallout from the Financial Crisis was 58.2%.)

    The second thing to know is that the ranks of the Employed did rise in December, at a 1.4% annualized rate.  That sounds great until you know that the ranks of those who left the Labor Force in December rose by 1.9%.  This leads us to our favored measure of the changing labor picture:  Net Newly Employed.  This metric measures new persons employed adjusted for changes in the Labor Force.  On an annualized basis, it turns out that the number of net new persons employed in December was 2,000.  The good news is that it's a positive figure, that in fact, there was a net increase in number of persons employed.  The bad news?  That's the smallest net gain since February.

    And what did the market have to say?  Sometimes it's best to keep the analysis very simple.

    Equities fell, while government bond prices and gold rose....and the Dollar fell.

    That is a picture of a market that is feeling decidedly anything but sanguine about the economic picture.  And...we agree.

    If there's adventure in watching what could happen in the market, it's just how long the yield on the 10-year U.S. government bond can go, without a bond buying program from the Fed.  Just when you think that the price of the 10-year bond can't go higher...investors prove you wrong. 

    The other signal point that we want to reinforce is the value of the Dollar.  While it's widely perceived that the Dollar has been exhibiting strength, especially against emerging market currencies, it's worth reminding that the Dollar's strength is limited.  The most common reference point for the Dollar is the U.S. Dollar Index.  And the point is that, during all of 2015, except for one brief period when it flirted with being over 100.0, which is par, the Dollar has not lifted above par.  And that's not an insignificant point: the Dollar has strengthened, but it's not really strong.  Its relative strength is more of a statement of considerable weakness abroad rather than objective economic strength at home. 

    The Domestic Scorecard will be updated next week.

  • ECONOMIC & MARKET ANALYSIS - February 1, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.8%.

    S&P 500 Index - The Index finished at 1940.24, up 1.7% from last week.

    US Dollar Index - The Index finished at 99.53, unchanged from last week.

    Gold - Gold finished at 1116.25, up 1.3% from last week.

    Commodities - Spot Prices finished at 267.60, up 2.6% from last week. 

    Government Bond Index - The Index finished at 2121.84, up 0.6% from last week.  

    New Orders for Durable Goods - In December New Orders for Core Durable Goods fell 2.8%.

    New Single-Family Home Sales - The total value of new homes sold in December rose 2.0%.

    December is the tenth consecutive month in which the value of New Orders for Durable Goods (with transportation-related goods stripped out) fell.  We consider a period of three consecutive monthly declines a serious harbinger of slowing.  Ten months?  The signs increasingly point to a very serious contraction.  

    A corollary measure that we think is helpful to look at is the amount of spending on non-defense capital goods.  This is a significant measure because it comprises spending on items that are closely associated with business start-up and expansion.  And in December?  It fell 6.1% for the thirteenth consecutive month.

    If you've been paying attention, you know that in recent months there's been a hint of weakness in demand for new single-family construction.  Even as growth has continued to come, it has come at a diminishing rate.  This most recent growth rate of 2.0% is the lowest since April 2014.  What's interesting is how that figure is arrived at, since it's a question of volume of sales times average price. 

    While the number of sales was relatively consistent with recent months, this was the first month in several years that the average price paid fell 4.1%.

    Over time, our observation has been that this indicator is stunningly well correlated with economic direction.  In other words, it's very consistent with our forecast.

    Now let's see what the Market is telling us.

    The Equity Market rose. 

    Commodities rose, even with the Dollar flat week-over-week.  (That could be potentially a good sign.)

    But Gold rose, and so did the prices of 10-year Government bonds.

    Gold doesn't rise just for fun when the Dollar is unchanged.

    And traders don't rush to buy more 10-year bonds if the stock market is rising on organic strength.

    Yes, in other words, even as the softening we predicted is underway, it's going to get worse before it stabilizes.

    The Global Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - January 18, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1880.33, down 2.2% from last week.

    US Dollar Index - The Index finished at 98.94, up 0.6% from last week.

    Gold - Gold finished at 1096.51, up 0.5% from last week.

    Commodities - Spot Prices finished at 254.65, down 3.9% from last week. 

    Government Bond Index - The Index finished at 2113.96, up 0.4% from last week.  

    Business Sales - In November, total Business Sales fell 2.8%.

    Retail Sales - In December, total Core Retail Sales rose 1.2%.

    Perhaps it feels less relevant because it's reported on a one-month lag, but there's certainly nothing irrelevant about Business Sales, which, in November, fell 2.8%.  The most notable takeaway here is not the size of the decline, or even that the fact that it declined, but that it was the eleventh consecutive month that Business Sales did fall.  To add to the matter, the ratio of Inventories to Sales has reached 1.37, a level not seen since January 2010.  How to interpret this figure?  First, it's a clear indication of diminishing demand, and second, it's just another reinforcing indicator that deflationary forces are gaining in strength. 

    Now, changes in Retail Sales aren't necessarily more relevant to understanding the trend in economic direction, but it might feel that way to the lay consumer.  Remember that when we look at Retail Sales, we put primary emphasis on Core Sales, those that exclude autos and auto-related sales.  And there is some nominal good news.  That good news is that Retail Sales did rise last month.  However, sales rose by only 1.2%, which is quite modest.

    What about the Market?  The most important thing to know about the market this week, by far, is that while bond prices rose, oil prices fell by more than a compensating amount.

    If you had to know just five market-based ratios that would help you to handicap the U.S. economy, the ratio of bond prices to oil prices would be one of them.  And the relationship is inverse.  You see, rising bond prices are an indication that bond traders are phlegmatic about the likelihood interest rates rising any time soon.  Because we're The Practical Economist, we do like to be practical.  While there are roughly three or four major elements that inform inflationary pressure, the price of Crude Oil is a terrific simple proxy.  When the price of Crude Oil, for example, stays the same, but bond prices decline, you can bet that traders are anticipating that interest rates will rise, not because, inflationary pressure is growing (it isn't because in this scenario Oil prices are unchanged, remember) but because they're sanguine about growing economic activity. 

    If that last paragraph was a little too dense, please read it again.  Remember: bond prices and bond yields move in opposite directions.  Rising bond prices denote falling bond yields.  When bond prices fall, other things being equal, bond yields rise, and that's an indication that bond traders believe that interest rates will likely be rising, and...if inflationary pressure is flat, it's an indication they believe that rates will be rising because of an improving economic outlook.

    So you can see that that ratio is critical to making practical judgments about economic direction.  This week?  Oil prices fell.  Had bond prices remained at the same level, that would be a bullish sign.  Even a small decline in bond prices could have been enough to more than offset the decline in Oil prices.

    But that's not what happened.  Instead, Crude Oil fell more than proportionately to the rise in bond prices.  In other words, what traders are telling you is not only that they see declining inflationary pressure, but...declining economic activity.

    Of course the simple movement in the ratio isn't enough to make a significant statement.  If you, for example, start from a position in which the economy is roaring and Oil is highly priced, an upward move in the ratio doesn't mean much.  But the ratio is already under pressure. 

    And this week that ratio crossed a new threshold.  It crossed over the ratio of 8:1 for the first time in years. And that should be making all of us nervous.

    Of course this is perfectly consistent with our forecast.

    Fasten your seat belts.

  • ECONOMIC & MARKET ANALYSIS - January 25, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1906.90, up 1.4% from last week.

    US Dollar Index - The Index finished at 99.53, up 0.6% from last week.

    Gold - Gold finished at 1101.75, up 0.5% from last week.

    Commodities - Spot Prices finished at 260.71, up 2.4% from last week. 

    Government Bond Index - The Index finished at 2110.13, down 0.2% from last week.  

    Consumer Prices - In December Core Consumer Prices rose 2.0%.

    Industrial Production - In December, Output fell 0.9%.

    The Inflation report is not all that interesting this month, though, if we disaggregate the components it can be misleading to the layperson.  Yes, on an all-in basis, prices rose a very modest 0.5%.  However, if we take out Energy and Food, Core Inflation rose 2.0%, which is not only in line with the Fed's target, but is higher than you should normally be comfortable seeing with the rest of the economy slowing down.  However, the data is easily misleading because, as we've been consistently stating, we strongly expect weakness in Core Inflation very shortly.

    Changes in Consumer Prices is one of those indicators on which the key inputs act with a long delay.  Based on what we know at this point, you should expect serious disinflationary movement by this time next year, possibly leading to Deflation. 

    Now, let's talk about some marquee data: Industrial Output.  Output fell in December, by 0.9%.  That's a pretty serious turn of events.  This contrasts with an increase, last February of roughly 4.0%.  Now we have Output results that are not a declining rate of growth, but actual decline.  To go a little further, keep in mind that our measure averages out results over three months to correct for aberrational activity.  In point of fact, when you look at the results year-over-year, Output, in raw terms, has now fallen two months in a row.  How does the Fed rate hike in December seem to you now? 

    This conversation dovetails naturally into one about Capacity Utilization, one of our key inputs to Consumer Prices.  The result there is consistent with Industrial Production and with our forecast for disinflation.  First of all, the Index, on a 12-month rolling basis, stands at 77.77.  That's the lowest it's been since October 2014 and is very incompatible with sustained rising inflation, and further, is indicative of only mild demand.  Further, the Index has now fallen for seven consecutive months (by 2.4% in December). 

    This data is some of the most significant in terms of a discussion about where demand is and where it's trending. 

    Turning to how the Market ended the week there's one big takeaway we want to direct your attention to.  Remember, we're The Practical Economist.  Simple methods of measuring important trends are not above us.  The thing to observe this week is that, even as Commodities--and especially Crude Oil--had a very good week, Bond Prices had only a mildly poor week.  That relationship is very important.  Remember: rising commodity prices generally correlate with rising prices in general and can be considered as an indication of rising demand.  Put in other way, other things being equal, rising commodity prices should translate into rising bond yields.  However, while commodities had a very good week, the yield on the 10-year government bond rose marginally.  That is not a picture of strength.  In other words, the Bond Market is discounting the idea that rising commodity prices are an indication of growing demand. As we like to say, bet against bond traders at great peril.

    The other point that we want to drive home has to do with the value of the U.S. Dollar.  The Business Press continues to hammer the point that the U.S. Dollar has not only strengthened, but is strong.  

    It's a lie.

    Yes, the Dollar has strengthened considerably over the past 18 months, but:

    1.  The Dollar has ceased its long rally.

    2.  The Dollar is still barely touching par of 100 on the U.S. Dollar Index

    Remember: in the immediate wake of the financial crisis in 2008, the Dollar soared, but...that was temporary.  A few months after the immediate crisis subsided, the Dollar sank and floated at significantly lower levels.  This is a point we're going to make again and again in coming months, but...we think it's very foolish to assume that the Dollar has nothing but strength ahead of it. 

    The Global Scorecard will be updated next week.

     

  • ECONOMIC & MARKET ANALYSIS - February 8, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 1880.05, down 3.1% from last week.

    US Dollar Index - The Index finished at 96.96, down 2.6% from last week.

    Gold - Gold finished at 1132.00, up 1.4% from last week.

    Commodities - Spot Prices finished at 261.96, down 2.1% from last week. 

    Government Bond Index - The Index finished at 2129.41, up 0.4% from last week.  

    Case-Shiller House Price Index - In November, the Index rose 5.2%.

    Disposable Personal Income  - On a per-capita basis, Income rose 3.0% in December.

    Consumer Spending - On a per-capita basis, Consumer Spending rose 2.2% in December.

    Employment - The Employment Rate remained at 59.6% in January.

    Let's talk briefly about the Housing Sector.  While we recently saw some first cracks with price weakness in the sales of new single-family homes, the Case-Shiller Index is showing that the sector is still holding up, with this important index of the prices of previous-owned homes rising for the most recent month for which data is available.  Keep in mind that this data is reported on a significant lag:  we are now in early February and data for November is just now available.  Will Case-Shiller still be looking good by the time December data comes out?  We will know soon enough. 

    The most recent results for Income and Spending are not remotely strong and are, in truth, very modest.  The one thing that saves the figures from being characterized as anemic is that Inflation is very low.  However, when you remember/consider that Inflation is low because economic activity is weak, not because the Fed is successfully keeping a lid on hyper-activity, the results don't even look respectable.

    Now, what about the labor picture?  Well, the change in January is mildly positive.  It's a fact that the ranks of the employed rose at a 1.6% annualized rate.  That's good.  But the ranks of those who are not in the labor force also rose...at a 1.5% annualized rate.  In sheer numerical terms, those who became newly employed did outstrip those who fell off the labor rolls, however.  The Number of Net Newly Employed--as we measure it--was 32,000.  That is the best result of the last three months. Still, except for the last three months, it's the worst result since September 2014.  And, if that isn't sobering enough, the Employment Rate is now unchanged, at 59.6% for the past three months.

    Not an inspiring week, and the Market agreed.

    It's not terribly unusual for the stock market to have a good week when the Dollar falls.  After all, a cheaper dollar tends to boost the sales of US-made products to overseas markets.  But when the stock market falls and commodities fall on a weaker dollar, as well, it's a sobering situation.  Combine with that the fact that traders' demand for bonds rose, sending the yield on the 10-year government bond down....to 1.83%, and what you have is a picture of a market that is...very nervous.

    The Domestic Scorecard will be updated next week.

  • ECONOMIC & MARKET ANALYSIS - February 15, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.5%.

    S&P 500 Index - The Index finished at 1864.78, down 0.8% from last week.

    US Dollar Index - The Index finished at 95.97, down 1.0% from last week.

    Gold - Gold finished at 1241.00, up 9.6% from last week.

    Commodities - Spot Prices finished at 268.05, up 2.3% from last week. 

    Government Bond Index - The Index finished at 2133.56, up 2.3% from last week.  

    Retail Sales - Core Retail Sales rose 1.4% in January.

    Not much to cover in terms of fresh economic data this week.  However, the one piece we got, Retail Sales, has already been shown to be enough to confuse many people.

    Total Retail Sales rose 2.1% and that's the highest in four months.  However, not only is that level of growth on the high side of modest, i.e. not terrible but not encouraging, it also includes auto-related sales.  Our preferred measure excludes auto-related sales, as a better measure of the "core" economy.

    With autos excluded, Sales rose a very meager 1.4%.  Here's where the pundits are getting it wrong.  It's easy to interpret this figure as yes, extremely modest, but not as bad as it looks because Inflation is very low.

    However, Inflation is very low only because petroleum products are very cheap, because energy-related Inflation is very low.  Core Inflation is not very low

    This figure, this month?  Not out of line with our forecast at all.

    The Market was pretty erratic this past week, and make no mistake: there's going to be more of the same.  Are you allowing the Business Press to let you believe that the economy is on relatively sound footing?  Let's keep it simple: 

    -  What is the behavior of bond traders, as evidenced by bond yields, saying?

    -  Where is Capital Spending trending?

    -  Where has demand been trending?

    There is nothing in the behavior of the 10-year government bond yield to suggest that bond traders are remotely close to becoming more sanguine about the economy and rising inflation; capital spending continues to decline; and demand (as best demonstrated by factory utilization) continues to decline.

    Taken together, these three points are our most potent leading indicators.  And taken together, they're pointing to a continuing slowing economy.

    In terms of how the Market actually behaved last week, you can do the arithmetic pretty easily:  

    -  Bond yields fell

    -  The US Dollar fell

    -  Commodities rose

    -  Gold rose

    Leading with the points that bond traders continued to pile into long-term government bonds and that the Dollar weakened, this is a Market that is clearly very nervous about medium-term economic prospects.

    For more on the state of the economy at the moment, see the Domestic Scorecard, which was updated this week.

  • ECONOMIC & MARKET ANALYSIS - February 22, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.8%.

    S&P 500 Index - The Index finished at 1917.78, up 2.8% from last week.

    US Dollar Index - The Index finished at 96.59, up 0.6% from last week.

    Gold - Gold finished at 1210.10, down 2.5% from last week.

    Commodities - Spot Prices finished at 266.87, down 0.4% from last week. 

    Government Bond Index - The Index finished at 2135.52, up 0.1% from last week.  

    Business Sales - In December, Business Sales fell 2.8%.

    Industrial Production - Output in January fell 1.3%.

    Consumer Prices - Inflation rose at 0.9% rate in January.

    Business Sales in December fell 2.8%.  It was the tenth consecutive monthly decline.  No, Business Sales is not one of our top leading indicators, but, the extent to which businesses buy and sell to each other is not a bad proxy for understanding economic direction.  In other words, there is, naturally, some correlation.  Ten consecutive monthly declines?  Is it a coincidence that this trend corresponds with a diminishing rate of growth in Industrial Production?  Of course not.

    And that brings us to our most significant current economic indicator.

    Industrial Output fell 1.3% in January.  It was the second consecutive monthly decline.  We think this data point speaks for itself.  Output is declining

    We are now at a place in the economic cycle that tends to confuse.  Why?  Even as most leading indicators are pointing downward, Inflation is a bit of a problem.  And rising Inflation is normally considered to be at odds with declining demand.  So, what's going on?

    Well, from a strictly descriptive standpoint, All-in Inflation, in January, rose at the highest rate since December 2014.  The problem was not Energy, or even Food.  It's Core Inflation.  Core Consumer Prices rose 2.1%, and that's the highest rate since January 2014.

    Adding to what makes it problematic to understand is that, as we have frequently hinted, we don't think the medium-term is going to be rosy for the Dollar.  If that's true, that would signal even more rising Inflation.

    But this is a pattern that crops up frequently before recessions.  In a case like this, we trust to other more significant leading indicators of demand than Inflation, itself, which is a lagging indicator.  Our take: there is no question that Inflation will catch up, though that sounds like the wrong word, with falling demand.  We repeat over and over: Deflation is the far greater risk at this point.  That growth in core consumer prices?  That's a function of the little burst in growth that was going on a year ago, not a function of recent developments.

    What about the Market's activity this week?  This is one of those weeks for which it's treacherous to try to extrapolate much from what the Market was saying...because it didn't essentially say anything.

    It's tempting to conclude that the Market was feeling fairly strong on the economy, sending both the Dollar and Stocks up.  And the fact that traders left the yield on the 10-year government bond unchanged would seem to argue for more optimism, in the face of expected disinflation from a higher Dollar. 

    We're not convinced.  We think the Market is still coming to grips with the economy softening underway.  We don't think you're going to see a pattern like this for more than three consecutive weeks, at best.

    So, stay tuned.   

  • ECONOMIC & MARKET ANALYSIS - February 29, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.5%.

    S&P 500 Index - The Index finished at 1948.05, up 1.6% from last week.

    US Dollar Index - The Index finished at 98.09, up 1.6% from last week.

    Gold - Gold finished at 1236.00, up 2.1% from last week.

    Commodities - Spot Prices finished at 268.13, up 0.5% from last week. 

    Government Bond Index - The Index finished at 2137.67, unchanged from last week.  

    Sales of New Single Family Homes - In January, the value of sales rose 3.6%.

    New Orders for Durable Goods - New Core Orders fell 1.9% in January.

    We get, this week, to talk about one of our "pet" economic indicators: the sales of new single-family homes.  It's a "pet" indicator because it's far more revealing and indicative of both where things are, and where things are going, than most people realize.  For the layperson, it's a just a tremendous way of understanding things.

    January clearly was a pivotal month.  The total value (price x volume) of new homes sold rose, by 3.6%.  But that's the smallest increase in 19 months.  Further, weakness came from both sides, so to speak, for the first time in at least that long.  Yes, prices fell for the second consecutive month.  But, for the first time in at least 19 month, the volume of homes also declined.  That's not a good sign.  Are we surprised?  No, and neither should you be.

    As very valuable as the sales volume of New Orders for Durable Goods is, it's important to understand that there are different ways to understand that data.  The first gross metric tells us the total sales volume of all such orders, and...there's a tiny bit of good news: orders rose by a meager 0.5%.  But that's where the good news ends.  Subtracting out the very volatile sub-category of transportation-related goods, New Orders actually fell--yet again, by 1.9%.  This is the thirteenth consecutive month that this metric has shown a decline.  We also like to take a look at the totality of all non-defense capital spending.  Even though this includes transportation-related spending, it does bear some relevance since it takes out government-related spending on defense.  That figure?  It's a decline of 0.5%.

    Of course, if you listened to the conventional business press this week, you probably just heard that New Orders for Durable Goods gained.  And that, as you are finding out, was a very misleading statement for the press to make.

    Not a great week on the data front.

    As for the Market, you'd be wise to take those rises in the Equity Market and the US Dollar with a figurative grain of salt.  On the other side of the ledger, traders sent Gold up and responded by leaving bond prices essentially unchanged.  When the Stock Market and Dollar rise, but bond traders continue don't loosen their grips on bonds, that is not a moment in which you should casually become exuberant.

    We will talk at length, in a coming issue, about what traders are telling us about their long-term beliefs, through the relationship between commodity prices and bond prices, but for now, we will simply reiterate two things:

    1  At the margin, trust to what bond traders and gold traders tell you over what equity and currency investors are saying

    2. What bond traders and gold traders are indirectly saying right now is that that they are extremely phlegmatic about medium-term economic prospects.

    We are not budging from our forecast.

  • ECONOMIC & MARKET ANALYSIS - March 7, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.5%.

    S&P 500 Index - The Index finished at 1999.99, up 2.7% from last week.

    US Dollar Index - The Index finished at 97.22, down 0.9 from last week.

    Gold - Gold finished at 1242.00, up 0.5% from last week.

    Commodities - Spot Prices finished at 278.51, up 3.9% from last week. 

    Government Bond Index - The Index finished at 2131.35, down 0.3% from last week.  

    Case-Shiller Index - The price index of previously-owned homes rose 5.2% in December.

    Labor - The Employment Rate edged up 0.1 percentage point to 59.7% in February.

    The first thing to remember about the Case-Shiller Price Index is that the data arrives on a bit of a lag; we're just now getting the data from December.  So, in a softening environment it would not be surprising that the most recent releases look good compared to other more recent economic data.  On the other hand, that increase of 5.2% is more than respectable.  Our belief: housing is more of a reactionary indicator than a leading, or even confirming, indicator.  Having said that, we hold to our line that there cannot be any significant economic downturn without a downturn in Housing.  At a minimum, what happens over the next two-to-three months is going to be very interesting.

    We've definitely got a rare week, this week, data-wise.  First you get that nice Housing report.  And now we get to talk about Labor.  It was a surprising report, at least to us.  It was the strongest report in at least four months.  Our broadest measure of the Labor Market improved a little, with the Employment Rate moving up by 0.1 percentage point to 59.7%.  That's a positive thing, and it was strongly reinforced by the number of net newly employed people in February.  That figure came in at 80,000, which is strong and is, in fact, the strongest figure in six months. 

    Does this change our forecast?  Not at all.  Is it an outlier?  Or do we need to be able to explain it?  The short answer is that we believe that ultra-low energy prices are having unusual effects on the economy and this is one area in which we're probably seeing the effect.  Keep in mind that for almost all businesses, the energy costs associated with running that business comprise a significant cost. 

    More importantly, as we've said before, Labor is far more of a lagging, than leading, indicator.  If, over the course of the next six to eight weeks, two or three major leading indicators show turnarounds, then we can be sure this labor result is being informed by positive economic changes.  We'll wait and see, but we're not optimistic.

    What about the Market? Well, it was a mildly interesting week, but not for the reason that a facile look might lead you to think.  Bond prices fell.  And whenever bond traders eschew bonds, that's usually a sign of optimism.  (And the equity market had a nice week, for sure.)  But here's the thing: commodity prices rose, by more than the commensurate drop in bond prices would be. 

    Do the math: even if you believe that commodities fell largely on the US Dollar falling, there are two points to contend with.  The first is that a falling Dollar is never really a sign of a strengthening economy. 

    The second is the more compelling point: when you see bond prices fall by less than the amount by which commodity prices rise, you can be sure that, not only are bond traders not thinking that expansion is around the corner, but that, if anything they are discounting the extent to which that rise in commodities is going to result in inflation.

    Did that sentence sound difficult? Read it again and again 'til it makes sense.  Because the upshot of what the Market said last week, taking everything into account, is that expanding growth is NOT around the corner.

     

  • ECONOMIC & MARKET ANALYSIS - March 21, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.3%.

    S&P 500 Index - The Index finished at 2049.58, up 1.4% from last week.

    US Dollar Index - The Index finished at 95.06, down 1.2% from last week.

    Gold - Gold finished at 1267.00, unchanged from from last week.

    Commodities - Spot Prices finished at 287.92, up 1.1% from last week. 

    Government Bond Index - The Index finished at 2151.09, up 1.0% from last week.  

    Personal Disposable Income - In January, Income rose on a per-capita basis by 2.8%.

    Consumer Spending - In January, Spending rose on a per-capita basis by 3.4%.

    Business Sales - In January, total business sale fell 2.4%.

    Retail Sales - In February, Core Retail Spending rose 2.8%.

    Consumer Prices - In February, Core Inflation rose 1.4%.

    Industrial Production - In February, Output fell 1.3%,

    We routinely report data on Income and Spending even though, while they sound hugely important, they're very much lagging indicators and don't particularly tell you much about where we're going or where we are at the moment, for that matter.  For the record, though, this month, the results we got quite respectable, especially considering that all-in inflation is very low. 

    The real reason we're very interested in Income--and we are very interested in Income--is that we use it to derive what the most recent effective tax rate is.  One of the pillars of our Model is the level and directionality of tax rates.  So, for the most recent month--January--the effective personal tax rate was 12.7%.  The most important thing to know about this rate is that it's the highest since February 2014.  In other words, in case we have to spell it out, you should expect no economic help for the country from this area, at least not in the short term.

    And Retail Spending?  While it seems to have come in below the Government's estimate, that's not really the point, to us.  Just as a reminder, you need to know that we care most about what we call Core Retail Spending, that is, Retail Spending excluding automotive-related sales, which, due to the price ticket of these products, can easily offer a misleading view of the economy.  And the good news?  While the figure looks to be relatively low, there are two points to be made: that increase of 2.8% is in context of very low inflation, thus boosting its value, and it's the highest result since June 2014.

    It's on a one month lag, but Business Sales are mildly important in that it often tips you off as to what business people think about where the economy is going.  In that regard, it's important to note that Sales fell in January, by 2.4%.

    Now, let's take one step back.  The primary reason that Retail Sales figure isn't terrible is because Inflation is subdued.  Well, in fact, in February that situation became more accentuated as Core Inflation rose 1.4%.  What is very meaningful about this is that what you have is a disinflationary situation, as Core Inflation, last month, rose 2.1%.  This is particularly interesting--and arguably, disturbing--when you consider that while Energy prices fell 6.3% in February that decline contrasts with a decline of 11.6% in January.

    In other words, Energy prices are less disinflationary, and yet...Core Inflation is demonstrating a disinflationary trend.

    All of this is critically important to us because one of the cornerstones of our most recent economic forecast was that demand was softening in a big way.  And here we have demonstrative evidence of that.

    Now, on to the marquee data of the month: Industrial Production

    Let's remember that Industrial Production is a terrific denotative descriptor of the current environment.  And the latest result?  It's directly describing a turndown, a softening that we forecast several months ago.  While we have said recently that there's a small chance that we could be looking at an upturn later this year, even if that's true, we still have to work through the softening. And no, it's not over.

    There are a few very specific things we want to emphasize about this month's result.

    The first thing to note about Output is, of course, that it was an actual decline.

    The second thing to observe is that the most recent output level is the lowest since January 2015.

    The third thing to know is how Capacity (or Factory) Utilization factors into the equation.  (Capacity Utilization is our single best proxy for measuring both demand and inflationary pressure.)

    What's the most recent figure is telling us?  Inflationary pressure is not remotely a problem, as Utilization declined 2.5% in February.

    The upshot?  The economic softening we had forecast may be stabilizing, but for now, we're square in the middle of it.

    And the Market...what did it say/think?  There is really only one significant take-away from the Market this week.  Keeping in mind that it was this past week that the Federal Reserve announced that it was leaving interest rates unchanged for the moment, bond prices rose--not an unsurprising development when/if the Market believes that the trend in monetary policy is toward more accommodation, even as the Commodity Spot Index rose.  It was a minor swing, but...is it intuitive to you that bond prices would rise (or that bond yields would fall) when commodity prices rise? 

    Of course not.  And that right there is the take-away for the week.  The Market is not very sanguine about economic prospects at the moment.

    We don't put a lot of stock in crowd psychology, but you should always bet against bond traders....at your peril.

     

  • ECONOMIC & MARKET ANALYSIS - March 28, 2016

    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 2035.94, down 0.7% from last week.

    US Dollar Index - The Index finished at 96.13, up 1.1% from last week.

    Gold - Gold finished at 1267.00, unchanged from from last week.

    Commodities - Spot Prices finished at 282.56, down 1.19 from last week. 

    Government Bond Index - The Index finished at 2151.81, unchanged from last week.  

    Sales of New Single-Family Homes - In February, the total value of sales fell 0.9%.

    Durable Goods Orders - In February, the value of new orders for core durable goods fell 0.8%.

    Regular readers know that while there are sexier economic indicators, we're very fond of the indicator that is created by multiplying the volume of new single-family homes that are sold by their prices, i.e. the value of new single-family homes sold.  We have found that it is surprisingly correlative with where the economy is going in the very short term.

    In February, the total value of new single family homes that were sold fell.  The arithmetic behind it is simple:  it fell because the average price fell 1.8% and volume dropped 2.4%.  This is the first month in a very long time that both components fell.  By now, we think that most observers have come to reluctantly acknowledge what we forecast in late fall: that the economy is now going through a noticeable softening.  This is just one more tangible demonstration of this. 

    And while the sales volume of new orders for core durable goods fell in February, the data is very interesting.  This figure fell 0.8%.  This is the fourteenth consecutive month that Core Orders fell.  Thus, it dovetails with what we'd expect. However, it's also the smallest decline since February 2015 and when we look at Total Durable Goods Orders, we find that they actually rose by 1.1%.

    As we we have hinted, we think there's a possibility that the trough in the softening may be reaching its nadir shortly and that things may be gently turning around shortly, thus making the February data directionally informative.

    And what about the Market?  The first thing to observe is that, since it was a holiday week, the market data is somewhat unreliable in terms of providing a solid wall of information around investors' sentiment.  But, such as it is, it is interesting.

    Let's try to do the math...

    Gold fell...appreciably.  Yet the Dollar was up just slightly.  Right there you have a bit of a disconnect.  Yes, Gold and the Dollar are inversely correlated, but...there should not be a large difference in the size of the direction each moves in.  So what's going on?

    Then we notice that bond prices were, for all intents and purposes, unchanged.  Dollar up and bond prices unchanged?  It starts to sound as if the bond market does not have confidence that the Dollar is rising on confidence in economic growth.  And lastly, stock prices fell.  Again, it sounds like the market is not confident that a rising Dollar is related to an expanding economy that will, in turn, reward the stock market.

    Please, think about this for a minute.  What the Market is saying is that it has faith that the Central Bank has a bias in favor of raising interest rates, thus the hit to Gold (which tends to be the safe haven in times of the currency being diluted), but that that it believes the economy cannot sustain such monetary tightening, hence the hit to the stock market and no increase in the yield that bond investors are demanding.

    Did that sound confusing?  Read it again.  Does it sound at odds with our early belief that there's a possibility that the economy could exhibit a turnaround shortly?  It sure sounds that way, but...let's remember:  (1) it's only one week's data and (2) we are at least three weeks away from actually altering our forecast. 

    It is not very glamorous to not make definitive an thunder-like pronouncement every week or every month.  We like to get it right, and while we eagerly issue a forecast when the data consistently point in one direction, that, itself, is the point.  Our prevailing forecast stays in place until the data solidly point in another direction.

    We hope you turn to us, not for histrionically-structured commentary but for truth and accuracy.  At least, that's what we hope.


  • ECONOMIC & MARKET ANALYSIS - April 4, 2016

    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 2072.78, up 1.8% from last week.

    US Dollar Index - The Index finished at 94.61, down 1.6% from last week.

    Gold - Gold finished at 1237.00, up 1.3% from from last week.

    Commodities - Spot Prices finished at 277.89, down 1.7% from last week. 

    Government Bond Index - The Index finished at 2165.82, up 0.7% from last week.  

    Employment - The Employment Rate remained unchanged at 59.7% in March.

    Disposable Personal Income - In February, on a per-capita basis, DPI rose 2.8%.

    Consumer Spending - In February, on a per-capita basis, Spending rose 2.8%.

    Energy Production and Consumption - In December the ratio of Production to Consumption was unchanged at 91.0%.

    Let's talk about the Labor picture, especially since it's the brightest spot this week and since it's an indicator that is widely digested and understood, especially by the Consumer, as being directly meaningful to understanding economic direction.

    In March, the Employment Rate was unchanged over February, at 59.7%.  How to put that figure in perspective?  For one, we've come a long way since the low point of 58.2% that the Employment Rate fell to in the wake of the Financial Crisis.  That's a rise of 1.7 percentage points.  On the other hand, our benchmark for a healthy economy is 62.0%.  So, we have a long way to go. 

    However, the good news is that the Number of Net Newly Employed Persons in March grew at a very healthy pace....by 128,000.  That is a pretty strong number.  What does it mean?  It does mean something, especially when the figure is this strong.  However, alone, it has limited meaning since it doesn't tell the whole picture.  In context of income earned and money spent, though, it begins to take on greater meaning.

    So, the first thing to tell you about Income and Spending in February is that both rose 2.8%, which is fairly respectable given how low Inflation is at the moment, but...it's not a strong figure, either.  The second thing to know is that the relationship between Spending and Income is right in the range that's expected.  Yes, one of the regular things we look for is the ratio of Spending to Income. If that ratio starts to get too high, we know that consumers are becoming financially stressed. The takeaway here?  While that newly employed figure is good, it's not really translating to the rise in income you want to get.

    A newer metric that we began studying and incorporating into our Model last year is the relationship between production and consumption of energy...as well as the direction in the consumption of energy.  While it's true that there have been strides made in energy efficiency, our belief is that, for the most part, energy consumption tends to correlate with economic growth.

    The first thing we want to tell you is that the ratio of production (of all sources of energy), domestically, to consumption remained unchanged in December, from November, at 91.0%.  Very plainly put, this is a very high ratio and is signaling to us that you should not probably expect wholesale price increases in Crude Oil or other energy sources anytime soon.

    The other thing to observe is that, while the production of all energy declined...by 3.3%, consumption declined by a greater amount, by 4.4%.

    In other words, this indicator is not pointing to economic expansion 

    All around, a very average sort of week.

    Now then, regular readers know that it's silly to expect the market data that concludes each trading week to equally bear insight every week.  But some weeks are interesting.  This is one of those weeks.

    We're going to try to connect the dots for you, slowly.

    First off, you'll notice that the price of Gold rose while the Dollar fell.  Nothing surprising about that.  Prices of commodities generally correlate inversely with Dollar movement, other things being equal.  But, you will notice that while Gold rose, Commodities, in aggregate fell.

    Commodities and the Dollar fall together?  That's a combination that should be putting you on notice that traders are strongly phlegmatic (at least for the moment) about economic growth.

    The other thing we want to draw your attention to is the fact that Gold did rise.  If you're a long-time reader, you probably have an understanding of why we believe Gold rose while Commodities, in aggregate, fell.  If you don't, we suggest you read the section under Hot Topics, on this site, that treats the subject of Gold, which many flatter themselves to think is not a meaningful investment class because it doesn't directly generate cash flow.

    For the moment, here's one response to those who spout the facile reasoning that Gold doesn't generate cash flow: for several months now, the 10-year bonds of several governments have been yielding negative interest rates. 

    That's right.  Not only have the instruments that bond traders have been buying yielding zero cash flow, but they've been yielding negative cash flow, that is, the traders receive less in principal at the end of the investment period than they put in, at the start of the period.  Why are traders willing to accept a deterioration in their principal?

    Still think that the argument that an investment class doesn't yield cash flow, is a meaningful argument?

  • ECONOMIC & MARKET ANALYSIS - April 18, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2080.73, up 1.6% from last week.

    US Dollar Index - The Index finished at 94.71, up 0.6% from last week.

    Gold - Gold finished at 1233.85, down 0.7% from last week.

    Commodities - Spot Prices finished at 291.99, up 3.3% from last week. 

    Government Bond Index - The Index finished at 2174.26, up 0.7% from last week.  

    Retail Sales - Core Retail Sales rose 3.0% in March. 

    Business Sales - Business Sales fell 1.4% in February.

    Inflation - In March, Core Inflation rose 2.2%.

    Industrial Production - In March, Output fell 2.6%.

    How about a bright spot: retail sales. It's not really a leading indicator, but it does display some multiplicative properties for the economy.  And it's a moderately good number.  At 3.0%, it's not robust, but considering that Inflation is very low, it's not so bad.  To give you more, that 3.0% is the highest percentage increase since September 2013 and it's the fifth consecutive monthly increase.  So....not bad.

    Given that the data is reported on a one-month lag, maybe when the data comes out for March it will show something brighter, but Business Sales for February fell 1.4% and is certainly consistent with the general theme that overall demand is weak.  Businesses don't cut back on their purchasing of raw materials when they expect conditions to improve.

    Now, let's talk about an interesting situation that's developing, which is the divergence in direction between Industrial Production and Inflation.

    March was the seventh consecutive month that Industrial Output declined.  It's difficult to not view that fact as significant.  But here's the thing: while all-in inflation rose a scant 0.8%, reflecting weak energy prices, core inflation (which strips out food and energy) rose a moderately strong 2.2%.

    No one really minds rising prices as much when the economy is expanding.  But when it's contracting? 

    Among our key indicators for trajectory of demand is Capacity Utilization, and March is the 12th consecutive month that it declined.  The Index now stands at 74.83, down from 77.90 the same time last year.  Rising inflation in the face of declining demand is not unheard of, but it is very unusual, and our money says that, based on what Capacity Utilization is telling us, you should expect to see that result for core inflation moderate downward in coming months.  Bear in mind that disinflation may feel good in the short term, but it has serious consequences for capital formation and for rising real interest rates that don't benefit business formation or the stock market.

    With regard to reading the Market's tea leaves, there's just one clear take-away form this week: and that's that commodities rose even as the Dollar rose.  And that means one thing: investors were feeling mildly optimistic. 

    You can guess our reaction to investors' one-week optimism...simply, it does not trump important and hard economic data like declining output and declining capacity utilization.  You can bet that we're betting that the fact of fall-out from these indicators will make itself felt to investors in short order.

    The Global Scorecard will be updated next week.

  • ECONOMIC & MARKET ANALYSIS - April 25, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2091.58, up 0.5% from last week.

    US Dollar Index - The Index finished at 95.12, up 0.4% from last week.

    Gold - Gold finished at 1249.25, up 1.2% from last week.

    Commodities - Spot Prices finished at 291.99, up 3.3% from last week. 

    Government Bond Index - The Index finished at 2168.75, down 0.3% from last week.  

    This is the second week in three weeks during which no major economic data came out.  Normally, for such a week we don't update this column, but...the week-ending market data was particularly interesting, so we want to take a minute to talk about it and what investors are indirectly saying.

    The first thing to notice about the data is that the U.S. Government Bond Price Index fell.  This is completely consistent with the fact that commodities' prices rose...keep in mind that rising bond yields naturally follow a pattern of rising prices.  It's quite natural for investors to demand more yield as prices for raw materials rise, as these are a key input to Inflation.

    However, where the data gets interesting is that the U.S. Dollar AND Gold also rose. 

    Now, if Gold rose just a smidgen that fact would be easily dismissed as not necessarily meaningful, but, it rose a healthy 1.2%.  And, the point is that Gold rose even on the heels of a higher Dollar.  And, lastly, we need to point out that bond yields rose in the face of that higher Dollar. 

    All of this is suggests a pattern of investors feeling sanguine about economic prospects.  If the Dollar had fallen, it would be too easy to dismiss the rise in commodity prices and the rise in bond yield as fallout from a weaker Dollar, which could naturally be expected to result in higher inflation.

    Yes, the tea leaves are saying, this week, that investors finished the week feeling generally positive.

    We have said this before--and we will repeat it many times along the way: over the course of three-to-six weeks, investors very rarely get the big picture wrong, that is, assuming you can interpret the signs well.

    Does that mean that we are optimistic?  Not necessarily.  While investors almost always get the big picture right over the course of, roughly three-to-six weeks, they frequently will get it wrong within the space of a week or two.  You need to see a trend.  And you only see a trend with at least three weeks' worth of data.

    In other words, don't be like the pop press and over-extrapolate from too little data.

    The Global Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - May 2, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 1.8%.

    S&P 500 Index - The Index finished at 2065.30, down 1.3% from last week.

    US Dollar Index - The Index finished at 93.02, down 2.2% from last week.

    Gold - Gold finished at 1256.00, up 0.5% from last week.

    Commodities - Spot Prices finished at 307.17, up 1.5% from last week. 

    Government Bond Index - The Index finished at 2174.50, up 0.3% from last week.  

    Sales of New Single-Family Homes - The value of new homes rose 0.9% in March.

    Durable Goods Orders - In March, Core Durable Goods Orders were flat.

    Hopefully, by now you're aware that we've long said that the directionality in the value of sales of new single-family homes is a pretty strong short-term leading indicator of where the economy is going.  No, it's not a strong, early leading indicator, but it does correlate very strongly with where things are headed in the short term.

    In March, we had an increase in value (number of sales x mean price) of 0.9%.  This is better than last month, but it is very, very modest.  Dissecting the data we find that the number of properties sold rose 1.6%.  However, this is the smallest figure since July 2014.  And, the mean price?  It fell 0.2%, and that's the second consecutive month that it fell.

    Regular readers know that the direction in which New Orders for Durable Goods are heading is a pretty significant leading economic indicator.  This is an indicator that has been declining for many consecutive months.  Not surprisingly to us, dovetailing with our forecast for things to stabilize, the Core figure came in flat.  It's not as meaningful, but Total Orders (this includes transportation-related products such as aircraft, demand for which is highly volatile) rose a modest 1.3%.

    Now, let's take a quick look at the market.  What happened is actually mildly interesting.  Commodities rose, but the Dollar fell, so that makes sense, right? 

    Here's the thing: bond prices also rose, and that's not remotely intuitive in the context of a strengthening economy.  Even if the bond market believed that real growth is not going to be there, the fact of a falling Dollar should suggest the potential for rising inflation.  Thus, why would the bond market send bond yields down?

    Exactly.  This week's market data is a classic example of a market that is turning strongly phlegmatic on the economy's prospects.

     

  • ECONOMIC & MARKET ANALYSIS - May 9, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.8%.

    S&P 500 Index - The Index finished at 2057.14, down 0.4% from last week.

    US Dollar Index - The Index finished at 93.83, up 0.9% from last week.

    Gold - Gold finished at 1256.00, up 0.5% from last week.

    Commodities - Spot Prices finished at 299.45, down 2.5% from last week. 

    Government Bond Index - The Index finished at 2185.84, up 0.5% from last week.  

    Energy Consumption and Production - The ratio of consumption to production fell to 90.6% from 91.0% in March.

    Labor - The Employment Rate rose 0.1 percentage point to 59.8%.

    Durable Goods Orders - In March, Core Durable Goods Orders were flat.

    Let's start with some good news.  And that would be the fact that the Labor picture continued to improve in April, as demonstrated by the most recent labor data.  The Number of Net Newly Employed rose a strong 168,000 (the rank of the employed rising 1.9% on an annualized basis), and the Employment Rate now stands at 59.8%, up 0.1 percentage point from March.

    The Employment Rate is still very low, but at least the directionality is very good.

    Next, let's talk about an indicator that is very important to us: the ratio of energy production to consumption.  This metric takes into account all domestic energy sources and uses.  The data is reported on a lag of several months, with January's data is just now available. 

    And what does it show?  First off, it's the third consecutive month in which energy consumption declined.  Secondly, the ratio of production to consumption declined to 90.6% from 91.0%.  The present ratio is tied for being the lowest since March 2015.

    This is a very compelling indicator, and we urge our readers to take this information very seriously.  Declining energy consumption?  Especially coupled with declining consumption relative to production?  This data tells you two things:

    1.  Demand is dropping, suggesting a softening economy

    2.  All other things being equal, consumption is falling faster than production, suggesting disinflationary pressures

    All of this reinforces what we think is the truth: while many observers are predicting a resurgence of rising and strong inflation, we don't see it on the horizon. 

    And of course, that, in turn, suggests that economic expansion is not close to being on the horizon. 

    Last week, we reported the latest figures for Durable Goods Orders.  This week, we want to segment that data a little more.  As is our custom, we stripped out transportation-related goods to get at what we call "Core Durable Goods."  This week, we stripped out all transportation- and defense-related orders.  The result was a 1.0% decline in new orders year-over-year.  In other words, while it's not hard for us to have already concluded that the great softening that has been upon us has actually started to level out, it's no more than a leveling out.  Weakness in Core Demand for Durable Goods is simply not compatible with the idea that the economy is on a sustainable growth direction. 

    As is our custom, let's take a quick look at the tea leaves left by the Market.  The story, this past week, is not very different from last week. 

    The first thing to note is that the aggregate price index for commodities fell.  Now, given that the Dollar strengthened, that's not necessarily surprising.  But notice the difference in how they moved.  The Dollar rose 0.9%, but commodities fell a fairly robust 2.5%.  That is a point of concern, and could be a sign that investors see demand weakening (remember our point about demand for energy?).

    Next, let's focus on the fact that the Dollar strengthened.  If the Dollar rose on investors' optimism over the US economy, you would expect the yield on long-term bonds to rise, as a strengthening economy tends to result in rising inflation, which weakens the value of fixed-income instruments.  But...they didn't.  The yield on the 10-year bond...rose.  What does that tell you?  Investors' demand for fixed income actually rose. 

    So, yes, the Labor report this week was pretty darn good.  But remember: the employment rate is still quite low, and perhaps more importantly, that report on energy consumption and its production should be viewed as a far more potent indicator.  And it appears that investors agree.

  • ECONOMIC & MARKET ANALYSIS - May 16, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 4.0%.

    S&P 500 Index - The Index finished at 2046.61, down 0.5% from last week.

    US Dollar Index - The Index finished at 94.62, up 0.8% from last week.

    Gold - Gold finished at 1279.25, down 0.1% from last week.

    Commodities - Spot Prices finished at 307.24, up 2.6% from last week. 

    Government Bond Index - The Index finished at 2183.12, down 0.1% from last week.  

    Retail Sales - Core Retail Sales, in April, rose 4.1%.

    It was a week of near complete paucity with regard to important economic data, the one exception being the report for Retail Sales.

    It was a bright report.  Core Sales (those excluding automotive-related products) rose a moderate 4.1%, which though moderate with regard to being a display of economic strength, is the strongest result since December 2012.

    If you're looking to skew your perspective with regard to how well the economy is performing, that would be a decent place to start. 

    However, as we often feel compelled to remind, this kind of economic indicator, while robustly indicative of current conditions, is not particularly strong as a forecasting tool. 

    And, in this regard, please remember that we have said, for at least four weeks now, that important forward-looking data has been suggesting to us that the softening that had set it in was about to stabilize.  In other words, do not expect too much from this one data point.

    We urge you to read the update to the Editor's Letter next week.  There are very preliminary signs that a further deterioration in the economy may be in store in the latter part of the year and the early part of this year.  Next week's Letter will be the start of our addressing what we think is going on.

    And, in that respect, this week's Market "tea leaves" are falling in line.  Where do we start to understand what happened this week?  Well, let's start with the fact that the Dollar rose and that Commodities rose, as well.  Other things being equal, this is not an intuitive turn of events, so when both of these things happen, it usually signals either that the economy is gaining strength and demonstrating it in the way of increasing demand for commodities OR that, if demand is not growing, that supply is being constrained.  And that's precisely what we think happened this week.  This turn of events is not about economic optimism.  How do we know?

    There are two key points that reinforce our understanding.

    The first is that the equity market fell.

    The second, the more compelling argument, is that even though the Government Bond Price Index fell (suggesting investors expect interest rates to rise on greater economic activity), which is consistent with optimism, the fact is that the Price fell a paltry 0.1%. 

    On the other hand, the yield on the 10-year government bond?  That fell, by almost 10 basis points.  It would be bad enough if the yield remained the same in the face of rising commodities prices, but for the yield to fall?  In other words, demand for fixed income instruments to grew in the face of growing commodities prices.  And that should not be intuitive to anyone.

    That is not a picture of a bond market that is remotely sanguine about economic prospects.

  • ECONOMIC & MARKET ANALYSIS - May 23, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 2.8%.

    S&P 500 Index - The Index finished at 2052.32, up 0.3% from last week.

    US Dollar Index - The Index finished at 95.22, up 0.7% from last week.

    Gold - Gold finished at 1246.25, down 2.6%, down 2.6% from last week.

    Commodities - Spot Prices finished at 367.30, up 2.1%, up 2.6% from last week. 

    Government Bond Index - The Index finished at 2172.71, down 0.5% from last week.  

    Industrial Production - Output declined 1.6% in April. 

    Factory Utilization - Utilization fell 2.7% in April.

    Consumer Prices - In April, Core Inflation rose at an annualized 2.2% pace.

    It's simply the most important economic indicator in terms of denoting the current economic state, or rather two taken together, do:  Industrial Output and Factory Utilization.  And the result gives lie to the truth that the economy is continuing to expand.

    Let's just get to the numbers.

    Yes, on a 12-month rolling basis, and averaged over three months, Output fell 1.6% in April.  Is that methodology nearly as opaque as the government's methodology for seasonal adjustment?  No, but it's still not as transparent as it might need to be in order to make our point.  And here's the point:  unadjusted for anything, year-over-year, Output declined 0.7%.  That's simply a naked fact.  And, going back to our rolling 12-month average, it's the seventh consecutive month that the figure fell.

    So, on to Capacity (or Factory) Utilization. This indicator is terribly important; it tells us, based on where the figure comes in and its trend, how strong demand is.  That, in turn, gives us abundant information about current economic activity, of course, as well some strong insight into inflationary trends.

    And the result:  very much as we expected.

    First off, on a 12-month rolling basis (and yes, averaged over three months), Utilization fell...by 2.7%.  And, yes, the result on a naked year-over-year basis, is directionally consistent, falling 2.0%.  And where did the absolute figure come in, on the Index?  75.97 (again, that's the 12-month rolling average).  Not only is that barely a moderate figure and therefore not inflationary, it's the lowest result since October 2011.  So, you may want to think that over for a good while.

    Now, let's talk about Inflation.  The all-in figure showed an increase of 0.7%, which is quite modest, of course.  And of course, the smallness of the increase is due to the continued low level of energy prices, more than anything else.  It is notable that Core Inflation (which strips out Food and Energy) grew at a fairly strong pace of 2.2%. 

    Does that result give fuel to the speculation that the Fed will be tightening monetary policy, i.e. raising interest rates?

    Don't bet on it.  Combined with the facts of declines in both Industrial Production and Capacity Utilization, we think it's highly unlikely.

    And the Market?  It was a mess this week.  On the surface, a smart casual observer might conclude that the Market's feeling very optimistic.  For one thing, the Dollar rose 0.7%.  Then Commodities rose 2.1%, into a rising Dollar.  Finally, bonds sold off in a fairly big way: the yield on the government's 10-year bond jumped from 1.70% to 1.84%.

    However, stocks rose a meager 0.3%.  And here's something else: for the week ending May 14, the four-week moving average of initial jobless claims reached the highest level since the week ending February 6. 

    The key to understanding this past week's movements is to remember that the Federal Reserve made a major announcement in which it fueled speculation that it would raise short-interest rates in June.

    Our opinion: noise out of the Fed is the signal factor around which the Market reacted.  Not only do we think that the Market over-reacted, we think that there will be no such rate hike.  Bond investors are very smart.  We don't think they need getting to June to know that there won't be a rate hike.  As we've said before, we think bond investors sometimes get it wrong, so to speak, over the course of a three-week period.  They never get it wrong over the course of, say, four to six weeks.  We think they'll be changing their tune shortly.  What that means is that we think is bond prices that will move back up, and a Dollar that will move back down at least a smidgen.

    If we're wrong, it means that you're among those who believe that a rate hike is, in fact, in the works.  If you believe that, you need to re-read the first two-thirds of this column as well as the current Editor's Letter.

    The Global Scorecard will be updated next week.

     

  • ECONOMIC & MARKET ANALYSIS - June 6, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2099.13, unchanged from 2.3% from last week.

    US Dollar Index - The Index finished at 93.87, down 1.9% from last week.

    Gold - Gold finished at 1212.40, down 0.9 from last week.

    Commodities - Spot Prices finished at 374.02, up 0.6% from last week. 

    Government Bond Index - The Index finished at 2181.32, up 0.2% from last week.  

    Case-Shiller Housing Price Index - The National Index rose 5.1% in April. 

    Disposable Personal Income - On a per-capita basis, DPI, in April rose 3.5%.

    Consumer Spending - On a per-capita basis, Consumer Spending, April, rose 3.0%. 

    Employment - The Employment Index remained unchanged in May at 59.8%.

    This month, the results from the Case-Shiller Housing Price Index will likely be most relevant to readers in the context of a broader assessment of the Housing Market.  We suggest you take a look at the Investment Outlook for more on this.   For what it's worth--and it's worth something, certainly--the housing market continues to exhibit moderate strength.  But we do have some concerns about the Housing Sector, and they're articulated in the Investment Outlook column.

    Now, those figures on income and spending, this month, are pretty good.  And they're good from two perspectives.  First, even without taking inflation into account, they're quite respectable.  That 3.5% annualized growth in Disposable Personal Income is not robust, but it is moderately good and is tied for being the highest result since October 2013. 

    And Consumer Spending?  That 3.0% result is the highest since April 2012.

    Add in the fact that Inflation is somewhat modest and the figures look even better.

    But please remember that income and spending are not leading indicators. 

    Here's something to mull over, however: one of the most telling signs of the likelihood that the economy is going to grow strongly in the medium term is the ratio of consumers' spending to their income.  That's a ratio that, to see rough stability we want to see north of 92.0%...and really 92.5% to expect a continuation of the status quo.

    Where is that proportion right now?  It's at 91.4%.  That's not indicative of consumers being fearful or a severe cut-back in spending, but it shows that consumers are being cautious and are holding back a little.  As such, it also tells you something about inflationary pressure: inflationary pressure, from the standpoint of consumers' income growth and spending, is not likely to present a problem anytime soon.

    Now we have a bit of a surprise for you.  If you paid any attention to the conventional press late in the week, you're probably aware that the popular reaction to the Labor Report was one of disappointment.

    The most important thing to know about that report is that the results were not bad at all.  Were they very strong?  No, but they were more than respectable.

    Here's what happened:  the bare fact is that the Number of Net Newly Employed rose 173,000.  That's a pretty strong figure.  However, what happened is that the Employment Rate did not move.  Simply from a mathematical perspective, the reason for that is that, even as many more people became employed, the population surged, as well, thus offsetting the number of people who became employed.  The Employment Rate is, as we've often said, far more meaningful than the Unemployment Rate, which doesn't take into account people who drop out of the Labor Force.  But the most important way to understand it is that, regardless of how positively the ranks of the employed change, the Employment Rate is a very good gauge of pressure put on the system and the likelihood that an economic boom is underway (or not). We have long held that the threshold that divides a healthy economy from one that is not is a figure of roughly 62.0% for the Employment Rate.  Below that it's very hard to talk sensibly about inflationary pressures from wages or about a rapidly expanding economy.

    Now, what of the Market's doings?  If you've been reading the last several weeks, you know that we've gently opined that the Market has been in a bit of confusion.  Of course we look primarily to the bond market, and THIS is the week that bond traders seemed to have finally found their mental footing, so to speak.

    Commodities rose and the Dollar fell.  Not much to write about there.  The S&P 500 ended the week unchanged....in the face of the US Government Bond Index having rise 0.2%.  And...more significantly, the yield on the 10 Year Government Bond fell a whopping 15 basis points. 

    We have been expecting this "correction," and it has (finally) come.  Please know that the week-ending yield of 1.70% on the 10-Year Government Bond is, except for the week ending May 13, just about the lowest it's been in five years, and in the face of Crude Oil having regained a bit of its footing, having risen almost $15 a barrel over the past three months. 

    We have long told you to watch the relationship between bond yields and commodities prices.

    What the bond market is telling you, at least for the moment, that it is, if anything, phlegmatic about forward-looking prospects for growth.

    We will have a major forecast announcement sometime in the next six weeks (at the outside) and you can expect that developments in the credit markets will significantly inform that forecast.

  • ECONOMIC & MARKET ANALYSIS - May 30, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2099.06, up 2.3% from last week.

    US Dollar Index - The Index finished at 95.70, up 0.5% from last week.

    Gold - Gold finished at 1223.85, down 2.6%, down 1.8% from last week.

    Commodities - Spot Prices finished at 371.88, up 2.1%, up 1.2% from last week. 

    Government Bond Index - The Index finished at 2176.48, up 0.2% from last week.  

    Sales of New Single-Family Homes - The value of new homes sold rose 19.1% in April.

    Durable Goods Orders - New core orders fell 1.5% in April. 

    It's simply one of the oddest results: when you multiply the volume of new homes sold by the mean price of those homes, the value of those homes, in April, jumped.  That's the only word for it:  odd.  That figure rose a whopping 19.1%. 

    This is an indicator we look to, generally, as confirming what we already believe--from other indicators--about where the economy is and is headed in the immediate term.  We are not, though, going to read too much into a one-month jump like this.  Besides, there may be a deeper story going on here.

    Here's the real point: to anyone who's been following the housing market, it will not come as a surprise to be told that supply of homes for sale is quite low relative to demand.  This means that this development should have been translating to much greater upward pressure on prices for the last several months.  And guess what?  Nearly all of that tremendous jump in home value in April comes, not from volume of homes sold, but from...yes, a tremendous increase in the mean price. 

    In case we have to connect the dots for you: other things being equal, reduced supply of homes for sale generally drives prices higher.

    So, yes, this month's data point for this indicator is less about the economy and where it's headed than being a confirming commentary on the housing market.  (Oh and yes, we have a colleague who writes for us who has a real estate practice so that's a help.)

    The other big data point for the week is New Orders for Durable Goods, of course.  And, it's the 16th consecutive month that new orders for core good (ex-transportation) fell.  How can we put this in context of where we're headed?  The first thing to say is that the pattern certainly makes sense of where the economy has been going the last nine months.  But the second thing to say is that the decline appears to be getting smaller. 

    There is a 50/50 chance that that stabilization we have been talking about is going to translate to a very modest pick-up in the next few months.   Don't let the Editor's Letter confuse you in this regard.  A very modest pick-up in the next few months is not the same as a robustly expanding economy with the realistic expectation of rising interest rates.  What we're saying, if it's not clear, is that we're actually expecting small continued improvement in spending on durable goods over the next few months.  Please do not neglect the word, "small."

    And the Market?  It was truly a fascinating week.  You will recall that we have told you that bond traders will sometimes get the picture wrong over the course of three to five weeks.  But they never get it wrong over six to eight weeks.  And so...where are we?

    Well, equities, commodities, and the Dollar all rose.  That sounds like the Market thinks things are picking up.  Now let's see what the bond market did:  the yield on the 10-year bond was essentially unchanged week over week.  (In point of fact it rose 1 basis point.  That's equal to 0.01%.)  Based on that information, what do you think bond traders made of the week?

    Exactly.  You do the math.  Rising commodities prices, especially on a higher Dollar, should mean increased economic activity, which should translate to higher inflation and the expectation of rising interest rates.  Does it sound to like the bond market is expecting higher interest rates?

    It sure doesn't...not to us.

  • ECONOMIC & MARKET ANALYSIS - June 13, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.7%.

    S&P 500 Index - The Index finished at 2096.07, down 0.1% from last week.

    US Dollar Index - The Index finished at 94.68, up 0.8% from last week.

    Gold - Gold finished at 1263.90, up 4.2% from last week.

    Commodities - The Index finished at 378.76, up 1.3% from last week. 

    10-Year Government Bond Yield - Yield fell 3.3% to 1.64% from last week.  

    Capital Spending - Capital Spending fell 9.2% in April.  

    Deposits/Money Supply - The ratio of deposits to the total money supply fell 0.7% year-over-year in April. 

    It's easily arguable that, among all of the economic indicators we study and report, the one that has the most immediacy in terms of both understandability to the average reader and to informing future economic conditions is...Capital Spending.

    The indicator is precisely what it sounds like.  We track the government's reporting of all spending on non-defense capital goods.  It's a powerful measure.  Nothing at all correlates with medium-term economic trajectory more than capital investment. 

    And, in April, Capital Spending fell....for the 17th consecutive month.  You'll remember that we reported, back in mid-fall of last year, that we were forecasting a significant economic softening.  At this point, it's hardly remotely arguable that that softening hasn't taken place.  And, as long as Capital Spending continues to decline, which it has, the outlook is unlikely to brighten. 

    A few months back, we talked about the relationship in growth between bank deposits and M2, which is the total supply of all money in banks (note that we are talking solely about federally-chartered banks).

    As you might guess, that ratio should stay pretty much in close lock-step.  The fact that it isn't always in lock-step is precisely the point.

    In April, that ratio fell for the fifth consecutive month.  In other words, M2 grew faster than deposits grew.  The standard--and most important--way to understand this is that, even as the Fed grows the money supply, consumers are withdrawing cash from banks.

    To really underline the fact that there's a trend here that is worth talking about, not only was April the fifth consecutive month that the ratio declined, the ratio is now the lowest it's been since March 2014. 

    In other words, people are taking their money out of banks at a fairly consistent clip.  And yes, this is one of those developments that the conventional press is not likely to report.   And yes, you are absolutely correct in your next assumption: to the extent that deposits fall, everything else being equal, that development puts pressure on banks' liquidity and risk.

    Now let's talk about the Market and how it ended the week.  You may remember that we have said, repeatedly, that while the Bond Market may get temporarily confused from time to time, it is never so for longer than roughly six weeks.  And this is the week that it really got its footing.

    First off, let's observe that the Equity Market was essentially unchanged week over week.  Then we notice that the Dollar did rise, about 0.8%.  And yes, it's true that, while in boom times, so to speak, the Dollar and Equities tend to move together, it's also true that, in times of fundamental weakness, they are inversely correlated, primarily because a stronger Dollar tends to make U.S. exports more expensive to foreign buyers, thus putting earnings pressure on multinational companies.  But that's not where the week got interesting.

    You'll notice that Commodities rose...1.3% despite the fact that the Dollar also rose.  Again, very unintuitive, unless we're walking into an expanding economy in which case it makes sense to see Commodities and the Dollar rise together.  But then you'd also expect to see the Stock Market perform well, as well.

    So that theory isn't right, is it?

    And then you notice that Gold rose a very strong 4.2%, and especially with noting that Crude Oil was essentially unchanged week over week (Crude Oil is the strongest input to the Commodities Index) and you realize that the fact of Commodities rising is not about strengthening demand, but traders' fears of a weakening economy and the possibility of currency dilution. 

    The icing on the cake  The 10-year yield on the U.S. Government Bond fell to 1.64%.  To put this in perspective, understand that this contrasts with 1.84% just three weeks ago.  During that time, Crude Oil has been basically unchanged in price, and Commodities in aggregate rose roughly $10.  Yet traders are abundantly unafraid of Inflation and are clamoring to buy 10-Year Bonds. 

    For now, our big forecast that the landscape is set for short-term stabilizing is still roughly true.  However, we have a strong suspicion that we will be in a position to offer an updated and dramatically different forecast before Labor Day.

    Stay tuned.

  • ECONOMIC & MARKET ANALYSIS - June 20, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2071.22, down 1.2% from last week.

    US Dollar Index - The Index finished at 94.15, down 0.5% from last week.

    Gold - Gold finished at 1310.75, up 3.7% from last week.

    Commodities - The Index finished at 376.85, down 0.5% from last week. 

    10-Year Government Bond Yield - Yield fell 1.9% to 1.61% from last week.  

    Retail Sales - In May, Core Retail Sales rose 2.9%.

    Business Sales - In April, Business Sales fell 0.5%.

    Consumer Prices - In May, Prices rose at an annual 0.7% rate.

    Industrial Production - In May, Output fell 1.6%.

    It's somewhat intuitive that anything related to consumer spending is well correlated--almost by definition--with the current state of the economy, so while Retail Sales doesn't tell us a lot about the future, it does tell us a lot about what's going on now.  And for the last month, Core Retail Sales came in barely respectably this month, up 2.9%.  It's true that Inflation has been muted, but even so this is not a level we associate with expansion. 

    And it was the fourteenth consecutive month that Business Sales declined. 

    You put those two things together and what you have is what we call a mixed picture, trending toward being decidedly uninspiring.

    Now, let's talk about some data that's on everyone's mind:  Inflation

    It's not that difficult to find someone who will strongly opine to your face that Consumer Prices are rising and that they're going to continue rising.  So first, we're going to talk about the current situation.

    The reality is that Inflation continues to be quite muted.  But that's the all-in picture.  If you take out the contribution made by Energy and Food, Core Inflation was running at a 2.2% rate in May.  and that's unchanged since February.  Add in the fact that energy prices have risen a bit off their low (and if you add in the perspective that we share, certainly, that the Dollar is starting to come under pressure) and it's not that difficult to see why some see the specter of rising inflation as a threat.

    Is that, in fact, the case?

    You may remember that in the few months leading up to the onset of the financial crisis, inflation was rising at a steady clip.

    And prospects for inflation and actual inflation aren't always perfectly and strongly correlated. 

    What do we make of prospects for Inflation? 

    In May Industrial Output fell 1.6% and it was the eighth consecutive month that Output fell.

    And it was the fourteenth consecutive month that Capacity Utilization fell.  That's 14 months in a row, folks.  That index fell at an annualized rate of 2.5% in May, taking it down to a level of 75.82.  This is not a deflationary level, but neither that level nor direction suggest that Inflation is going to be any kind of threat in the near- to medium-term.  In fact, what the data suggests is that the trend is more likely to be disinflationary, at a minimum. 

    As for the Market, it was a pretty dismal week.  Commodities fell, even though the Dollar also fell.  The S&P 500 also fell.  And...Gold soared 3.7%.  To top off your understanding of it, the yield on the 10-Year Government Bond fell 1.9%, from 1.64% to 1.61%.

    This is a Market that is starting to pour concrete into its sentiment around the medium-term economic prospects. 

    For now, our current forecast is unchanged.  To refresh your memory, we had previously called for a significant economic softening.  And that happened.  Its evidence is, today, in indications of things like Industrial Output and New Orders for Durable goods.

    You may also recall that, about six weeks ago, we updated that forecast to call for a stabilizing of that trend, at least in the short term.  And that's where we are.  Our Model is showing us minute downward trajectory, from say, two months ago, out to August/September, but...it's really a minute change.  No, that does not mean that things are going to be on an upward swing soon.  It means that conditions, while not likely to improve in the near term, are ceasing to deteriorate for the moment.

    We are not yet updating that forecast, but...based on what we're seeing now, we expect to have an updated forecast certainly before August  is over at the latest, and...it's not looking auspicious.

    For most of you, we recognize that the signal reason that you take an interest in matters economic is to develop insight into your investment strategy.  Our best advice: keep an eye on the Investment Outlook.  Over the course of what we think is a time frame that appropriately takes into account vagaries of politics and the market, you'll get a round-up of great opportunities, dangers...and hopefully an awareness of areas in which to not read opportunity or danger when extraneous sources tell you otherwise.

    However, fairly shortly, we will publish in The Editor's Letter a major statement on the prospects for the investment landscape over the longer term.  We promise it will be thoughtful and relevant...something we hope will serve as a persistent guide over time even as you are buffeted by distracting facts and noise.

  • ECONOMIC & MARKET ANALYSIS - June 27, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.8%.

    S&P 500 Index - The Index finished at 2037.41, down 1.6% from last week.

    US Dollar Index - The Index finished at 95.54, up 1.5% from last week.

    Gold - Gold finished at 1262.15, down 3.7% from last week.

    Commodities - The Index finished at 369.17, down 2.0% from last week. 

    10-Year Government Bond Yield - Yield fell 3.2% to 1.56% from last week.  

    Value of New Single-Family Homes - In May, the value of new homes sold rose 18.2%.

    We almost chose to not update this column this week given the paucity of economic releases.  But, given the vote over the United Kingdom's exit from the European Union, it seemed necessary to say something on the matter.

    First, let's dispose quickly of the one fresh piece of economic data: in line with last month's move, the value of new single-family homes that were sold in May rose a strong 18.2%.  Please understand something: while we consider this indicator strong in terms of measuring current economic activity, our belief is that the strong data of the past two months is not much more than a release of pent-up demand given the high ratio of sales to inventory.  Do we think this trend will continue or that it's representative of an upward trajectory in economic growth?  Absolutely not.

    As for the market data, the key point to observe this week is that while the aggregate value of commodities fell (somewhat a reflection of a sharply stronger Dollar), the yield on the 10-Year Government Bond fell about 5 basis points, on a percentage basis, more than commodities fell.

    The upshot?  Bond traders continue to display relative pessimism about the economic landscape.

    Of course, it's easily argued that the reason for such pessimism this week was due to the result of the British vote on leaving the European Union.  Our first response to that is that bond traders are typically smarter than to respond to stimuli that are likely to be short-term in nature.  Do traders believe that the result of the vote is going to dampen economic prospects?

    Look at this way: while traders sent the yield down 5 basis points, they sent the yield down only 5 basis points.  Does that sound like they're terribly concerned about the British exit?

    And that leads us to our own thoughts about the exit.  Our long-form essay on the exit is covered in the fresh update to the Editor's Letter.  But a short word here is in order.

    While it's true that the United Kingdom benefits from the free flow of transactions between that country and the rest of the European Union, it's also true that the latter benefits from transacting with the United Kingdom.

    Our belief: the economic impact to the United Kingdom will be, in the short term, lightly detrimental, but...it will be only lightly so, and it will not be a long-term development as the U.K. adjusts to the market and positions itself for a different economic alignment.

    We don't mind if you--or any economic commentator--has a different perspective.  We do mind if you can't support that perspective with anything but platitudes.

    The Global Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - July 4, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims was unchanged.

    S&P 500 Index - The Index finished at 2102.95, up 3.2% from last week.

    US Dollar Index - The Index finished at 95.64, up 0.1% from last week.

    Gold - Gold finished at 1320.75, up 4.6% from last week.

    Commodities - The Index finished at 376.44, up 2.0% from last week. 

    10-Year Government Bond Yield - Yield fell 3.2% to 1.56% from last week.  

    Case-Shiller Property Price Index - In April, the index rose 5.1%.

    Disposable Personal Income - In May, on a per-capita basis, DPI rose 3.5%.

    Consumer Spending - In May, on a per-capita basis, Spending rose 2.8%.

    New Orders for Durable Goods - in May, Orders fell 2.1%.

    Energy Consumption - In March, Energy Consumption dropped 4.1%.

    Let's have a quick word about the Case-Shiller Index.  You may be aware that we are much of the opinion that the market for housing is slowing down fast.  The first thing to say in this context is that, while the recent figure doesn't reflect that, it's important to remember that this indicator is reported on a longer indicator than most, and that we are just now getting April's result.  It's also important to remember that Housing is not remotely a leading indicator, but rather a lagging one. 

    And as with housing, the figures for Income and Spending appear to look pretty good.

    Disposable Personal Income rose 3.5%, on an annualized basis, and that's tied for the highest increase since October 2013.  And in the context of low inflation, that makes the figure even more impressive.  Spending rose at a more moderate rate, 2.8%.  But...if those figures look pretty good--and they do look good on the surface--let's take a closer look, behind the numbers.

    The first thing we want to alert you to is the ratio of spending to income.  That ratio tells you a lot about how consumers actually feel.  That ratio, in May was 91.4%, roughly consistent with where it's been for the last several months.  This is a ratio that we consider below a level that we consider neutral, so to speak.  We want to see that ratio at 93.0% at a minimum.  Above that, we consider the ratio to be consistent with a more rapid pace of growth.  Below it, it's consistent with a perspective that would foretell very modest growth.

    And that takes us to a corollary indicator:  consumers' savings grew at a 15.0% annualized rate in May, and that's the highest rate since April 2014.  Fast rates of savings are always consistent with consumers' fears of recession. 

    The interesting data this week comes to us from New Orders for Durable Goods.  The truth is that, if we include all durable goods, orders actually rose, by 1.0%.  But we strip out transportation-related goods for a reason: demand for them is extremely volatile and need significant in terms of pointing to economic direction.  And, the result is that, if we look at New Orders for Core Durable Goods, the indicator fell by 2.1%.

    And on to one of our most important leading indicators:  energy consumption.  Consumption of energy is very highly correlated with economic growth.  And, in March, it declined, at a 4.1% annual rate.  That's the fifth consecutive month that it declined.  In addition, the ratio of production to consumption of all domestic energy remained unchanged, month-over-month, at 90.5%.  This is a fairly high level of production, and is associated with very tame upward pressure, at best,  on energy prices.

    So now let's turn our attention to how the markets ended the week and what they seem to be telling us.

    It's probably the knee-jerk reaction of most lay people to look first to how equities performed.  That's not terrible, but it's important to look at it in context of how the Dollar performed.  The Dollar barely moved, yet the S&P 500 performed well, up 3.2%.   And then we see that commodities rose 2.0%, chiefly on the back of more expensive Crude Oil.  That picture?  It basically doesn't say much.

    And then we look at what we will argue are the more telling market indicators, but largely ignored by the lay investor and observer:  Gold and Bonds.

    Very simply, Gold rocketed 4.6% and the yield on the U.S Government's 10-Year Bond plummeted 7.4% to 1.44% (down 0.12 basis points from last week).

    It's difficult to overstate how very low this level of yield is...especially in the context of an absence of a government-based bond-buying program.  Simply put, investors are accepting a yield of 1.44% over a term of 10 years.  This is a level of yield that is, simply, unprecedented.

    It's not difficult to argue that investors are digesting and reacting to the result of the referendum in the United Kingdom last week, the decision to exit the European Union. 

    And yes, it's quite possible that, as we've said in the past, bond investors, over the short term, occasionally "get it wrong," with the result that their sentiment stabilizes over a period of four-to-six weeks.

    If we were alarmists, we'd point to this new level of yield as a very strong indication that bond traders are extraordinarily bearish on the medium-term economic outlook.

    Here's the point: even if traders are exhibiting some hysteria and uncertainty and they send the yield, say, 25 basis points higher over the next three weeks, just how sanguine should you be about the economic outlook if traders are willing to accept a yield of 1.70% on 10-year money when commodities prices have bounced back a bit off their low? 

    With the exception of one week in June, the commodity index price level is now tied for the highest level since July of last year.  And yet a yield level of 1.70% would be, except for the past month, the lowest yield on 10-year government bonds since the period quantitative easing during which the government forced yields down by buying government bonds.

    Get it?  Bond prices at roughly the lowest level they've been, absent government assistance, and commodities prices at the highest level they've been in almost a year.

    Does that seem to augur an auspicious outlook?

  • ECONOMIC & MARKET ANALYSIS - July 11, 2016

    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 2129.90, up 1.3% from last week.

    US Dollar Index - The Index finished at 96.28, up 0.7% from last week.

    Gold - Gold finished at 1356.70, up 2.7% from last week.

    Commodities - The Index finished at 357.72, down 5.0% from last week. 

    10-Year Government Bond Yield - Yield fell 5.8% to 1.36% from last week.  

    Labor - In June the Employment Rate rose 0.1 percentage point to 59.7%

    Capital Spending - Core Capital Spending, in May fell 2.6%.

    It was an interesting week for us data-wise.  The Labor picture this past month wasn't bad at all.  In fact, it was pretty good.  The Employment Rate continued to improve, now up to 59.7%.  When the Employment Rate reaches 61.0% we can begin to talk about the employment situation being healthy. 

    Supporting that rise in the Employment Rate is the fact that the Number of Net Newly Employed was 105,000.  That's a very good number truly.  However, know this: it's also the smallest number since January of this year.

    It's also very important to keep in mind that Labor is very much a lagging statistic.  Anyone who wants to dispute that fact is welcome to write to us and we'll be happy to respond with figures of how labor conditions have fit into patterns of recession and growth to demonstrate that point.

    Of course, Capital Spending is one of our most important leading economic indicators.  It's important to disclose that, in this regard, we look at and value what we call core capital spending, that is all spending on capital goods that are not related to either defense or transportation.

    And--drum roll, please--that figure declined (yet again) in June by 2.6%.

    There's not a lot more that needs to be said about this indicator.  If leading data continue to come in like this, we expect to have a significantly revised forecast by the third week in August, in time for that month's updated scorecard.

    And that takes us to this past week's market data.  We'll try to keep it simple.

    Two things to look at:

    1.  Gold rose, even though the Commodity Index fell, and the Dollar rose.  In other words, it's hard to make the case that Gold rose on the coat-tails of commodities in general.  Ask yourself why gold traders would send the price of Gold up when the Dollar strengthens and commodities in general fall? 

    2.  Even though the Commodity Index fell, the yield on the 10-year Treasury Bond fell. 

    Put those two pieces of information together, and what do you get?  You get a picture of traders, all around, telling you that they're increasingly bearish on the economy.

    If we continue to see this pattern and if it dovetails consistently with other leading indicators, that updated forecast in August could be quite sobering.

  • ECONOMIC & MARKET ANALYSIS - July 18, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 2.2%

    S&P 500 Index - The Index finished at 2161.74, up 1.5% from last week.

    US Dollar Index - The Index finished at 96.68, up 0.4% from last week.

    Gold - Gold finished at 1342.75, down 1.0% from last week.

    Commodities - The Index finished at 360.22, up 0.7% from last week. 

    10-Year Government Bond Yield - Yield rose 13.8% to 1.55% from last week.  

    Retail Sales - In June, Core Retail Sales rose 2.8%.

    Consumer Prices - In June, Inflation rose at a 1.1% annualized rate.

    Industrial Production - In June, Output fell at a 1.7% annualized rate.

    Shall we start with some moderately good news?  Core Retail Sales (this is all Retail Sales ex-auto related sales) rose 2.8%.  How to understand that number?  It is a moderately good number.  It's good because in context of low inflation, it's respectable.  It's only moderately so because, as you're about to read in the next paragraph, Inflation has ticked up a little.

    Let's start this little chat about Inflation by saying that our very informal current forecast for Inflation is very tame, so it's important to put the current month's results in perspective.  All-in-Inflation rose at a 1.1% annualized rate in June.  Now, that's a fairly low figure, but...here's the point: it's the highest since December 2014. 

    Core Inflation (ex-energy and -food) rose at a stronger 2.2% rate.  That rate of growth is unchanged since last month, and the way to understand this figure is not so much that non-energy and non-food products and services are gaining in price levels but that downward pressure on energy prices has abated greatly over the last few months.  So, you shouldn't get too exercised about these figures.

    The real story is in Output.  Of course, Industrial Production is one of the key indicators of the current economy, so its importance in describing the current state cannot be overstated.

    And the story is simple: for the ninth consecutive month, Industrial Production (or Output) declined.  Yes, you read that correctly.  It fell by 1.7% by our measure of looking at the rolling 12-month average and smoothing that over three months.  And yes, even on a raw year-over-year basis, the indicators...declined.

    The metric that is an important corollary to Output is, of course, Capacity Utilization.  It is impossible to overstate how useful Capacity Utilization is in terms of understanding the direction in which both demand and consumer prices are likely headed.  In June, yes, Capacity Utilization fell 2.0%.  And that is the 15th consecutive month that the metric declined.  This is a very important input to our Scorecard and we strongly suggest you keep it upper-most in your mind over the next several weeks as you listen to the continuous flow of noise from the press about business and economic developments.

    And the Market?

    Well, the story there could easily confuse if you're not careful.  Gold fell moderately, but...the Dollar also rose moderately, so there's not much to glean from that.  Commodities did rise, despite the fact that the Dollar rose, so that could be a bullish sign.

    But, there's a lurking problem in the background.  Yes, the yield on the 10-year government bond soared this week.  That's good.  But, even with the yield soaring 19 basis points, the upshot is that it's basically back to where it was just before the Brexit vote occurred. 

    In other words,

    -  except for the period of mid-May to last week, the yield on the 10-year government bond is lower than any time since July of last year

    and

    - except for the past two weeks, the commodities index is now higher than any time since July of last year.

    Downward pressure on bond yields in the face of gently rising commodities prices...

    This is not a good omen for the economy.

  • ECONOMIC & MARKET ANALYSIS - August 1, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 5.6%

    S&P 500 Index - The Index finished at 2173.60, down 0.1% from last week.

    US Dollar Index - The Index finished at 95.52, down 1.9% from last week.

    Gold - Gold finished at 1341.75, up 1.6% from last week.

    Commodities - The Index finished at 339.40, down 2.8% from last week. 

    10-Year Government Bond Yield - The yield fell 7.3% to 1.45% from last week.  

    New Single-Family Home Sales - In June, the value of new sales rose 28.4%.

    Case-Shiller Housing Price Index - In May, the Index rose at a 5.0% annualized rate.

    Orders for Durable Goods - In June, New Orders for Core Goods fell 1.9%.

    Energy Consumption - In April, Consumption of all types of energy fell 3.2%.

    The state of sales of new single-family homes is not a strong leading indicator...at least not relative to several others that are more powerful leading measures.  But, as we've long said, it's a good secondary measure.  Sure, mild softening or strengthening is possible even when contra-indicated by this measure, but we think it's highly unlikely that you'll ever see an outright contraction in a short time frame when this indicator is still trending up.  And, conversely, it's highly unlikely that you'll see a strong economic expansion when this indicator is mildly trending downward.

    So...for those keeping score at home, this month's result is mildly heartening.  It should be especially heartening when joined with the latest data from the Case-Shiller Housing Price Index, which showed a 5.0% annualized rise in prices. 

    However, keep in mind that the ratio of supply to demand is under pressure, and that's helping to keep prices afloat.  Do not discount that point.  That's why the results are only 'mildly' heartening and not to be taken as being in opposition to what leading indicators are saying

    And, in that vein, June is the 18th consecutive month that New Orders for Core Durable Goods declined.  (Remember that Core Durable Goods comprise the sum of all durable goods less transportation-related items since demand for these tend to be very volatile.)

    That's a straight year and a half of monthly declines. 

    Highly-paid commentators and highly-placed monetary officials can say whatever they like in abstruse prose, but...when you see outright declines in Durable Goods Orders for a period as long as this, it's extremely foolish to take any kind of strong stand on economic expansion.

    And, within the greater category of New Orders for Durable Goods there's a sub-category that's about as compelling as leading indicators get, and that's Core Non-Defense Capital Spending.

    It's simply more specific.  If you can make a case for a growing--or even stable economy--in the face of declining new orders for core (ex-aircraft) capital goods, we'd like to hear it.  And, yes, it's now over a year of consecutive monthly declines in capital spending. 

    And, in terms of looking to the future, regular readers may know that one of our favored indicators is energy consumption. 

    In April, Consumption of all types of energy fell 3.2%.  Technically, year-over-year Consumption actually rose very modestly, but we're loath to extrapolate a trend from one data point, but prefer to stick to our preferred methodology of working with a three-month average. 

    Looking at another dimension of the data, the ration of Production to Consumption came in at 89.8%.  Why is this interesting?  Well, it's the lowest ratio since February 2015 and that is possibly an early sign that energy prices, which have been dragging, may stabilize as available supply grows at a slower rate than Consumption.  We shall see.

    This past week, the Chair of the Federal Reserve did say something to the effect of near-term risk having diminished.  In the context of a week in which equities fell, the Dollar fell, commodities fell, gold rose, and the yield on the 10-year bond falling....that is what she said.

    The lesser take-away from this week's market data is that the Dollar is starting to come under real pressure.  To put the Dollar's being at a level of roughly 95.8 on the US Dollar Index, ask yourself the last time that the Dollar sat at the mirror-opposite level of 104.2 (putting 100.0 at the midpoint).  It's been a very long time, hasn't it?  In other words, there's not a lot of reason, based on recent years' experience to make a large wager that the Dollar has anything but a chronic problem.

    The big take-away from the week?  Well, as you can guess, it's about the bond rates and inflationary pressure, here suggested by commodity price levels. 

    The yield on the 10-year bond plummeted this week.  We have been waiting to see if traders come to a stable understanding of where the economy is going.  We're not there yet so taking the data as it presents itself, we start with the fact that the yield on that long bond plummeted 12 basis points in one week.  Our fastest most efficient temperature-read on the economy is how that 10-year bond yield is moving relative to commodities prices.  That's a ratio whose importance cannot be overstated.  If that bond yield plummets, but the bottom falls out of commodity prices, that's a market movement that could be bullish, depending on how that ratio moved. 

    The reality is that when you look at this week's data, yes, that 10-year bond yield fell just a little more than the aggregate price of commodities fell.  In other words, bond traders sent that yield down further than inflationary pressure is gauged to be sliding.

    And, in other words, that ratio slid a little so, yes, the market ended the week...slightly more bearish than the week before.

    All of this is part of what we consider part of the leading picture.  We are not updating our formal forecast...yet...but informally, we'll tell you: we are very confident that 2017 is going to be a weak year.  The question at the moment is just how weak it will be.

    Stay tuned.

     

  • ECONOMIC & MARKET ANALYSIS - August 8, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 21782.87, up 0.4% up from last week.

    US Dollar Index - The Index finished at 96.24, up 0.8% from last week.

    Gold - Gold finished at 1362.75, up 1.6% from last week.

    Commodities - The Index finished at 341.48, up 0.6% from last week. 

    10-Year Government Bond Yield - The yield rose 9.6% to 1.59% from last week.  

    Disposable Personal Income - In June, on a per-capita basis, DPI rose 3.5%.

    Consumer Spending - In June, Spending rose 2.9%.

    Employment - In June, the Employment Index remained unchanged at 59.9%.

    Some people probably attribute more importance to Income and Spending as leading indicators than they should.  They are, of course, decent indicators of the current situation, but not much more.  And the results, this month, show a modest picture.   

    There's really nothing remarkable about these figures.  They're just fine.  They're neither strong nor weak.  However, you should know two things:

    1.  June's change in Income is the lowest in six months.

    2.  The ratio of Spending to Income came in at 91.0%; that's unchanged from last month

    The ratio of Spending to Income is more useful than you might think.  While you would rightly count the nominal amount in rises in Income and Spending as more important in terms of measuring the strength of the economy, for the consumer, that ratio tells you a lot about demand and inflationary pressure.  The current ratio of 91.0% is the lowest since September 2009.  You may have already read in the Editor's Letter that we have opined that we expect inflationary pressure and demand to be somewhat weak in the coming months.

    This month's Labor report is a little complicated, but we will try to be as elegantly articulate as we can.  The first thing to say is that the Employment Rate remained unchanged in June over May, at 59.9%. 

    The second thing to say is that the economy added, on an averaged annualized basis, about 88,000 net new jobs (remember that "new new" refers to the fact that, even as some jobs are created, some are lost).   This is a good number. 

    However, there's another very important face to the data, and that is the trend in creating net new jobs.

    June was the second consecutive month in which the number of net new jobs fell on a 12-month rolling average basis.  In fact, on that basis, the rate at which net new jobs were added fell, by 1.3%.  Does a decline like that link to a declining economy?  No, but it does suggest that the economy may be running out of steam, so to speak.

    Now if you're playing along at home, you may feel heartened by the fact that bond traders sent the yield up pretty solidly on the 10-year Treasury bond.  As a consequence, traders appear to be a little less bearish than the week before.  Given that that yield is, in our view, an amalgam of what traders think of growth prospects and inflation together, it's important to bear in mind that commodities, in aggregate, did rise in price this week.

    What we need is a good way to put it all in perspective.  So, here goes...

    Even with that increase in the yield on the 10-year bond it's still the lowest it's been in many years (notwithstanding the time frame during which the Fed's quantitative easing was in effect) except for since late June. 

    And, except for the period since April, commodities are at their highest price level since November. 

    Our view is that traders are struggling with what the medium-term forecast is.   In our view--based on our Model, bond traders are clearly, but mildly bearish on the economy.  What we want to see is how trader sentiment settles over the next two months.  It will tell us a lot.

  • ECONOMIC & MARKET ANALYSIS - October 24, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2126.41, down 0.7% over last week.

    US Dollar Index - The Index finished at 98.34, down 0.3% from last week.

    Gold - Gold finished at 1266.25, down 0.4% from last week.

    Commodities - The Index finished at 85.92, down 0.2% from last week. 

    10-Year Government Bond Yield - The yield rose 6.8% to 1.85% last week.  

    Consumer Prices - In September, prices for core consumer goods and services rose 2.2%.

    Retail Sales - In September, core retail sales rose 2.4%.

    Business Sales - In August, business sales fell 0.4%.

    Industrial Production - In September, Output fell 0.9%.

    We have a fair amount of data to get through this week. 

    Let's start in a place that's intellectually very accessible and understandable to everyone: Retail Sales.  Retail Sales is a pretty good confirming indicator, in other words, it's a good indication of the economy at the moment.

    In September, Retail Sales rose.  Now, please understand that it's extremely rare for Retail Sales to decline....even in times of recession.  In September, sales rose 2.4%, which is, to our mind, borderline recessionary, especially in an environment in which inflation is showing some strength.  In a nutshell, an increase of 2.4% is very modest.  Put that in context of increases north of 6% in 2011 and 2012 and you'll understand what we mean.

    So, that brings us to Inflation.

    At 2.2%, we have an inflation rate that has been steady for about eight months.  But it's still at the highest it's been since June 2014. 

    Downward pressing Retail Sales combined with upward pressing Inflation?  That's not the combination you want.

    As you probably know by now, Business Sales is reported on a one-month lag relative to Retail Sales.  In August, they fell...by 0.4% and that's perfectly in line with yet another decline in Industrial Output.  It is now the thirteenth consecutive month in which Industrial Production has fallen.  This month it fell by 0.9% and the Index stands at 104.2, which is the lowest it's been since October 2013 (and also happens to be tied with August 2008). 

    In consistent fashion, Capacity Utilization fell 1.5% to 75.48.  This is the 18th consecutive month that Utilization fell...and that level on the Index is the lowest since July 2011.indications.

    As far as the market data, we'll keep it simple.  Equities and the Dollar both rose.  That could suggest a mildly bullish signal on the part of traders.  But, Gold rose, as well.  There is nothing intuitive about traders being bullish on Gold when they're bullish on the economy.  As a consequence, in other words, those rises in the stock market and the Dollar can be safely concluded to be a result of technical forces, such as the compelling draw of investors to stocks based on very low interest rates...and downward pressure on other major economies, rather than upward expansion on the part of the U.S. economy.

    Yes, you have to pay close attention. 

    The Domestic Scorecard was updated this week.

  • ECONOMIC & MARKET ANALYSIS - August 15, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2184.05, up 0.1% up from last week.

    US Dollar Index - The Index finished at 95.68, down 0.6% from last week.

    Gold - Gold finished at 1355.00, down 0.6% from last week.

    Commodities - The Index finished at 350.47, up 2.6% from last week. 

    10-Year Government Bond Yield - The yield fell 5.0% to 1.51% last week.  

    Business Sales - In June, Business Sales fell 1.3%.

    Retail Sales - In July, Retail Sales rose 2.2%.

    It's not hard to argue, at least in a simple way, that Retail Sales is a more important indicator than Business Sales.  After all, consumer spending, of which this is a major component, tells you a lot about consumer sentiment.  But, the point is that Business Sales tells you a lot about business confidence, and that, we'd argue, in a better economic indication of where things are headed.

    In June, Business Sales fell for the 16th consecutive month.  Yes, you read that correctly. 

    We've been clear, for many weeks now, that the big question is not whether a large softening is coming (it started, actually, over nine months ago), but how large it will be and how much of a contraction it might actually turn out to be.  On that head, we expect to get some clarity before the end of September.

    And Retail Sales?  First we should remind that we work with what we call Core Retail Sales, that is, we remove auto-related sales from the total.  This component can tend to be very volatile and cloud the greater picture. 

    And so, the result for July?  Sales rose 2.2%.   That's not a particularly heartening result, but it's not terrible, either.  However, bear this in mind: its the smallest result of the last six months.

    Now, we came close to not updating this column this week given the relative paucity of new economic data, but especially in view of the especially poor trajectory in Business Sales, the week-ending market data has some important things to tell us.

    As we alluded to, above, we've been waiting to get more clarity about what the Bond Market thinks, and this is the week that we think we're going to start getting consolidation around sentiment.  The most important take-away from this week's market data?  Very simple:  even as inflationary pressure rose, week-over-week (because commodities rose 2.6%), the yield on the 10-year Treasury bond fell a whopping 5.0%, or 8 basis points. 

    Read that last sentence again.  On paper, inflationary pressures should be rising, but traders are fighting to accept a yield on 10-year money that is lower week-over-week.  Think that over. 

    Working with our standard ratio that relates one to the other puts that ratio at almost the worst figure it's been in more than six years.

    Again, it's not whether the softening continues, but where it goes.  We think that we're starting to get consolidation. 

    Of course bond traders aren't required by law to convey a sentiment that is dramatic in any way.  But, given the preponderance of what other leading economic indicators are telling us, we feel certain that there will be consolidation of trader sentiment, but in a downward direction.

    This past week seems like it could be the first move in that direction.  Hold onto your hats.

  • ECONOMIC & MARKET ANALYSIS - August 22, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2183.87, flat over last week.

    US Dollar Index - The Index finished at 94.50, down 1.2% from last week.

    Gold - Gold finished at 1350.05, down 0.4% from last week.

    Commodities - The Index finished at 370.44, up 5.9% from last week. 

    10-Year Government Bond Yield - The yield rose 4.6% to 1.58% last week.  

    Industrial Output - In July, Production fell 0.8%.

    Consumer Prices - In July, Core Inflation rose 2.2%.

    And so, this week the lies in the conventional press continue.  For yet another month, it's being reported by the Fed and the Press that Industrial Output rose. 

    That's simply not the case.

    In fact, July is the tenth consecutive month that Industrial Output declined. 

    Eventually, the effects are going to be felt in a substantive way and the Press will no longer be able to ignore what's really going on.  What might trigger the Press's more accurate understanding?  Our guess is that it will be something related to corporate earnings or a sudden dramatic result in a confirming indicator, such as Retail Sales.  And when it happens, everyone will act surprised, because the Fed continues to threaten interest rate increases.

    Along with that result in Output, Capacity Utilization trended down 1.4%.  It was the 16th consecutive month that the Index declined.  Before the start of the decline the Index was at 78.16.  It's now at 75.68. 

    And that's a perfect segue into a discussion of Inflation.

    Make no mistake: a reading of 78 or so, with recent movement in the upward direction can be interpreted as a clear sign of rising inflationary pressure.

    A reading of 75 or so, especially when recent data has been downward?  That's not remotely inflationary.  And yes, of course this is a leading indicator.

    But what does the most recent inflation data have to tell us?

    Well, for starters, Core Inflation came in at 2.2%.  Now, the first thing to concede is that that's not a particularly low figure.  But the second thing to say is that the rate of change is unchanged since last month.  And thirdly, all-in inflation came in at 0.8% and that's the lowest rate of increase in the last five years.

    Please think that through before your next conversion about the economy at the water cooler.

    Now, we've been forthright in saying that we're expecting some real consolidation in trader sentiment.  And, if things don't change significantly off how this week ended, it appears that we're starting to get it.

    Sure, the Dollar ended down and stocks ended flat....and there's nothing particularly hopeful about any of that, but, as usual, the big news is in what traders told us indirectly about their sentiment about economic growth against inflationary pressure.

    Change in the commodities index is our proxy for inflationary pressure, and that index jumped this week.  It jumped 5.7%.  But the yield on the 10-year government bond rose only 7 basis points to 1.58%.  In other words, traders are telling you that they believe that those inflationary forces that you think you're seeing in commodities aren't real.  A rise of seven basis points is not remotely what you call ample compensation for a $20 rise in the price of that commodities basket. 

    Granted, it's just one week, and traders are notorious for over-reacting, say, at least, two or three times a year. 

    The next two-to-three weeks are going to be critical in terms of consolidating our understanding of medium-term economic trajectory.  Based on the balance of our leading indicators, (see the updated Domestic Scorecard), it's not hard to figure out where we think traders' sentiment is heading.

    Right now, our Leading Indicator Score is modestly negative.  It won't take a lot for it to move into solidly negative territory. 

    Buckle your seat belts.

  • ECONOMIC & MARKET ANALYSIS - August 29, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims fell 0.5%

    S&P 500 Index - The Index finished at 2169.04, down 0.7% over last week.

    US Dollar Index - The Index finished at 95.48, up 1.0% from last week.

    Gold - Gold finished at 1321.30, down 2.1% from last week.

    Commodities - The Index finished at 363.07, down 2.1% from last week. 

    10-Year Government Bond Yield - The yield rose 3.2% to 1.63% last week.  

    New Single-Family Home Sales - In July, the value of new homes sold rose 26.3%.

    Durable Goods Orders - In July, new orders for core durable goods fell 2.1%.

    We have a bit of good news this week.  You may recall us saying that, while, the value of new homes sold is not a significant leading indicator, we think it's a very strong correlating indicator.  That is to say, it's very difficult to envision the economy moving in a direction contrary to it, at least not in the very short term.

    And so, this rise in value of homes sold in July is somewhat comforting.  When we parse the figure, we see that while both prices and volume rose, the real driver was volume.  The number of homes sold rose 22.3%, which is the highest result since April of last year. 

    However, we must be fair, since so much of our rhetoric has been pointing in the opposite direction, and so we now present the case for that understanding. 

    When we look at the time period of July 2010 to July 2016, we see that the range in the ratio of inventory to sales stretches from 4.4 to 8.0, with the higher figures showing up earlier in that time range, quite naturally, given the fallout from the Financial Crisis.

    The current ratio is hovering at 4.4, and so that's at the lower end of the range.  On the one hand, you'd expect a low ratio of inventory to sales to put upward pressure on price, giving an advantage to sellers.  On the other hand, you'll observe that recent growth in the housing market is coming from volume, not price.  So, what does this tell you?  That there is an inherent weakness in the market.

    Hopefully, by now, all readers understand how useful an indicator the change in New Orders for Durable Goods is.  Specifically, we focus on core goods, those that exclude transportation-related products.  And, as with Industrial Production last week, the Federal Reserve is misleading the public. 

    New Orders for Core Durable Goods declined in July, by 2.5%.  That's the 19th consecutive month that they declined.  And, if we exclude all defense- and transportation-related products, we fine that Capital Spending (which is what we're left with) declined 4.3%.

    You can try to make a case for an increasingly strengthening economy, but in the face of declining Capital Spending, you will do it without us.

    That last point cannot be overstated: as you read in this column, there are spots of brightness in the economy....but you need to differentiate between what indicators are leading and what indicators are also most significant in terms of pointing to direction.

    That intersection, between those that are leading, and those that are most significant in terms of affecting the economy, is the sweet spot, so to speak, in terms of where the proverbial rubber meets the road. 

    Better to sit on the fence than commit to a forecast of expansion when Core Capital Spending is trending downward.

    As far as the market data for the week, it was one of those weeks in which it's best to simply not draw any conclusions.  The Federal Reserve made a public announcement about its ideas for the direction in which short-term interest rates should or could be headed.  At the end of the day, the Fed basically said nothing.  In her announcement Chair Yellen actually used the word, "months" in referring to a time frame in which a rate increase could occur.  Rate increases are coming, but....they could be months away? 

    Unfortunately, the Market, as it's done for the last 18 months, twitched, as it does every time the Fed "threatens" monetary tightening. 

    The takeaway from this week?  The Market is incorporating an assumption about higher rates into its behavior.  As a result, is the market data rationally demonstrative of what traders really think?  We don't think so.  We think you have to wait up to two weeks from now to see what traders really think.

    On the heels of the Fed's announcement, the Dollar rose 1.0% (a function of traders assuming that the Fed would tighten), and that, quite naturally, had the effect of pushing commodities' prices down. 

    And, the yield on the 10-year Treasury Bond rose 5 basis points to 1.63%.  Directionally, at least, this could normally be demonstrative of traders' sentiment becoming more sanguine, especially coupled with dropping commodities' prices.

    After all, expectation of lower inflationary pressure coupled with demand for higher yield?  That's precisely the recipe for expectation of an expanding economy.  Two points:

    1.  It's just one week, and given the Fed's announcement, we think it has no meaning.

    2.  Even with the lower prices and the higher yield, our measure of how the two interrelate still puts traders' sentiment in bearish territory.

    We were going to update the Editor's Letter with a sort of report card on the state of the economy since, while the economy did a fair amount of growing the past 18 months, it's our belief that the lay person thinks (1) the economy has grown more than it has and (2) all-in, the economy is not remotely as healthy and sound as it is.

  • ECONOMIC & MARKET ANALYSIS - September 5, 2016

    Economic & Market Analysis

    Given the paucity of fresh economic data this past week, this column will be updated the following week, September 19.

    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 2169.04, down 0.7% over last week.

    US Dollar Index - The Index finished at 95.48, up 1.0% from last week.

    Gold - Gold finished at 1321.30, down 2.1% from last week.

    Commodities - The Index finished at 363.07, down 2.1% from last week. 

    10-Year Government Bond Yield - The yield rose 3.2% to 1.63% last week.  

    Employment - The Employment Rate remained unchanged at 59.9%.

    Case-Shiller Housing Price Index - In June, the national index rose 4.%.

    Disposable Personal Income - In July, DPI, on a per-capita basis, rose 3.7%.

    Consumer Spending - In July, Spending, on a per-capita basis, rose 2.9%.

    Energy - In May, total domestic energy consumption fell 1.8%.

    Everyone has gotten used to the idea that the week that Labor data is marquee data.  Of course, nothing could be further form the truth since trends in Labor tend to be lagging indicators rather than leading indicators. 

    Having said that, it's not as if the data isn't important!

    The first thing to know is that the result was actually pretty good.  The ranks of the Employed rose at an annualized 1.7% rate, and the number of Net Newly Employed was strong at 145,000. 

    However, at the end of the day, the Employment Rate came in at 59.9%, which is unchanged now for three months.  

    Now, has everyone gotten used to the idea that home prices are going to continue on a nice, cozy upward trajectory?  The good news is that, in June, prices continued to march upward, that month at a 4.9% annualized rate.  That's a fairly healthy rate.  One word of caution, however:  that is the lowest annualized rate of growth in prices since October.

    We have a bit of good news around Income and Spending even though they really aren't leading indicators, at least not in terms of predicting economic growth, but they have something to tell us about how consumers likely feel...and a little to tell us about inflationary pressure.

    That 3.7% annualized growth in Income is pretty good.  You should also know that it's unchanged form last month. 

    What about that 2.9% growth in Consumer Spending?  Again, fairly decent.  It's also essentially unchanged from last month (in point of fact, it actually fell by a narrow margin).

    When we look at the ratio of Spending to Income we find a ratio of 91.0%.  What does that tell us?  The first thing to know is that it has been unchanged for three months.  The second thing to know is that it's the lowest ratio since July 2009.

    In other words, this indicator, on its own, is suggesting a dampening in demand and disinflationary pressure.

    There are, of course, many factors that you'd ideally want to consider when you try to align energy consumption with growth, especially as advances in technology are leading to more efficiency.  However, over the very short-term, we hold that it continues to be true that economic expansion correlates very closely with growth in energy consumption.

    In May, total energy consumption fell by 1.8%.  And that is the eighth consecutive month that consumption declined.  And, the ratio of production to consumption?  It's now at 89.6%.  That is, of course, interesting because it's the lowest it's been since January 2015.  With that ratio declining, you expect to see a subtle upward pressure in energy pressures.  And, in fact, haven't we seen, over the past few months, stabilization in energy prices?  Will that continue, and will it continue to the point we can see that we are seeing significant inflation in energy?  It's possible, in theory, but it's unlikely.  Remember that this data dates from May, and that we have already seen that stabilization. 

    On the other hand, we would strongly expect to see an expansion in energy consumption well in advance of actual economic growth, so we caution you not to discount that data result as being significant.

    Looking at the week-ending market data, perhaps the most interest thing to note, aside from the usual look we take at commodities and bonds, is that the US Dollar Index rose 0.4%.  Why is this interesting?  Even though pundits are misguided about how to interpret Employment data, the common consensus is that the result that came out is likely to dampen the Fed's supposed aim of raising interest rates.  (Of course, we don't believe that the leading economic indicators support any kind of rate rise.) 

    Our advisory: this is not the kind of thing to gloss over.  When the Fed has been dragging its heels for months on raising rates even though it claims it wishes to do so, and data comes out that can give some justification for not raising rates, BUT traders send the Dollar higher, something's afoot.  We may believe that bond traders are the smartest people on Earth, but currency traders aren't very far behind.  It's hard to argue that the Dollar is going to become the target of less dilution in the short-term, but is it hard to argue that, as soft as things may be getting at home, that traders strongly believe that our major trading partners will get even softer? 

    Our feeling is that traders have very phlegmatic views on the Euro Zone, Japan, and the United Kingdom.

    And what of bond yields and commodities?  We stated, last week, that traders' perspectives were a little unreliable, coming right off the Fed's announcement.  The spread of the 10-year government bond yield over commodities prices is still elevated over last week, but:

    1.  It came down a smidgen week-over-week

    2.  It is still at a relatively depressed level.

    We have not made a forecast for an out-and-out contraction, but, make no mistake: even if the current ratio were to continue for six consecutive weeks, the writing would be on the proverbial wall.  Press writing about the economy tends toward the melodramatic, but...even if the data does not give us license to issue such a type of pronouncement, please be clear: it is correct to state that traders are, at present, moderately bearish. 

    Next time you're standing around the water cooler with your colleagues, ask them:  is inflationary pressure low enough to make bond yields seem to be reflecting bullish sentiment? 

    Watch them turn pale when they're asked the right question for the first time.

     

  • ECONOMIC & MARKET ANALYSIS - September 19, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2139.16, up 0.5% over last week.

    US Dollar Index - The Index finished at 96.04 up 0.7% from last week.

    Gold - Gold finished at 1310.80, down 2.4% from last week.

    Commodities - The Index finished at 83.24, down 0.9% from last week. 

    10-Year Government Bond Yield - The yield rose 1.1% to 1.69% last week.  

    Business Sales - In July, Business Sales fell 1.7%.

    Retail Sales - In August, Core Retail Sales rose 2.5%.

    Consumer Prices - In August, Core Consumer Prices rose 2.3%.

    Industrial Production  - In August, Output fell 0.7%. 

    Let's talk, first, about Retail Sales.  In our opinion, the Business Press makes more of this indicator than is justified, at least in terms of explaining a proper understanding of the economic landscape. 

    Yes, it's true that rising Retail Sales tends to correlate with economic expansion, but we're more interested in the landscape that is likely to promote increased spending, not the actual spending, itself.  For what it's worth, though, how did Spending come in this month?  In a strong sense, it describes the current climate well.  Sales rose (core sales, which are ex-auto) 2.5%.  This is a level that we consider just respectable enough, but just barely when you consider that, while All-in-Inflation is running at the low rate of 1.0%, Core Inflation came in at 2.3%, thus mitigating the power of that result in Retail Sales.

    And so we should talk about Inflation for a moment.  At an annualized rate of 2.3%, Core Inflation is now at the highest rate since December 2013.  Is Inflation at the start of a slow rise?  We believe so, if only because, given how much of a pummeling Commodities took over the last year, it's very difficult to see the medium-term trend being anything but a tortuous path upward.  Mind you: it will be a slow rise.

    But rising inflation is not necessarily a bad thing.  Other things being equal, rising inflation is a strong sign of rising business activity.  But that assumes that all other things are equal, the most notable 'other thing' being the value of the U.S. Dollar.  Inflation brought about by a falling Dollar doesn't have much meaning for business expansion.  But rising inflation accompanied by a proportionate (or higher) rise in the Dollar?  That's one of the most significant compound indicators (or ratios) you can look to for understanding where the economy is headed.  (Keeping score at home?  You'd be wise to put these in your scorecard.)  For practical purposes, how commodities perform is an excellent proxy for inflation.  And, the week ended with commodities falling 0.9% and the Dollar rising 0.7%.  And that, Gentle Reader, is not promising.  Commodities will fall all day, so to speak, when the Dollar rises, so you can't look there for help.

    And what about the week's marquee data?  Industrial Production?  This is the 11th consecutive monthly decline for Output, as it fell 0.7%.  And it was accompanied by a 1.3% decline in Capacity Utilization, bringing that indicator's Index to 75.60, the lowest it's been since November 2011. 

    And so that brings us to an important point about harmonizing what may appear to be contradictory points in this column.  While we believe the short-term outlook for inflation is upward, it is our deep conviction that, for the medium-term, disinflationary forces will take over, a consequence of weakening domestic demand.

    We challenge you to find us an economist who will forecast a quickening pace in Inflation in the face of persistent declines in Capacity Utilization and absent a persistent decline in the value of the currency. 

    The current Editor's Letter is a strong guide to understanding the health of the economy.  In a couple of weeks, we're going to be putting up a fresh primer on our most significant leading indicators, i.e. the ones that, when we report on, you should most be paying attention to.

    You should, yes, expect a lecture on being able to discern the difference between how things feel at the moment and where things are headed. 

  • ECONOMIC & MARKET ANALYSIS - October 3, 2016

    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 2168.27, up 0.2% over last week.

    US Dollar Index - The Index finished at 95.42 down 0.1% from last week.

    Gold - Gold finished at 1318.10, down 1.6% from last week.

    Commodities - The Index finished at 85.34, up 1.2% from last week. 

    10-Year Government Bond Yield - The yield fell 1.4% to 1.60% last week.  

    New Orders for Durable Goods - In August, Core New Orders for Durable Goods fell 1.9%.

    New Single-Family Home Sales - In August, the value of new home sales rose 27.7%.'

    Disposable Personal Income - On a per-capita basis in August, DPI rose 3.5%.

    Consumer Spending - On a per-capita basis, in August, Spending rose 2.9%.

    Energy Consumption - Domestic energy consumption rose 0.4% in June.  

    Let's talk, first, about New Single-Family Home Sales.  We have repeatedly said that this is a remarkably good economic indicator.  It's not quite a leading indicator, but it does tend to register sentiment in advance of where the economy is going to end up.

    And, on the surface, this month's result looks pretty good.  The value of sales (average price x volume) rose a strong 27.7%.  However, here's an important take-away: the rate of growth in median price paid, in August, is the lowest since 2012.  That's what we'd call an important early warning.

    Of course, regular readers know how we feel about New Orders for Durable Goods.  It's simply one of the most important early indicators of where the economy is headed.  And...in August, New Orders for Core Durable Goods (this comprises all goods except those that are related to transportation for which orders are typically very volatile) fell 1.9%.  This makes 20 consecutive months that New Core Orders have declined.

    The key take-away from Income and Spending data this month is not change in amounts (nothing particularly interesting there), but the ratio of Spending to Income.  That ratio is now at 90.9%, which is the 22nd consecutive month that it has fallen.  That is neither a picture of an expanding economy nor a picture of rising inflationary pressure.

    Looking for a bright spot?  One of the pillars of our way of understanding the economy is that, over the medium-term, at least (energy production is becoming more efficient, after all), consumption of energy does tend to correlate with economic growth.

    In June, for the first time in many months, consumption ticked up a bit.  It's not much, and it's not enough to offset significant leading indicators pointing south, but still...it's something to try to create some hope around.

    There's something else...: the ratio of production to consumption is now the lowest it's been since June 2015.  We can't say for certain that that portends rising gas and energy prices, but...it certainly bears out the firming we've been seeing in that sector over the last few months.

    And what of the market?  By now, most of you are probably clear that we are almost singularly focused on how 10-year government bond yields move in relation to the prices of commodities.  And here's the bare fact of it all:  commodities' prices in aggregate are now the highest they've been since early July, and yet, the yield on the 10-year government bond is the lowest it's been in six weeks.  That is not what you call northward-looking signal.

    In the face of rising commodities prices, consumers are spending smaller and smaller proportions of their income....does that sound like a precursor to anything but a downturn?

    That's why we're The Practical Economist.  Catch up with the revised economic forecast in The Editor's Letter.  

     

  • ECONOMIC & MARKET ANALYSIS - October 10, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2168.27, up 0.2% over last week.

    US Dollar Index - The Index finished at 96.48, up 1.1% from last week.

    Gold - Gold finished at 1254.50, down 4.8% from last week.

    Commodities - The Index finished at 85.64, up 0.4% from last week. 

    10-Year Government Bond Yield - The yield rose 7.9% to 1.72% last week.  

    Labor - In September, the Employment Rate ticked up 1 percentage point to 60.0%.

    Case-Shiller Housing Index - In July the price index of previously owned homes rose 4.0%.

    Regular readers should know, by now, that for weeks in which there's a paucity of significant fresh economic data, we don't update this column...simply because there's too little to talk about.

    There is truly not much this week that's going to be very useful; the market data is probably going to be more interesting.  However, given that we updated our formal forecast last week, we felt it was important to stay close to you with the data that's coming out...lest you think we're running away from our rhetoric, so to speak.

    The good news is that the Case-Shiller Price Index continues to show solid gains.  Remember our aphorism: there can be no contraction without some kind of fallout in Housing.  And the Index data bears out nothing like a recession.  We remember, of course, that this data is reported on a greater lag than most other data.  July's data is the most recent.  And remember: while a decline in Housing would not be a surprise in advance of a major contraction, the real fallout in Housing is always after the contraction starts. 

    Labor...what can we say about this topic we haven't said before?  The data, this month, as it has been for several months, is good.  The Employment Rate ticked up one percentage point to 60.0%.  That's a nice development.  And the ranks of the Net Newly Employed (this is newly employed people adjusted for those freshly entering the work force) rose 0.4%.  That's a strong touchstone for understanding the labor market as remaining modestly growing.

    We hope we do not have to remind that trends in labor are lagging indications, not leading indications.

    And so that brings us to the week's market data.

    You will notice that Gold slipped considerably.  Most of the time, it's fair to associate a drop in the price of Gold with optimism on the part of investors with regard to the economy.  And, in fact, the Dollar rose...by 1.1%.  However, you will notice that the stock market declined 0.7%.  Is that because investors think that the economy cannot withstand a hit to the nation's exports by way of a higher Dollar?  We don't think so.  

    In other words, it's pretty safe to conclude that the Dollar's rise was possibly due in part to continued belief that the Fed is intent on raising interest rates, but even more so, to weakness in the economies of major trading partners.  

    The upshot?  There's not a lot in this week's market data to feed a sanguine view of the economy. 

    For those who choose to take an optimistic view of the week's fresh economic releases, this might be a good time to remind you that, in August, consumer prices rose the most they have in more than a year, and that disposable personal income (per capita) rose the smallest it has in more than a year.

    Pay attention.

     

  • ECONOMIC & MARKET ANALYSIS - November 7, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.9%

    S&P 500 Index - The Index finished at 2085.18, down 1.9% over last week.

    US Dollar Index - The Index finished at 96.89, down 1.5% from last week.

    Gold - Gold finished at 1301.00, up 2.7% from last week.

    Commodities - The Index finished at 83.29, down 3.0% from last week. 

    10-Year Government Bond Yield - The yield fell 3.9% to 1.78% last week.  

    Case-Shiller Housing Price Index - In August, the Index rose 4.9%.

    Energy Consumption - In July, Energy Consumption rose 0.1%.

    Disposable Personal Income - In September, DPI per capita rose 3.5%.

    Consumer Spending - In September, per-capita consumer spending rose 2.8%.

    Employment - The Employment Rate ticked up 1 percentage point to 60.1% in October.

    If you're looking for reasons to remain rationally sanguine about the economic outlook, a good place to start would be the residential real estate market.  We look primarily to the Case-Shiller Housing Price Index for an understanding of that market.  For those to whom the Index is unfamiliar, the Index measures the value of previously-owned homes, nationally.  

    The data comes out on a slight lag, with August data having just been released.  And the latest data is perfectly in line with the way the residential sales market has been performing all year. And...it's a good figure, with no necessity to modify that characterization in any way.  So there's that much to rely on if you're looking to paint the clouds with sunshine.

    Regular readers probably know that we look to energy consumption as a key indicator of economic growth; the two correlate very strongly.  The good news?  The most recent data shows an uptick in consumption.  The bad news?  It's only an increase of 0.1%, which for all intents and purposes is no change at all.

    Just as importantly, the ratio of production to consumption tells us a lot about likely inflationary forces.  This month's ratio of 88.9% is unchanged from May and June and is the lowest since January of last year.  In other words?  This is just another indication to us that inflationary pressure is very subdued.

    Let's continue in that vein...

    Disposable Personal Income did last month.  It rose at a 3.5% annualized rate, but that's the lowest increase since November of last year.

    And Consumer Spending?  It rose at a very modest 2.8%.  And that's the lowest since last February.

    And that leads us to our marquee ratio on the likelihood that the velocity of money is going to speed up.  The ratio of Spending to Income is now at 90.8% and that's the lowest since July 2009.  In other words, consumers are spending at the slowest rate since July 2009.  Does that sound like rising inflation is on the horizon?

    Now, do we spend too much time explaining, each month, the common misconceptions about understanding labor data?  Maybe, but given the fierceness with which the conventional press measures the labor landscape, it seems necessary.

    The first thing to say is that the labor results for October were very good.  The Employment Rate ticked up 1 percentage point to 60.1%.  The ranks of the employed rose 1.8%.  And the number of net newly employed rose 3.0%.  (For those who are new to our metrics, "net newly employed" is the number of people freshly employed in October, adjusted for those entering the labor force.  When the figure is positive, it means that jobs were added in excess of those entering the labor force.)

    We cannot stress enough that labor trends occur on a significant lag...a lag that is at least 18 months long.  The present Employment Rate of 59.6% was precisely the same rate in effect in November 2009.  Please think about that.  That is a full 14 months after the collapse of Lehman Brothers.  And the nadir that the Employment Rate reached was not until May 2011.   Please let that sink in:  May 2011.  that is a full two and a half years after the Lehman collapse.

    In other words, current-trending labor data tell you almost nothing about where we're headed.

    And so, what of the market this week?

    Well, there are a few important things to know:

    1.  Commodities, in aggregate, fell, even as the Dollar fell.  (We assume you understand that the inverse is much more expected.)

    2.  Gold rose more than the Dollar fell.  (When Gold moves more than the inverse of the Dollar, it's a sure sign that traders are wary about believing that the Fed is going to be tightening monetary policy.)

    3.  Equities fell 1.9%.

    That is not a picture of a sanguine trading market.

  • ECONOMIC & MARKET ANALYSIS - October 31, 2016

    Economic & Market Analysis

    Latest Economic Indications

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

    S&P 500 Index - The Index finished at 2126.41, down 0.7% over last week.

    US Dollar Index - The Index finished at 98.34, down 0.3% from last week.

    Gold - Gold finished at 1266.25, down 0.4% from last week.

    Commodities - The Index finished at 85.92, down 0.2% from last week. 

    10-Year Government Bond Yield - The yield rose 6.8% to 1.85% last week.  

    New Single-Family Home Sales - In September, the value of new single family home sales rose 24.3%.

    Durable Goods Orders - In September, core durable goods orders fell 0.4%.

    If the only new data release, this week, were for new single-family home sales, we probably wouldn't have updated this page this week.

    But regular readers know that trends in new orders for durable goods can be very important for detecting overall economic trends.  

    Let's talk about home sales first.  

    In September, the value of new homes sold rose 23.4%.  That's a strong figure.  However, what you need to know is that almost all of that strength comes from volume in sales.  The average price paid rose just 2.7%; that's the smallest increase in price since March.

    You may recall that we have said in the past, that sales of new single-family homes correlate terrifically with the general economy, but they're not particularly a leading indicator.

    On to the marquee data...

    For the twentieth consecutive month, new orders for core durable goods fell.  This month they fell by 0.4%,  Regardless of what your particular prejudice is with regard to the stock market, bond market, or the general economy, this is a trend that is very difficult to ignore and strongly informs our downgraded forecast.

    What of the week's market data?  The most significant take-away from the market data is one that, to most people, may seem abstruse, remote, and difficult to relate to present circumstances.  In a nutshell, commodities prices fell while bond yields rose.

    Now, the first thing to say is that fallout from changes in commodities prices and bond yields occur on a significant lag.  That lag is typically 18 - 24 months.  You may already be aware of this phenomenon, from the fact that was commonly commented on in 2006 and 2007 that bond yields had become inverted (i.e. long-term bond yields had fallen below short-term bond yields), resulting in the common conclusion that bond traders were expecting a recession.

    But the second thing to say is that, if you subscribe to the theory that most of inflationary pressure can be seen in commodities prices, this raises the question of what's in store for us in 2018.

    Rising bond yields even as commodities remain stable or drop?  Or, to put it another way, bond yields that rise faster than commodities prices?  That is a classic formula for economic growth.  Is it silly to talk about growth being on the horizon when we're forecasting a contraction?  

    On the other hand, rising bond yields can simply be an indicator of investors' declining faith in the credit of the U.S. Government.

    Put simply, if this trend continues, you can bet that the answer is one of these two possibilities.

    Which is it?  Stay tuned.

  • ECONOMIC & MARKET ANALYSIS - November 21, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - Initial jobless claims fell 0.1% on an annualized basis.  

    S&P 500 Index - The Index finished at 2181.90, up 0.8% over last week.

    US Dollar Index - The Index finished at 101.34, up 2.4% from last week.

    Gold - Gold finished at 1226.75, down 3.2% from last week.

    Commodities - The Index finished at 83.02, up 0.8% from last week. 

    10-Year Government Bond Yield - The yield rose 9.6% to 2.36% last week.  

    Industrial Output - In September, Output declined 0.9%.

    Business Sales - In August, Business Sales rose 0.1%.

    Retail Sales - In September, core Retail Sales rose 2.8%.

    Consumer Prices - In October, Core Inflation rose 2.2%.

    This was not particularly a strong week if  you're looking to boost your sanguine outlook for the economy.

    For starters, Business Sales rose...yes, but but a scant 0.1%. 

    Retail Sales?  They rose a modest 2.8%.  That figure contrasts with annualized increases in the 5% - 8% range in 2010 and 2011.  And, this figure comes to you in context of annualized inflation hovering just under 2.0%.  In other words, Inflation, while moderate, is not ultra-low.

    Of course, the marquee indicator for the week is Industrial Production.  And yet again--for the 12th consecutive month, Output...declined, this month by 0.9%.  The Industrial Production Index now stands at 104.2.  To put that in context, the last time the figure was that low was October 2014, and the last time before that was September 2007.  Get the picture?  This is not a picture of a strong and strengthening industrial economy.

    And Capacity (Factory) Utilization?  As our regular readers know, this indicator is one of our best leading indicators of demand and inflation. 

    Let's interrupt that train of thought for a moment to talk about Inflation.  Core Inflation rose 2.2% in October.  That annualized rate of Inflation has been unchanged at that level since February.  If we add in Energy and Food, we come to an annualized rate of 1.4%, which is the highest level since December 2014.  Of course, all-in-inflation is being buoyed at this point by energy, which has started to creep up again.  The key take-away?  That level of Core Inflation is not associated with a softening economy, yet...by most measures--as our regular readers know--there isn't a strong case to be made that the economy is expanding.  That's the important point to bear in mind.  

    Of course, one of our most effective measures of inflationary direction is Capacity Utilization. In September, Utilization declined yet again, for the 18th consecutive month, and by 1.5%.  That Index now stands at 75.48.  To give you an idea of how weak that figure is, the last time it was that low was July 2011...and the last time before that was September of 2003.

    There are weeks in which the only data that comes out seems to support a view that things will continue percolating along.  This is not one of those weeks.

    And the market?  We think the Equity Market is in complete denial of basic economic facts of life, and we think the Bond Market is reflecting where the economy will likely be going two-to-three years out, as traders' sentiment around bonds is a leading indicator, but a far-off leading indicator.  

    Don't be drawn in by euphoric sentiment.  It's a trap.

    N.B.:  One word of housekeeping--we have modified how we report initial jobless claims to be more in line with how we measure and report other data.  You will notice that, instead of looking at the four-week average based on seasonally-adjusted data, we are now working with actual raw figures and how the rolling 52-week average changes.  We think it's a better (read: more accurate) measure.

  • ECONOMIC & MARKET ANALYSIS - November 28, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - Initial jobless claims fell 0.1% on an annualized basis.  

    S&P 500 Index - The Index finished at 2213.35, up 1.4% over last week.

    US Dollar Index - The Index finished at 101.50, up 0.5% from last week.

    Gold - Gold finished at 1186.10, down 3.3% from last week.

    Commodities - The Index finished at 85.03, up 2.4% from last week. 

    10-Year Government Bond Yield - The yield was unchanged over last week at 2.36%.     

    New One-Family Home Sales - The value of new homes sold in October rose 15.8%.

    Durable Goods Orders - In October, Core Orders rose 0.6%.

    Capital Spending - In October, Non-Defense Capital Spending fell 3.6%.

    Let's start this discussion by looking at one of the easiest indicators that the lay person can relate to:  the value of new one-family homes that were sold.  In October, the value of these sales (volume x price) rose a moderate 15.8% in October.  It's not a bad figure, but two points need to be expressed:  (1) that's the smallest increase since April and (2) all of the increase came from volume, not from strength in prices.  In fact, the mean price....declined by 0.5%. This is not exactly a picture of a robust or expanding housing market.

    What about Durable Goods Orders, a particularly important economic indicator?  We have some modestly good news.  After months of declines, this indicator registered a minor increase of 0.6%.  This is the first increase since December 2014.  Let's put this in perspective: in December 2014, the 12-month rolling average was $161 million.  In October of this year it was just $152 million.  In other words, we're strongly suggesting you don't put too much stock in a one-month increase when we have $9 million in spending to make up before we even get to where we were almost two years ago.  

    Even more compelling than New Orders for Durable Goods (which, of course, includes things like consumer products such as refrigerators) is Capital Spending.  To refine that measure even more we remove Defense Spending from the total.

    Non-Defense Capital Spending is, arguably, the single most significant economic indicator in terms of capturing state and direction of the economy.

    Now, in October, Capital Spending declined...yet again...by 3.6%.  This is the 23rd consecutive month that the indicator registered a decline.  By way of contrast, Capital Spending came in at about $87 million in November 2014 (the last time it rose) and in October 2016 it sat at $72 million.  That's a decline of 17% (or $15 million) off the last time it rose.  

    You may, if you like, consider this week's data update a tonic against those who claim that brightening times are around the corner.  At a minimum, you may consider this as further support for our current forecast.

    And what of the markets this week?  Most indications were in line with each other...:  equities rose along with the Dollar....that's definitely, on paper, a sign of sanguine trader sentiment....especially given that commodities (in aggregate) also rose.  Heck, even Gold fell, which dovetails with the idea that things are firming up.

    If all of that's the case, please explain why the yield on the 10-year government bond was unchanged.

    Ignore our oft-repeated admonition at your peril: bond traders occasionally get it wrong, so to speak, over the course of a six-week period, but....they never get it wrong longer than that.  They always know what's coming. Rising commodity prices but stagnant 10-year yields? As the saw goes, keep your eye on the ball. 

    N.B.:  One word of housekeeping--we have modified how we report initial jobless claims to be more in line with how we measure and report other data.  You will notice that, instead of looking at the four-week average based on seasonally-adjusted data, we are now working with actual raw figures and how the rolling 52-week average changes.  We think it's a better (read: more accurate) measure.

  • ECONOMIC & MARKET ANALYSIS - December 5, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - Initial jobless claims fell 0.2% on an annualized basis.  

    S&P 500 Index - The Index finished at 2191.95, down 1.0% over last week.

    US Dollar Index - The Index finished at 100.66, down 0.8% from last week.

    Gold - Gold finished at 1178.10, down 0.7% from last week.

    Commodities - The Index finished at 87.04, up 2.4% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.39%, up 1.3% from last week.    

    Energy Consumption - In August, total energy consumption rose 1.3%.

    Case-Shiller Property Price Index - In September, the National Index rose 5.0%.

    Personal Income - In October, Personal Income rose 3.9%

    Consumer Spending - In October, Consumer Spending rose 3.9%, as well.

    Employment - The Employment Rate ticked up one percentage point to 60.2% in November.

    We hope that our regular readers know that we believe that one of the strongest indicators that correlate with economic expansion is energy consumption.  And, we have a bit of good news: in August, total consumption rose a modest 1.3%.  That outcome is the highest since March, but...keep in mind, as well, that it's the lowest in more than three years.

    Don't read too much into this month's Case-Shiller Price Index result.  That annualized increase of 5.0% looks healthy enough.  However, this is a case where this Index is a less accurate descriptor of the housing market than the pieces that comprise the results of Single-Family Home Sales.  The problem?  Even on a national level, the supply of homes for sale relative to buyers is low.  It's actually very low.  That's having a misleading upward effect on price growth.  Adjusted for supply, the figure isn't impressive.  Mentally increase supply to a level that's more consistent with historical ratios of supply to demand....and what do you think happens to price growth?

    Now, let's talk about Income and Spending.

    Both rose moderately well in October. In fact, Income rose at the fastest rate since February.

    However, if you look at Disposable Personal Income with the effects of Inflation removed, it rose a much more moderate 2.5%, which is the lowest increase since January.  

    There are two other major take-aways, as well:

    1.  Spending as a percentage of Income came in at 90.7%, which is the smallest percentage since before the financial crisis.

    2.  Savings as a percentage of Income rose to 5.9%, which is also the highest rate of savings since before the financial crisis.

    This is not a picture of an expanding consumer segment.

    Is this context, let's talk about the labor picture.

    The plain fact is that the labor market has continued to firm up.  In November, the ranks of the employed rose a strong 1.8%.  That ended up translating to a very strong figure of 221,000 net newly employed people.  (Remember that the 'net newly employed' metric removes the effect of people entering and leaving the labor force.)

    That is a very strong figure.  But please remember that labor trends occur on a significant lag.

    For example, please remember (or know, for the first time), that the ranks of the Net Newly Employed, in the wake of the Financial Crisis, did not turn positive until 2012....three years after the onset of the crisis.  THREE YEARS.

    With that in mind, isolated positive labor data should be taken with a proverbial grain of salt.  Labor data is NOT a leading indicator of where the economy is headed.

    As for the market, the single biggest takeaway from the week is that both equities and the Dollar fell.  These are not the stuff of what sanguine trader sentiment is made of.

    We remain unchanged with regard to our phlegmatic outlook for the near term.

     

  • ECONOMIC & MARKET ANALYSIS - December 19, 2016

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - Initial jobless claims were unchanged.  

    S&P 500 Index - The Index finished at 2258.07, down 0.1% over last week.

    US Dollar Index - The Index finished at 102.81, up 1.2% from last week.

    Gold - Gold finished at 1126.95, down 0.1% from last week.

    Commodities - The Index finished at 87.13, down 1.1% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.59%, up 5.0% from last week.    

    Business Sales - In October, Business Sales rose 1.5%.

    Retail Sales - In November, Core Retail Sales rose 3.6%.

    Consumer Prices - In November, Inflation ran at a 1.6% annualized rate.

    Industrial Output - In October, Output fell 0.7%.

    Employment - The Employment Rate ticked up one percentage point to 60.2% in November.

    We will dispose quickly of the less important data this week.  Business Sales did rise in the latest data release, but it was a meager 1.5%.   Retail Sales rose a respectable amount, 3.6% (this is core sales, ex-autos), but it is only that.  It is not at a level you should consider expansionary.  It's a level that you should consider "fine" and no more or less than that.

    The big data this week is of course also some of the most important data of the month, and that's Industrial Production.

    In October, Output fell for the 14th consecutive month.  Remember our methodology: we work with actual data, unadjusted for seasonality, but look at how the 12-month rolling average changes.  In point of fact, this way of looking at the data comports very closely to how the data changes year-over-year, which also takes any noise related to seasonality out of the picture.  We then average the monthly data over three months to eliminate temporary aberrations from the analysis.

    However, for skeptics, here's what you need to know: year-over-year, actual Output changed on the Index, from 103.76 to 103.04.  That's about as plainly as we can use the data to describe the fact that Output fell in October (as it has for 14 consecutive months).

    Of course, a corollary indicator is Capacity Utilization (think factory utilization).  It's a very useful indicator for understanding the directionality of demand and inflationary pressure.

    That Index fell in October by 1.2%.  It has now fallen for 20 consecutive months, and the Index now stands at 75.  Given both the level the Index is now at and the trend in directionality, we are very confident in saying that the trend in the near term is going to be one of disinflation, not expanding inflation.

    And yes, to our mind, that does mean that we think the Federal Reserve was misguided in announcing this week that it is raising the short-term interest rate by a quarter of a percent.

    The market?  For those of you who are thinking the Fed is correct in forestalling growing inflationary pressure, you'd want to know that the Bloomberg Commodities Index (our primary gauge for commodity prices) fell...by 1.1%.  Of course the Dollar rose, and that was largely on the Fed's announcement about monetary tightening.  Lastly, the equity market was underwhelmed by it all...ending almost unchanged week-over-week.

    For those of who are in the Sanguine Camp, we think you'll need to read the fresh Editor's Letter.

     

     annualized increase of 5.0% looks healthy enough.  However, this is a case where this Index is a less accurate descriptor of the housing market than the pieces that comprise the results of Single-Family Home Sales.  The problem?  Even on a national level, the supply of homes for sale relative to buyers is low.  It's actually very low.  That's having a misleading upward effect on price growth.  Adjusted for supply, the figure isn't impressive.  Mentally increase supply to a level that's more consistent with historical ratios of supply to demand....and what do you think happens to price growth?

    Now, let's talk about Income and Spending.

    Both rose moderately well in October. In fact, Income rose at the fastest rate since February.

    However, if you look at Disposable Personal Income with the effects of Inflation removed, it rose a much more moderate 2.5%, which is the lowest increase since January.  

    There are two other major take-aways, as well:

    1.  Spending as a percentage of Income came in at 90.7%, which is the smallest percentage since before the financial crisis.

    2.  Savings as a percentage of Income rose to 5.9%, which is also the highest rate of savings since before the financial crisis.

    This is not a picture of an expanding consumer segment.

    Is this context, let's talk about the labor picture.

    The plain fact is that the labor market has continued to firm up.  In November, the ranks of the employed rose a strong 1.8%.  That ended up translating to a very strong figure of 221,000 net newly employed people.  (Remember that the 'net newly employed' metric removes the effect of people entering and leaving the labor force.)

    That is a very strong figure.  But please remember that labor trends occur on a significant lag.

    For example, please remember (or know, for the first time), that the ranks of the Net Newly Employed, in the wake of the Financial Crisis, did not turn positive until 2012....three years after the onset of the crisis.  THREE YEARS.

    With that in mind, isolated positive labor data should be taken with a proverbial grain of salt.  Labor data is NOT a leading indicator of where the economy is headed.

    As for the market, the single biggest takeaway from the week is that both equities and the Dollar fell.  These are not the stuff of what sanguine trader sentiment is made of.

    We remain unchanged with regard to our phlegmatic outlook for the near term.

     

  • ECONOMIC & MARKET ANALYSIS - January 2, 2017

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - Initial jobless claims rose 0.1%. 

    S&P 500 Index - The Index finished at 2238.83, down 1.1% over last week.

    US Dollar Index - The Index finished at 102.38, down 0.5% from last week.

    Gold - Gold finished at 1134.60, up 0.3% from last week.

    Commodities - The Index finished at 87.51, up 1.4% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.45%, down 3.7% from last week.    

    Sales of New Single-Family Homes - In November, the value of new sales rose 12.7%.

    Personal Income - Income rose 2.4%.

    Durable Goods Orders - In November, New Orders for Core Durable Goods rose 0.7%.

    Capital Spending - In November, Core Capital Spending fell 3.1%.

    It's starting. 

    And we can see it this month--or at least the start of it--in the sales of new single-family homes.  The value of these sales (volume x price) rose what sounds like a healthy 12.7% on an annualized basis.  There are two problems with this result:

    1.  It's the smallest increase in seven months.

    2.  All of the increase came from volume.  The mean price actually fell 2.4%.

    Is this an opportune to remind you of one our favorite things to say?  That there can be no general expansion without an expansion in the housing sector?  You bet it is.

    Let's chat about Income for a minute.  Personal Income, adjusted for Inflation, rose 2.4% in November.  While that's not a strong figure, it's also not bad, but...consider: it's the smallest increase since 2010. 

    And consumers' ratio of spending to income came in at 90.8%, which is the lowest ratio since June 2009.  In other words: use this as more ammunition to support your case that rising inflation is not really on the horizon.

    The real heavyweight data this week...that's Durable Goods and Capital Spending.  Core Durable Goods is a subcategory that excludes transportation-related goods.  The result?  Pretty good.  The value of new orders rose 0.7%, and that's the second straight month of increases.  However, please remember that those two months follow 21 consecutive months of declines. Don't discount 21 consecutive months of declines, especially as the effects of this indicator occur on a lag.

    But more importantly, let's look at a separate refinement of the data and...that's Capital Spending.  Excluding defense and all aircraft, as well, spending fell 3.7%, and that's the sixth consecutive monthly decline for this category. 

    Nearly as powerful, if you include aircraft but continue to exclude defense, spending declined 3.1% for the 24th consecutive monthly decline.

    There's no way around it.  This is pretty compelling economic stuff.

    As for the Market, what you need to know is pretty simple: both the Dollar and stocks fell.  That is a textbook description of a phlegmatic investor outlook.

    Things are starting to get interesting.

     

  • ECONOMIC & MARKET ANALYSIS - January 16, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2274.64, down 0.1% over last week.

    US Dollar Index - The Index finished at 101.19, down 1.0% from last week.

    Gold - Gold finished at 1205.05, up 2.4% from last week.

    Commodities - The Index finished at 88.54, up 1.3% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.40%, down 1.0% from last week.    

    Business Sales - In November, Business Sales rose 1.7%.

    Retail Sales - In December, Retail Sales rose 3.8%.

    Employment - The Employment Rate remained unchanged at 60.2% in December.

    This is a great week to be reading this column if you're specifically looking for good news.  This week it's all about confirming/current indicators.

    To start with, Business Sales in November rose a modest 1.7%.  That's just a modest result, but it's an increase, which is in contrast to many months of declines.

    And Core (ex-auto) Retail Sales rose a moderate amount, by 3.8% in December.

    Those are pretty decent results.

    And, in December, the labor picture came out pretty decently.  The ranks of the employed rose 1.6%.  In fact, on a net basis, the number of newly employed was 112,000.  That's a strong number.  However, please know that, even for all that, the Employment Rate remained unchanged from November.

    This page wasn't updated last week, so this is, essentially, a fortnight of pretty decent economic results. 

    The most important thing to know about the Market, this week?  That would be, that, even as the Commodity Index rose (not surprising, as the Dollar rose) the yield on the government's 10-year bond fell.  Remember: the single-most important indicator of inflationary direction is the direction in which commodities prices are headed.  When you see bond yields fall while commodities prices rise? 

    Watch out.

     

  • ECONOMIC & MARKET ANALYSIS - January 23, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2271.31, down 0.1% over last week.

    US Dollar Index - The Index finished at 100.81, down 0.4% from last week.

    Gold - Gold finished at 1196.05, down 0.7% from last week.

    Commodities - The Index finished at 88.38, down 0.2% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.47%, up 3.0% from last week.    

    Business Sales - In November, Business Sales rose 1.7%.

    Industrial Production - In November, Output declined 0.7%.

    Consumer Prices - Core Inflation was essentially unchanged at 2.1% in December.  

    Would you like a modicum of good news?  Business Sales rose 1.7% in November.  Don't make much of it; it's not among the first and second ranks of most important economic indicators, but...it's still nice news. 

    Now, if you've been paying attention to the conventional press, you've been hearing that Inflation has been trending up.  That's true.  All-in-Inflation came in at 1.8% in December.  That may not sound very high, but it is, in fact, the highest rate in 27 months.  But that figure is all about recovery in the energy sector. 

    If we exclude food and energy, we're left with Core Inflation, which came in at 2.1%.  The significant thing about this is that, even as it's skimming the Fed's stated target, it has been essentially unchanged for 13 consecutive months.  Is this a convenient time to remind you that we have hewed firmly to the line that inflationary pressures are declining?  You bet it is.

    Of course, while it's funny it's also not funny: even as the Fed continues to talk about tightening monetary policy, Output continues to decline. 

    November is the 14th consecutive month that Industrial Output declined.  The current 12-month rolling average of the Index is at 104.1, and the last time the Index was at this level was September 2014.  You may want to think about that for a little while.

    In similar fashion, Capacity Utilization declined 1.2% and this is the 20th consecutive month that that indicator has fallen.  The Index now stands at 75.35.  The last time the Index was that low was June 2011, so that should give you something to think about, as well.

    As for the Market, the most important thing to take away from the data is not just that commodities fell in the face of a falling Dollar -- remember that it's far more intuitive that commodities would rise on a falling Dollar -- but that that commodities actually fell more than the Dollar fell.

    What does it mean?  No one knows 'til things fall out, but...our best takeaway: it's a pretty strong signal that demand is falling...or, at least that traders expect demand to fall pretty strongly.

    And yes, that dovetails pretty well with our longer-range forecast in the face of declining capacity utilization.

    Our prediction: 2017 is going to be a very bumpy year.

  • ECONOMIC & MARKET ANALYSIS - January 30, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2294.69, up 1.0% over last week.

    US Dollar Index - The Index finished at 100.56, down 0.2% from last week.

    Gold - Gold finished at 1189.70, down 0.5% from last week.

    Commodities - The Index finished at 87.98, down 0.5% from last week. 

    10-Year Government Bond Yield - The yield finished at 2.48%, essentially unchanged.     

    Sales of New Single-Family Homes - In December, the value of all sales rose 8.1%.

    Capital Spending  - In December, Capital Spending fell 0.7%.

    We have just two indicators to report this week, and if you want a quick summary, it really wasn't a great week.

    Let's start with the housing data. 

    It's true that when you multiple volume x mean price, the value of total home (single family) sales rose in December.  But when you slice the number open, it doesn't look so great.  To start with the number of homes sold in December rose....but it was the smallest rise since April of last year.

    And, the mean price actually....fell.  It fell by 1.1%.  This is the third consecutive month that the mean price fell.

    As if that weren't sobering enough, we move on to one of the indicators that lie at the heart of our economic model:  Capital Spending.  Another term you could use for this category is Private Domestic Investment.  It is, for all practical purposes, impossible to assign too much importance to this indicator in assessing economic direction.

    In December, total Capital Spending fell yet again, this month, by 0.7%.  December is the 25th consecutive month that this indicator has fallen.

    In November 2014, the 12-month rolling average in Spending was $86.753BN.  By December 2016, it had fallen to $70.450BN.

    Please do not gloss over this.  Please read it again.

    Please understand that the effects in Capital Spending occur on a significant lag.  We have been reporting to you that economic strength has been softening, but, the reality is that the real weakness, the stage for which has been set by Spending, is yet to come, probably later this year.

    Now, what about the Market? 

    As you know, we try to look for the one development in the week that stands out as most significant.  This week is a lot like last week:  yet again, commodities' prices fell, even as the Dollar fell

    When the prices of commodities move in opposite direction from the Dollar, untangling how demand is changing can be very difficult.  But when both the Dollar and commodities fall, you are looking squarely nto the face of trader sentiment that is buying into declining demand.

    And that, Gentle Reader, is too conveniently dove-tailed with our broader forecast.

     

  • ECONOMIC & MARKET ANALYSIS - February 6, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2297.42, up 0.7% over last week.

    US Dollar Index - The Index finished at 99.73, down 0.8% from last week.

    Gold - Gold finished at 1221.95, up 2.7% from last week.

    Commodities - The Index finished at 87.94, unchanged from last week.  

    10-Year Government Bond Yield - The yield finished at 2.47%, essentially unchanged.     

    Case-Shiller Housing Price Index - In December, the national index rose 5.3%.

    Energy Consumption - In October, energy consumption rose 1.4%

    Personal Income - In December, Personal Income rose 3.8%

    Labor - In January, the Employment Rate remained unchanged at 60.2%.

    Even as we have begun to see weakness in the sales of new single-family homes, sales of existing homes continue to hold up.  In December, the Case-Shiller Housing Index rose a relatively strong 5.3%. 

    There's more good news:  October, the latest month for which data is available, registered a 1.4% annualized increase in energy consumption, and that's good: energy consumption is a strong correlant with economic growth.  And, in fact, the ratio of production to consumption came in at 87.3%, which is the lowest it's been since September 2014, and that augurs well for industries that rely on rising energy prices.

    Lastly, even as there has been a slight uptick in consumer prices the last several months, Income has moderately kept up.  At an increase of 3.8% in December, Personal Income is holding up rather well, and that translates well through to Disposable Personal Income Per Capita, which rose a moderately strong 3.5%.

    However, if you want to start to look for clouds on the horizon, the Labor data will suit your purpose just fine.

    The good news is that the ranks of the Employed rose 1.4% in January.  And, using our standard three-month averaging rule, the number of Net Newly Employed rose a strong 156,000.  That last figure is pretty strong.

    However, if we look at the raw data (unaveraged, that is), the number of Net Newly Employed in January was actually the weakest since May 2016.

    And of course, there's the fact that the Employment Rate has now remained unchanged for two consecutive months, at 60.2%.

    That dovetails well into a quick point that's buried in the market data....and that's the inherent weakness in the Dollar.

    For much of the last 18 months, the Dollar has enjoyed an upswing in strength.  We must remember, however, that that strength was very relative, that at its height during this period, the Dollar only flirted with passing 100.0 (or par) on the US Dollar Index.  This is now the second consecutive week that the Dollar has fallen, and it's below 100.0. 

    We submit for your consideration our contention that at least 50% of the run-up in the Dollar over the past 18 months is attributable to expectations of tightening by the Central Bank  beyond what was reasonably expected from economic data. 

    The question is not whether the U.S. economy experienced some strengthening in the 2015 - 2016 period.  The question is whether the Dollar's surge from the low 90's on the Dollar Index to 100.0 was wholly justified based on organic economic data. 

    We argue that it wasn't...and that you are now seeing the truth. 

     

    t a quick summary, it really wasn't a great week.

    Let's start with the housing data. 

    It's true that when you multiple volume x mean price, the value of total home (single family) sales rose in December.  But when you slice the number open, it doesn't look so great.  To start with the number of homes sold in December rose....but it was the smallest rise since April of last year.

    And, the mean price actually....fell.  It fell by 1.1%.  This is the third consecutive month that the mean price fell.

    As if that weren't sobering enough, we move on to one of the indicators that lie at the heart of our economic model:  Capital Spending.  Another term you could use for this category is Private Domestic Investment.  It is, for all practical purposes, impossible to assign too much importance to this indicator in assessing economic direction.

    In December, total Capital Spending fell yet again, this month, by 0.7%.  December is the 25th consecutive month that this indicator has fallen.

    In November 2014, the 12-month rolling average in Spending was $86.753BN.  By December 2016, it had fallen to $70.450BN.

    Please do not gloss over this.  Please read it again.

    Please understand that the effects in Capital Spending occur on a significant lag.  We have been reporting to you that economic strength has been softening, but, the reality is that the real weakness, the stage for which has been set by Spending, is yet to come, probably later this year.

    Now, what about the Market? 

    As you know, we try to look for the one development in the week that stands out as most significant.  This week is a lot like last week:  yet again, commodities' prices fell, even as the Dollar fell

    When the prices of commodities move in opposite direction from the Dollar, untangling how demand is changing can be very difficult.  But when both the Dollar and commodities fall, you are looking squarely nto the face of trader sentiment that is buying into declining demand.

    And that, Gentle Reader, is too conveniently dove-tailed with our broader forecast.

     

  • ECONOMIC & MARKET ANALYSIS - February 20. 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2351.16, up 1.5% over last week.

    US Dollar Index - The Index finished at 100.90, up 0.2% from last week.

    Gold - Gold finished at 1240.55, up 0.3% from last week.

    Commodities - The Index finished at 88.11, down 1.4% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.42%, essentially unchanged.     

    Business Sales - In December, Business Sales rose 2.8%.

    Retail Sales - In January, Core Retail Sales rose 4.6%

    Consumer Prices - In January, Core Inflation rose at a 2.2% annualized rate.

    Industrial Production - In December, Output rose 0.1%

    As regular readers know, Business Sales are reported on one-month lag relative to Retail Sales, which get a lot more media exposure.  And it's not surprising why.  To start with, "Retail Sales" simply sounds like a strong indicator of economic confidence.  More importantly, we have to remember that the Consumer makes up roughly 70% of Gross Domestic Product.

    And in point of fact, the most recent data on retail sales is pretty decent.  Excluding autos, sales rose a very respectable 4.6%.  It's arguable that the most salient piece of information about this data point is to show how modest economic growth has been the past, say, 24 months, because this rate of growth is the fastest since May 2012.  You may want to think about that for a moment.

    But there's another equally important point.  Even as core retail sales have hit a new high since May 2012, Inflation is hitting a new high, as well. 

    In January, Core Inflation ran at a 2.2% annualized rate.  Consider: that's the largest figure since....March 2012. 

    Retail Sales rising modestly strong in the face of Inflation rising modestly well.  In other words, take the Retail Sales result with a grain of sale with regard to economic optimism.

    And that brings us to...the marquee data of the month: Output

    Would you like some good news?  Industrial Production rose in December.  It rose a very modest 0.1%.  Now keep in mind that that's the first monthly increase since September 2015.  That's more than 15 months back. 

    Next, consider this: the 12-monthr rolling average of the Output Index is 104.2.  This is the lowest the Index has been since October 2014.  And, that's a fact.

    Hand-in-glove with Industrial Production goes Capacity Utilization, perhaps our most salient indicator of demand.  And, in January, Utilization declined 0.3%.  That is the 22nd consecutive monthly decline in this indicator.  The Index now stands at 75.36, and that's the lowest since...July 2011.

    If you have any questions as to why we continue to be phlegmatic about short- to medium-term prospects for economic expansion, it's right there.  Even as inflation has been rising, even as the stock market is hitting new highs, we think it's extremely difficult to make any case for growth in demand and prices with results like these.

    And what should you make of the week-ending market data?  In a figurative word, not much.

    To start with, the Dollar, Gold, and Bonds barely moved.  Just as importantly, however, if we do look at how the important market points moved, we see a mixed picture.  The good news is that both stocks and the Dollar rose.  That's a bullish sign you want to see.  On the other hand, as we just said, the Dollar barely moved at all; and that's in conjunction with lower prices for commodities, in general, and Oil in particular, and with Gold moving higher.  Remember: there is nothing intuitive about Gold moving higher on both stocks and the Dollar rising.

    In a nutshell, don't conclude too much from this week's market data.

     

  • ECONOMIC & MARKET ANALYSIS - March 6, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2383.12, up 0.7% over last week.

    US Dollar Index - The Index finished at 101.34, up 0.2% from last week.

    Gold - Gold finished at 1238.10, down 0.8% from last week.

    Commodities - The Index finished at 87.19, down 0.3% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.48%, up 7.2% from last week.      

    Case-Shiller Housing Price Index  - In December, the Index rose 5.3%.

    Energy - In December, total energy consumption rose 0.6%.

    Consumer Prices - In January, Core Inflation rose at a 2.2% annualized rate.

    Sales of New Single Family Homes - In January, the value of new homes sold rose 5.2%.

    Personal Income - In January, Income rose 3.7%.

    Consumer Spending - In January, Spending rose 4.4%.

    Capital Spending - In January, non-defense capital spending fell 3.5%.

    We usually talk about Capital Spending last, but this month, let's get right to it, keeping in mind that it's easily argued that this is the most important of all leading economic indicators: this is the 26th consecutive month that non-defense capital spending (or private domestic investment) declined.  This is nothing less than a stunning thing and this alone should temper whatever sanguine thoughts you have about the domestic economy.

    On to the balance of the week's economic data...

    A quick minor bright spot:  energy usage grew by 0.6%.  The good news is that it grew, the bad news is that it's a very modest figure.  Of course we expect that you understand that energy consumption correlates very strongly with economic expansion.  Again, that's very modest growth figure.

    In a bright spot for purveyors of fossil-based fuels, the ratio of production to consumption came in at 84.2%, which is the lowest it's been since September 2014, thus putting upward pressure on prices for natural gas and crude oil.

    Now let's talk about some more-consumer based data...

    The apparent good news is that the value of new homes sold rose 5.2%.  However, that's the lowest increase since March of last year.  And while both the volume of sales and the mean price rose, volume rose 4.3%, which is the worst (or lowest) increase since March of last year.

    How about Income and Spending?

    Well, Personal Income rose 3.7% in January.  However, after you factor in year-over-year inflation of 2.4%, that's (except for last month) the lowest growth in more than five years.

    And Spending?  The ratio of Spending to Income came in at 90.9%.  While Spending did rise 4.4%, this ratio is, except for the past five months, the lowest since 2009.

    Not a very hearty picture, is it?

    Well, the market had a relatively positive "take" on things.  The Dollar was up, as were stocks.  Gold, as well as commodities, in aggregate, fell. 

    To complete the picture of a market that appears to be relatively sanguine, the yield on the 10-year government bond rose just a bit.

    The only thing that's missing from making that the textbook picture of a market that believes the economy is expanding is rising commodity prices. 

    Don't exhale yet.

     

  • ECONOMIC & MARKET ANALYSIS - March 20, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2378.25, up 0.2% over last week.

    US Dollar Index - The Index finished at 100.31, down 1.1% from last week.

    Gold - Gold finished at 1229.35, up 1.9% from last week.

    Commodities - The Index finished at 85.14, up 1.0% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.50%, down 2.9% from last week.      

    Employment  - In February, the Employment Rate remained unchanged at 60.2%.

    Retail Sales - In February, Core Retail Sales rose 8.2%.

    Industrial Output - Production rose 0.4% in February.

    Consumer Prices - Core Inflation ran at a 2.2% rate in January.

    There are three measures of the labor market that we look at, and if you want to argue that by giving the spotlight to the Employment Rate above others, we're unfairly creating a less positive picture than is the case, we won't completely disagree.  But we do believe that the Employment Rate is the broadest and most important measure of how strong the labor market is.

    Having said that, of course, it doesn't tell us enough, does it?  For example, the ranks of the Employed rose 1.1% in February, and in fact the Number of Net Newly Employed rose 127,000, and this is a pretty healthy number.

    So, is this a good moment for a bit of housekeeping?  Are you wondering how the Employment Rate could stay unchanged when the number of Net Newly Employed rose?

    It's simple: what is implied is that, if the Employment Rate isn't moving, but we know that the population is rising, it's a sign that people are continuing to leave the work force.  Another way to look at it: the general population is growing but the number of those employed isn't growing at the same rate.

    How about some really good news?  Retail Sales in February rose at the very strong rate of 8.2%.  That's just a very strong increase.

    Let's chat about short-term interest rates and the Fed for a moment.  This week, the Fed announced that it will raise rates a quarter of a percentage point, but the language around the announcement was fascinating.  For the first time in years, the Fed aggressively distanced its decision from the fact of key data justifying the move but rather couched it in an understanding of needing to normalize the monetary environment.

    This is interesting for one particular reason: inflation has, in fact, been slowly rising.  In fact, in January, all-in consumer prices (including food and energy) rose at the rate of 2.4% and that's the highest rate since April 2012, so...it wouldn't be difficult for a layperson to find justification for a rate rise, yet...that was not the Fed's primary rhetoric.

    This is a very important point, and you may want to read that last paragraph again.

    If you've been reading our columns closely you know that we don't remotely buy into the scenario that sees persistently rising prices over the next 18 months.  In fact, we continue to preach that a period of disinflation (not to say deflation) is on the horizon. 

    On a seemingly contrary note, Industrial Production did rise in February (by 0.4%) after many months of declines.  There are two points to be made about this.  The first is that, if you think that those many months of declines aren't going to make themselves felt before the results of renewed positive results make themselves felt, you are very mistaken.  To put it very simply, you can't simply decide to weight more heavily data that looks positive.

    The second is that, even as Output technically rose, Capacity Utilization declined yet again.  The Index is now at 75.34, and is now at the lowest it's been since May 2011.

    Does this sound like the picture of an economic expansion that's about to experience persistent and rising inflation?

    We suggest you continue to pay very close attention to the movement of key economic data over the next six months.  We think the business press is in for a surprise.

    And shall we chat about the market data for a moment?  Analytically, it was a simple week:  the Dollar fell...more than the stock market rose.  In fact, the stock market was practically unchanged, though the Dollar fell more than 1%.  And commodities, including Gold, rose...and that appears to have been on the figurative back of the falling Dollar. 

    Not a lot to see there except that, you can see that professional investors didn't warm to the Fed's move to raise interest rates...(a falling Dollar on higher interest rates?)...and, in fact, the yield on the government's 10-year bond fell 8 basis points.  That is not the picture of a market that is buying into a belief that the economy can tolerate higher interest rates.

    Is it?

     

  • ECONOMIC & MARKET ANALYSIS - March 27, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2343.98, down 1.4% over last week.

    US Dollar Index - The Index finished at 99.76, down 0.5% from last week.

    Gold - Gold finished at 1247.50, up 1.5% from last week.

    Commodities - The Index finished at 84.53, down 0.7% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.41%, down 3.6% from last week.      

    Sales of New Homes  - In February, the value of sales of new single-family homes rose 9.3%.

    Capital Spending - In February, Core Capital Spending rose 1.4%.

    We got only these two major indicators this week, but they're quite interesting.  Simply put, they came in moderately positive.  And no, there's no hidden bad news, but drilling down does yield some interesting ways to think about how the data relates to the economic engine.

    Let's start with the sales of new single-family homes.  This indicator isn't close to being what you'd call a marquee data point for most people, but...regular readers know we think it's useful: we'll argue with anyone that trends in this indicator correlate very closely with the general direction of the economy. 

    So, in February, the value of such homes rose.  (Of course we measure value as a function of mean home price multiplied by volume of homes sold.)  The increase was moderately positive.  Let's dwell on that "positive" word for a moment.  When this indicator is 'stubbornly' positive, you can continue to breathe normally, so to speak.  Just be aware: while the indicator came in positively, all of the increase came from price increase and not from volume, which was unchanged from last month.  

    Of course, it's hard to overstate how important capital spending is to the expansion of the economy.  And there's good news: core capital spending rose 1.4% in February (core capital spending excludes spending on national defense as well as spending on aircraft.)

    This is the second consecutive month that the indicator has risen.

    So far, so good, right?  Please remember that this is an indicator the impact of which is felt on a significant delay, and it's highly likely that we've yet to experience the impact of many consecutive months of declines in this area.

    And that dovetails beautifully into our short discussion about the week's market data.

    The most significant thing to know about how the week ended is that the yield on the 10-government bond fell 9 basis points to 2.41%...and, it fell in the face of a declining Dollar. 

    Note that there is nothing intuitive about this: in general, a falling dollar = rising inflation = upward pressure on rates....and that's not what happened. Instead of upward pressure on rates, rates....fell.  Combine that with the fact that, in the face of that falling Dollar commodities also fell.  Again, is there anything intuitive about lower prices for commodities when the Dollar falls?

    We think the writing is very faintly on the wall. 

     

  • ECONOMIC & MARKET ANALYSIS - April 10, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2355.54, down 0.3% over last week.

    US Dollar Index - The Index finished at 101.13, up 0.6% from last week.

    Gold - Gold finished at 1252.50, up 0.3% from last week.

    Commodities - The Index finished at 85.84, up 0.6% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.38%, down 0.1% from last week.      

    Case-Shiller House Price Index  - In January, the Index of previously-owned homes rose 5.4%.

    Employment - The Employment Rate improved 0.1 percentage point to 60.3%.

    Personal Income - In February, Income rose 4.5%.

    Personal Consumption - In February, Consumer Spending rose 4.8%.

    Energy Consumption - Energy Usage rose 86.6%.

    Let's start with the Employment picture since gains in the labor landscape have been getting a lot of attention. 

    Good news: the Employment Rate improved from 60.2% to 60.3%.  That's very good, and it's a reflection of the fact that the number of Net Newly Employed rose 97,000.  Make no mistake, that's a very good result, but also please know that it's a large drop in the number of net newly employed in December and January of 158,000 the previous two months.

    And when you think about jobs, you think about Income, right? 

    In fact, Personal Income rose, in February, at a rate that compares well with the pace at which it was growing in the late 2015/early 2016 time frame.  Spending, as well, rose at a pretty good clip, in fact, around one percentage point higher than the same time period.

    So far, so very good.

    Know this, however: in February, consumer prices rose at a pace of 2.4% and that's a rate that's roughly two percentage points higher than the similar time period in 2015/2016.  In fact, adjusting Income for Inflation yields a result of 2.2%, which is the lowest result it more than five years.  And Spending?   Adjusted for Inflation, it rose just 1.3%, and that's the lowest rate of increase since exactly one year ago.

    The wild card in much of the economy tends to be the relationship between production and consumption of energy.  Prices that rise faster than economic growth can pose a serious problem.  On the other hand, it's important to know that energy usage tends to correlate strongly with economic expansion. 

    The most recent data shows us that most recently energy consumption is up nicely, by 3.2%.  That's the highest increase since April 2014.  This is important because the ratio of production of energy to consumption is hovering at 86.6%, which is the lowest it's been since August of 2014.  This is good because we are less concerned about upward pressure on prices when much of that pressure is coming from expanding consumption (rather than contracting production).

    The most important take-away from the market data?  The government 10-year bond was basically unchanged even as both the Dollar and commodities rose. 

    Now, do a little math: put the bond to one side for the moment.  If the Dollar and commodities both rose, that could suggest that (1) the economy is expanding or (2) the supplies of basic commodities diminished.  What are the odds that it's either of those?  If supplies were contracting, that would speak to expectation of higher prices, yes...but/and it would also create an expectation of rising long-term interest rates.

    And that's not what happened; rates remained (basically) unchanged.  Likewise, if the economy were simply expanding, what would you expect from long-term rates?  Exactly.

    This is PRECISELY the textbook case for diagnosing economic slowdown.  But it's just one week.

    Continue to pay attention.

     

     

  • ECONOMIC & MARKET ANALYSIS - April 17, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2328.95, down 1.1% over last week.

    US Dollar Index - The Index finished at 100.58, down 0.5% from last week.

    Gold - Gold finished at 1274.30, up 1.7% from last week.

    Commodities - The Index finished at 86.30, up 0.5% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.23%, down 6.2% from last week.      

    Business Sales  - In February, Sales rose 4.6%.

    Retail Sales - In March, Core Retail Sales rose 3.7%.

    Consumer Prices - In March, Prices rose at a 2.8% rate.

    This may not seem like a lot, but...there's more here than meets the eye.  Let's start with the retail sector...core retail sales (those that exclude auto-related products and services) rose 3.7% in March.  That's a pretty good number.  It's moderate.  It should be viewed with caution as to how good it is, given that inflation has been gently rising.

    And that leads directly into some interesting points...

    The first thing you need to know is that Inflation came in at 2.8% in March, and that's the highest rate since March 2012.  But here's the point: that increase has been coming pretty much exclusively at the figurative hand of Energy.  Energy prices rose 11.3% in March; except for the period of May 2016 to the present, the current price index of 195.1 for Energy is the lowest it's been since June 2010. 

    And that dovetails perfectly into the next point: consumer prices for CORE products and services have remained almost shockingly stable in their rise.  Yes, prices have continued to rise, but at a remarkably steady pace of roughly 1.95% - 2.2% for many months, now. 

    Please remember that expansion in economic activity correlates extremely strongly with upward pressure on core consumer prices.

    And that leads directly into the key point we want you take away from this week's data.  Circling back to Business Sales, the ratio of business inventories to sales has remained almost unnervingly steady for well over a year.  Since February of 2016 that figure has hovered between 1.38 and 1.39.

    When the supply of business inventories relative to demand remains extremely stable, does that portend rising inflationary pressure?

    We have been telling you for months: forward-looking inflationary pressure is very tame.  Based on the economic data alone, there is little basis for the Federal Reserve to tighten monetary policy.

    Remember, you read it here first: the theme, straight through 2018 is going to be downward pressure on inflation.

    And what of the market?  Commodities were up, but the Dollar was down, so there's no surprise there.  But here's the kicker: stocks fell...and Gold rose, even on a falling Dollar.  And...the 10-year government bond yield fell 15 basis points.

    No, there's nothing particularly surprising about Gold rising when bond yields fall, but...is that a bullish signal?

    No.

     

  • ECONOMIC & MARKET ANALYSIS - April 24, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2348.74, up 0.8% over last week.

    US Dollar Index - The Index finished at 99.96, down 0.6% from last week.

    Gold - Gold finished at 1279.05, up 0.4% from last week.

    Commodities - The Index finished at 83.90, down 2.8% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.31%, up 8 basis points from last week.      

    Starting with this week, we're moving to a new format, one in which we give you the analysis of the week with the big economic indicators built into the "story," so to speak, rather than list them first.  At the least, we think it will encourage readers to understand the whole story of the week, instead of being at risk for isolating data points.

    As our regular readers know, we don't pick and choose indicators to report on simply to pad the page, nor do we swap indicators in and out based on their results, simply to try to make a case for an agenda on where we believe the economy is headed.  This means, of course, that some weeks there's simply less data to report and why, occasionally we will not update this page.

    This is one week in which there's very little to report.  However, in terms of hard economic data, it can be argued that the most important release was that relating to Industrial Output and Capacity Utilization.  In March, Industrial Output rose, by 0.7%, and Capacity Utilization similarly rose...by a scant 0.1%.  We think the latter of these two data points tells the story.  That increase is about as small an increase as you can get, and it's the first increase since February 2015.  The Index is hovering just below 76, which is not remotely an inflationary indication.  Are you betting that inflation is going to continue to trend up? 

    Nevertheless, the month came away with a positive result with regard to Output.  But is it a red herring?

    Let's look at what the Market had to say: commodities fell, even as the Dollar fell.  That, of course, is counter-intuitive.  Is it an indication of growing supply or of a contracting economy..or both?  On the one hand, the 10-year bond yield rose slightly, and in context of declining commodity prices, that's a bullish signal (unless, of course traders believe that inflation is going to come from some other source), but...Gold rose.  Rising gold prices when commodities are otherwise falling and when/if the economy is expanding?  That's also counter-intuitive.

    Of course no one knows for sure where things are going, but we're going to help you out: we got fresh data on government outlays and receipts this week, and the result is that, on a 12-month rolling basis in March, the deficit rose to 20%.  That's the highest the deficit has been since December 2013 and it compares to 18% last month.  (Remember: our measure of the deficit is the shortfall in receipts as a percentage of actual receipts...it is a true measure of deficit spending.)

    Based on this information, we know which way we think you should skew your analysis on the week.

    Which would you place more weight on?  That improvement in Output and a rise in 8 basis points in the bond yield or that surge in the rise in the deficit combined with rising Gold prices?

     

  • ECONOMIC & MARKET ANALYSIS - May 8, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2399.29, up 0.6% over last week.

    US Dollar Index - The Index finished at 98.57, down 0.5% from last week.

    Gold - Gold finished at 1228.45, down 2.7% from last week.

    Commodities - The Index finished at 82.68, down 1.6% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.35%, up 7 basis points from last week.      

    It was, all around, a decent week...from the perspective of major economic data.

    Regular readers know that we look to what for many is probably a secondary-sounding indicator: the sales of new single-family homes.  If you think it through, it will probably make sense to you why this metric correlates extremely strongly with economic direction and strength.  And in March, the figures improved a bit over where they had been heading, with the total value of new homes sold rising 14.3%.  This is a good result, but it's not as strong as it may appear at first glance.  When you take the components apart, you find that the volume of homes sold rose a strong 10.6%, but the average price paid rose a modest 3.1%.

    Next, let's move on to capital spending.  In March, non-defense capital spending rose by 4.6%.  That's not a very strong figure, but if you place that result in context of the fact that it's the best result since November 2014, it starts to look good.  Keep in mind that this result comes in after more than a year of declines.  We are not yet convinced that the effect of a year of declines has already been factored into the economic equation.

    Then there's the labor report and yes, it was another month of strong gains in the labor market.  The number of net newly employed people rose a strong 119,000 in April.  However, that gain wasn't enough to keep up with the rising population as the Employment Rate remained at 60.3% unchanged from last month.

    At this moment in time, when the Federal Reserve talks about the economy gaining strength you can be sure that they're talking mostly from the perspective of labor gains.  

    How does that translate into income?

    In March, Personal Income rose 4.3% and that's the biggest increase since January of this year.  However, when you adjust that figure for inflation, the figure drops to an increase of 1.6% and that's the lowest result in more than five years.

    And, for the record, Consumer Spending, adjusted for inflation, rose 2.6%, the lowest increase since June of last year.

    Let's put all of this in context of the Fed's announcements about interest rate policy.

    The last time the Fed raised short-term interest rates it led the market to believe that it would raise rates again, in 2017, by a minimum of two times. 

    The Fed met this week and announced that, for now, it is not yet again raising rates.  It is now almost mid-May. 

    The labor market continues to show strong gains, though the Employment Rate is still challenged.  (A healthy Employment Rate would be around 62.0% not 60.3%.)

    And Income, adjusted for inflation, is starting to come under pressure.

    None of this erases the other positive economic data for the week.

    But you know understand why the Fed has chosen, for now, to leave interest rates where they are.

    As you should know, at the conclusion of every week we try to make sense of what the Market seemed to think, based on the most salient market indicators.  And....this is one week in which we think it's impossible to make complete sense of things.

    For one thing, commodity prices fell solidly, but on a falling Dollar.  That's very counter-intuitive.  That could be an indication of over-supply or of a contracting economy.  But here's the thing: bond traders sent the yield on the 10-year government bond northward.  Did they send the yield up on fears of higher inflation?  If so, that inflation is not coming from commodity prices.  Did they send the yield up because they think the economy is going to be expanding...possibly due to lower input costs (as commodities slide)?   But then why did the Dollar fall?   Rising bond yield against a falling dollar but falling commodity prices, as well? 

    That's about a counter-intuitive picture as you can get.  There are some weeks in which the best you can do is to strap yourself in and wait and see what will happen next. 

     

  • ECONOMIC & MARKET ANALYSIS - May 22, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2381.73, down 0.4% over last week.

    US Dollar Index - The Index finished at 97.12, down 2.1% from last week.

    Gold - Gold finished at 1255.90, up 2.7% from last week.

    Commodities - The Index finished at 84.72, up 1.5% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.24%, down 14 basis points from last week.      

    This week's developments give a bit of a mini snapshot into what's going on in the greater economy.  For the fuller picture, read this month's updated Domestic Scorecard.

    The data was interesting, and if you look carefully enough, quite illuminating. First of all, Industrial Output rose in April.  And the result was rather strong.  Production rose 1.1%.  That's a good number.  But we must understand it in context that, until two months ago, saw over a year of monthly declines.  Output is now back to the level of June 2014.

    So, even if the Output level isn't all that robust, it was a good month in the industrial sector.  And that's reflected in the fact that Capacity Utilization rose 0.7% to an index level of 75.86, which is the highest level since August 2016. 

    So far, not so bad.

    We also got results for Retail Sales this week.  And the results were...interesting.  Curiously, the results for both including autos and excluding autos, were similar.  Total Retail Sales rose 3.1%.  Retail Sales ex-Autos rose 3.2%.  Those sound like reasonably good results.  But, are they?

    When we think of what a strong result in Retail Sales is, we think of figures that hover north of 5%.

    And, add in the fact that Inflation has been rising.  In fact, at at all-in rate of 2.7%, Inflation is the highest it's been since April 2012.  Factoring that into the picture do the results in Retail Sales seem very good?  We don't think so. 

    Of course, all of the upward push in Inflation is coming from energy prices.  Energy Inflation is now, except for last month, the highest since November 2011.

    And that leads to the ultimate point of the week's economic data: what meaning does the result in Industrial Production have in context of very steady prices in Core Inflation? 

    Let's remember that, despite the good results in Output, Production levels are back to where they were almost three years ago.

    In other words, the Industrial Sector is not all that very strong.

    And, Retail Sales when adjusted for Inflation, gives reason to be phlegmatic.

    How does the Market Data inform this understanding?

    Well, the Dollar fell as commodities rose...and that's, very roughly, a normal pattern.

    But why did traders send the Dollar down?

    And is there anything intuitive about traders sending the yield on the 10-year government bond down when commodities prices rise...with the understanding that, other things being equal, rising commodities prices equate to rising inflation and rising investor demand for yield?

    You see the point: it's hard not to take away an understanding that (1) the economy is not growing fast enough to keep up with inflation and (2) traders are increasingly phlegmatic about the economy.

     

  • ECONOMIC & MARKET ANALYSIS - June 5, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2439.07, down 1.0% over last week.

    US Dollar Index - The Index finished at 96.67, down 0.7% from last week.

    Gold - Gold finished at 1264.85, up 0.6% from last week.

    Commodities - The Index finished at 82.33, down 2.0% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.16%, down 9 basis points from last week.      

    The week-ending market data, this week, was particularly interesting; sometimes the market is not completely in synch with the tale that the primary economic indicators are telling.  That's not the case this week.

    Let's talk about what the market did.  The signal thing to know is that both the Dollar and Commodities (in aggregate) fell.  That combination is anything but an expected result.  When you see commodities fall in the face of a falling Dollar, your brain should be thinking that either this is an indication that traders believe supply of major commodities is on the rise or that the economy is contracting.

    In this regard, let's note that the week ended with the Dollar at its lowest level since early October and commodities at their lowest level since the middle of April of last year. 

    Interestingly, Gold rose this week, to the highest price level since August 2014.

    Gold rising on commodities, in aggregate, falling?  And on a lower Dollar?  What that tells you is that Investors are getting nervous.  And, as if to underline that point, we would like to point out that the spread in yield from high-yield bonds over corporate bonds is the lowest in more than five years.  That is not a typographical error; read it again.

    In other words, investors are preferring corporate bonds more than they have in the recent past.

    Investors are nervous.

    So, how does the economic data from the past fortnight inform investors' understanding of things:

    First there's quite a bit of good news:

    Non-defense capital spending in April rose 0.8%

    The value of the sales of new single-family homes rose 13.6%

    The number of Net Newly Employed individuals rose 128,000 in May

    These are all pretty strong developments, though you should, as usual, not get too excited about the labor report; while the number of employed rose, the Employment Rate is still at 60.3%, unchanged for the last two months.

    On balance, though, this is a pretty good picture.

    [Is this a good time to say that we believe that the effect of more than a year of declines in capital spending has yet to make its way into the general economy?  Probably not, because most readers will discount it because our perceived cause and effect appear to be too far removed in time, but...we believe that (1) it's not possible for more than a year of such declines to not have a widespread effect and (2) it's normal for such an effect to occur on a delay.  If the economy begins a significant slowdown, we think this will be one of the reasons.]

    Some economic indicators do deserve to be weighted more than others...and it's time to talk about Income.

    In April Personal Income rose 3.8%.  That's the highest result since February of last year. 

    But let's look closer. 

    When we adjust for Inflation, Personal Income rose just 1.4%, which is the lowest result since before the start of the financial crisis in late 2008.

    And Consumer Spending?  Adjusted for Inflation, it rose 2.6%, and that's tied for the lowest result since May 2014.

    You see the problem, and so do traders and investors.  And now you know why traders are nervous.

    If you read the current Investment Outlook you may have probably picked up a hint that we believe that an expanding economy is in the cards in the medium- to long-term.

    But that is not what the data is saying in the short- to medium-term.

     

  • ECONOMIC & MARKET ANALYSIS - June 19, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2433.15, down 0.1% over last week.

    US Dollar Index - The Index finished at 97.14, down 0.1% from last week.

    Gold - Gold finished at 1254.55, down 1.5% from last week.

    Commodities - The Index finished at 81.27, down 1.4% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.15%, down 5 basis points from last week.      

    As you may know, sometimes we start our essay by looking at what the market did.  We usually do that when the "hard" economic indicators appear to vindicate the market in a strong way.

    Remember: the market is under no obligation to give you a thumbs-up or thumbs-down conclusion.  That's not just because the market reserves the right to not always be correct, but because sometimes the actual data the market is working with is painting a clouded picture.

    The week ended with stocks and the Dollar essentially unchanged.  No particular information there, except that the Dollar fell in a week in which the Fed announced it would be raising short-term interest rates a quarter of a percentage point.  The market's response with regard to the currency was hardly an endorsement of the Fed's action. 

    Gold fell.  How should you interpret this?  It's a pretty strong indication that the market does believe that the Fed's move is making the Dollar sounded, if the market is not completely sure that a higher interest rate level is sustainable. 

    And commodities fell.  Should you consider falling commodities a validation of the Fed's move if the Dollar didn't actually strengthen?  Of course not.  And lastly, the yield on the government's 10-year bond...fell.  That's hardly a ringing endorsement of the Fed's moving to raise rates because the economy is supposedly strengthening.  If anything, it's a statement that the market thinks the Fed has now "over"-tightened.  We naturally associate rising yields with expanding economies.

    So, what about the hard economic data?

    The strongest data came from Retail Sales.  Excluding auto-related sales, we have the category of Core Retail Sales, and this category rose a moderate 4.5% in May.  If you take into account the fact that all-in inflation has been gently rising, this level of increase can barely be termed moderate and is really closer to being labeled "modest."

    And what about inflation?  As we just said a minute ago, the Fed voted to raise interest rates this week...but that's just as Core Inflation in May rose 1.9%.  That's a level that's reasonably associated with putting pressure on the Fed, but...here's the thing: that's the lowest rate for that category since November 2015.

    We also got fresh data on Industrial Output.  We had a nice increase in May; it rose about 1.6%.  But that only brings the 12-month rolling average of the Index to 103.5, which is....the lowest level since May 2016.

    If you're been paying close attention and reading regularly, you know that we're moderately sanguine about the medium- to-long-term prospects, but...the near term prospects appear to be problematic.

     

  • ECONOMIC & MARKET ANALYSIS - July 17, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2459.27, up 1.4% over last week.

    US Dollar Index - The Index finished at 95.11, down 0.9% from last week.

    Gold - Gold finished at 1218.90, down 0.5% from last week.

    Commodities - The Index finished at 82.70, up 1.1% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.33%, down 6 basis points from last week.      

    This is not the week (or fortnight) to over-read into the economic data.  You want the take-away from 10,000 feet?  The data came in satisfactorily.

    Let's start with the labor market.  Employment continued to grow, with the figure of Net Newly Employed having grown 140,000 last month.  That translates to the ranks of the employed rising at a 1.3% annualized rate.

    Make no mistake: these are good numbers, but they're not consistent with the language Fed Chair Yellen uses when she characterizes the economy as being at full employment.  That's decidedly untrue: the Employment Rate is unchanged over last month, at 60.3% and is about two percentage points shy of being able to be characterized as being at full employment.

    Remember Yellen's remarks.  She is not a person who speaks casually.  When she intentionally mischaracterizes the labor picture, you can be certain that she's setting listeners up for something.  Pay very close attention to the next press conference she gives.

    Industrial Output data got released late in the week and the data continues to be...interesting.  The good news--and possibly inflationary news--is production rose 1.4% last month.  The 12-month rolling average Index is at 103.6.  That figure is mildly good.  However, it is roughly the same level as that of July 2008.  If you remember July 2008, the economy was slowly up very quickly at that time.  Now let's look at Factory Utilization.  It's the highest it's been since July of last year, but...if you look back before that it's the lowest it's been since September 2011. 

    In other words, we think the conclusion that inflationary forces are rapidly gathering is very premature.

    And that takes us to Retail Sales.  Core Retail Sales, adjusted for inflation rose 9.4%...and that's a very high figure, but...it's very misleading and reflecting a spike in Sales that occurred three months ago.  In fact, unadjusted for inflation, Core Sales rose a very moderate 3.0% last month.  That's the slowest increase since November.

    Are we trying to make you conjure a tough picture in your mind?  No!  We're trying to ensure you conjure a realistic picture.  Keep in mind our short-term forecast: it's not a picture of contraction so much as one of gentle softening.

    And that takes us to the market's reaction to the week.  In preparation for discussing what the market did, have you taken a look at the market's chief week-ending indicators, above?

    First let's dispose of a couple of minor observations.

    1.  Notice that decline in Gold in the face of a lower Dollar?  What that tells you is that the Market is decidedly not too concerned about inflation in the short-term.

    2.  See that higher commodity index figure in the face of a lower Dollar?  That is completely intuitive and nothing to particularly get exercised about.

    What you really what to pay attention to:

    1.  The long-term bond yield is slightly lower in the face of an unchanged Fed Funds rate.

    2.  The yield curve (spread of yield on long-term bonds over short-term bonds) shows just slight compression. 

    In other words, this is the picture of a market that appears to be preparing for just a slight slowdown.  If the Market expected much else, you should have expected to see a much greater effect on the yield curve.

    Not to get too technical, but we want you to notice that we draw a distinction between the short-term interest rate that the market determines based off the Fed Funds rate and the actual Fed Funds rate, itself.  Why is this significant?  Even as the Fed Funds rate was unchanged week-over-week, you will notice that the market pushed the actual three-month short-term rate down...ever so slightly....but just enough to be different...and to to reinforce the fact that the market is expecting gentle economic compression in the short-term.

     

     

     

     

  • ECONOMIC & MARKET ANALYSIS - July 3, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2423.41, down 0.6% over last week.

    US Dollar Index - The Index finished at 95.64, down 1.7% from last week.

    Gold - Gold finished at 1243.50, down 0.6% from last week.

    Commodities - The Index finished at 82.60, up 3.7% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.30%, up 16 basis points from last week.      

    If you look over the week''s market data very superficially you might think that the most notable point to take away from is that the yield on 10-year bond moderately spiked 16 basis points week-over-week.  You need to quickly dismiss that thought, however, and remember that the yield had fallen unsustainably low, the prior week, fueled by the Commodity Index having fallen below a level of 80.

    Nothing is not possible, but...even as we believe that industry has become more efficient, when the Index rises either above 120 or below 80 you need to be skeptical.

    Let's talk first about the salient economic data before delving into what your take-aways from the market should actually be.

    First of all, we got data on new orders for durable goods and for non-defense capital spending ex-transportation.  These are both very important indicators.

    In May, the former rose a moderately strong 4.3%.  That's a pretty good figure.  Non-defense capital spending ex-transportation?  It rose a modest 2.7%  Yes, that's a decent figure, but it's not strong.

    But if you're looking for reasons to exhale, consider how the housing market is performing.  In May, the value of new single-family homes rose a strong 19.0%.  Most of that came from volume--an increase of 12.5%--but the mean price paid by buyers rose a healthy 5.4%.

    So far, this is truly a fairly sanguine picture.

    Data on Personal Income came in this past week.  Unadjusted for inflation, Personal Income rose 3.8%, which is tied for the highest increase in 12 months.  However, adjusted for inflation, Personal Income rose a moderate 1.4%, which is the lowest rate of increase in more than three years. 

    Consumer Spending?  Adjusted for inflation, consumer spending came in at 2.4%, which is tied for the slowest rate of increase since late 2011.

    And what of the Budget Deficit? At -18.5%, the deficit is tied for the highest level since February 2014.

    How to make a picture of all this?  If you're looking for validation of our economic model's forecast that the outlook for the near term is for more softening, it's all right there in the pressure on household income, with the simple fact that household income is not rising as fast as inflation is.  It is that simple.  The question, of course, is how soft things become.

    And the key point is that there is nothing in the model to support a believe in a sustained and deep downturn.

    And, in fact, if you've been reading, you know that we firmly believe that we are on the precipice of a strong rise in interest rates that will presage a prolonged period of economic expansion that will start to occur 12-18 months out.

    And, back to the market, there are two big take-aways from the week.  The first is that both long-term and short-term rates rose, primarily on inflationary pressure posed by higher commodity prices.  The second is that the Dollar's decline over the week underlines the thesis that rising yields are solely about rising prices but not really expansionary demand, and is emphasized by a lower stock market.

    In other words, as borne out by the market, our perspective that the medium term poses the probability of economic expansion does not mitigate the very high likelihood that the near term is going to become increasingly problematic.

     

     

     

     

  • ECONOMIC & MARKET ANALYSIS - July 31, 2017

    Economic & Market Analysis

    Latest Economic Indications

    S&P 500 Index - The Index finished at 2472.10, unchanged from last week.

    US Dollar Index - The Index finished at 93.34, down 0.7% from last week.

    Gold - Gold finished at 1261.10, up 1.5% from last week.

    Commodities - The Index finished at 84.48, up 1.8% from last week.  

    10-Year Government Bond Yield - The yield finished at 2.29%, up 5 basis points from last week.      

    This update is a good example of how to understand why we moved to a format of updating this column only every other week: there are weeks in which there is simply not enough data that is important enough for your time.

    Yes, new economic data is coming out almost every day.  But too much of it is noise and not ultimately helpful.

    There are just two data points to know this week.   

    The first is about housing, and specifically the value of sales of new single-family homes.  This indicator tells us more than you would think.  As we have said, there will never be a robust expansion without evidence of that in the housing sector, and likewise, there will be no contraction without evidence of it there. 

    What does the latest data tell us?  The total value of sales of new single-family homes rose, in June by 9.7%.  That's a solid figure.  What's interesting about it is that while it's a solid figure, it's definitely off a little compared to recent months.  And, given that the average price paid by buyers has stayed pretty consistent, it will be interesting to see if this slowing in the rate of increase is temporary.

    The other big data is, for those of your who are forward-looking, is quite important, as it informs leading economic conditions, and that's...Core Non-Defense Capital Spending.   This particular metric looks only at the private sector....and it strips out all aircraft spending.  (The issue with aircraft spending is that this kind of spending can be tremendously volatile and indicative of a temporary need.)

    In June Core Non-Defense Capital Spending rose a moderately strong 4.4%.

    This is a useful number.  To  appreciate why, why must start by explaining that the effect on the economy of capital spending is on a strong lag.  If you've been paying attention you will note two things.

    The first is that, even as the economic pace had hit a high point in late 2015, capital spending was contracting....and did so for over a year. 

    The second is that, as many quarters have begun to observe, economic growth is slowing very fast.

    It is not insignificant that capital spending, though now positive, is just moderate. 

    We will say it again if you don't retain it today: Core Non-Defense Capital Spending is an important leading indicator and cannot be glossed over.

    How does all of this dove-tail with the market data?  It's an easy week to read, if you know where to look.  You will observe that investors demanded marginally higher yield from the 10-year government bond.  That's consistent with the Commodity Index finishing higher.

    But then why did investors sell the three-month note?  Which is, in fact, what they did,   Such an action is not consistent with the market displaying a more sanguine attitude.  Had the Dollar risen along with the 10-year yield, it's likely that the yield on the three-month Treasury bill would have risen as well.  

    In other words, the higher long-term yield is nothing more than offsetting arithmetic for a lower Dollar.  And the lower three-month T-Bill is merely confirming the Market's lack of enthusiasm for the economy.

    And that, Gentle Reader, is the simple and practical anatomy of the week that the Market had.

     

     

  • EDITOR'S LETTER - May 26, 2014

    Editor's Letter

    A fortnight ago, we waxed at some length on the subject of one of our prime confirming indicators for the direction of Inflation.  This is a theme that we're going to be revisiting fairly regularly, especially until the general business press picks up on it.  For, we think it's one of the greatest dangers on the horizon. 

    Perhap, it's bad form on our part to revisit the subject again so soon, but we chose to take things a little easily given the holiday Monday this week.  We really will be brief.

    Now, when you think about Inflation, it's all very good (and correct) to take a peek at the direction that actual prices have moved in, but if you're cleverer than the average bear, you're probably looking, well, yes, at trends in Industrial Production, Capacity Utilization, and Currency value.

    But, if you're especially clever, you probably know that you should take a peek at the direction in which raw commodities' prices have trended in the very recent past.  We expect that our readers understand that prices of raw commodities are inputs to prices of finished goods.  You want to know where prices of finished goods are going?  Take a look at where raw commodities' prices have recently been.

    Here's the thing: the composite commodities Index as reported by The Wall Street Journal is now higher than any time since the week ending March 29, 2013 (excepting a brief two weeks this past April).

    Prices are now just 2.2% higher than six months ago; and they are 9.4% higher than six months ago.

    Get the picture? 

    We don't like to be wrong; that means that we don't make strong statements frivolously simply for the purpose of generating exciting and readership.   And, we're going strongly on record that you can count on steadily rising prices in the coming six months.

    How to prepare for that?  Well, we've touched on that, previously, in indirect ways.  We promise we'll come back to that.

    But, we've warned you before and we'll warn you again: the Press has convinced you that what likely keeps Janet Yellen up at night is Deflation.  That's a lie.  What keeps Chair Yellen up at night is Inflation. 

    You can bet your last sou on it.

  • COMMENTARY - May 26, 2014

    On Guarantees and Risk

    If your memory is strong, you'll remember that much of the political rhetoric in the aftermath of the Financial Crisis in 2008 centered on the idea that the Crisis was brought on us by lack of sufficient regulation by the Government of financial entities...entities that, for all intents and purposes have an implicit Government guarantee.

    Regulation is a very attractive-sounding idea.  The idea that some strong, objective institution is going to protect the fabric of our financial system by rapping someone on the knuckles and tying up every possible risk...well, it's a very cozy feeling, isn't it?

    It doesn't work.   And it doesn't work because the proposed regulations never comprehensively wrap their figurative arms around every risk the institution can take on...and, more broadly, because the institution's interest is at odds with the regulation.  In other words, large financial institutions figuratively stay up all night to find ways around the rules that are imposed on them.

    And yes, they've done it again.

    If you remember, a great deal of the risk that came close to crippling the big banks was exposure to credit-default swaps, an insurance type of instrument...and they essentially underwrote too much risk in one direction. 

    Of course, with new rules set to go in effect about banks' trading for their own account, they have to be more creative. 

    Yes, they have returned to buying and selling credit-default swaps...by their foreign subsidiaries.

    We can see you shaking your head.  We can also hear you saying, "So...amend the law."

    And it all misses the point.  The banks have little incentive to keep the risk they take on in line with what they can reasonably mitigate.  Why?  It's that pesky government guarantee.

    If you're a taxpayer, how do you feel about that?

    You think you can regulate the banks?  We've got a bridge we'd like to sell you.

  • ECONOMIC & MARKET ANALYSIS - May 26, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 0.3%.

    S&P 500 Index - The Index finished at 1900.53, up 1.2% from last week

    US Dollar Index - The Index finished at 80.39, up 0.2% from last week.

    Gold - Gold finished at 1295.35, up 0.1% from last week.

    New, Single-Family Homes - The 12-month rolling average of the value of new homes sold declined 0.2%.

    As we explained last week, the relationship among the major stock market index, the Dollar, and Gold tells you almost everything you need to know about what the Market as a whole is thinking.  This week, investors sent the S&P 500 higher, and the Dollar and Gold both rose marginally.  That portrays a picture of a Market that is modestly confident about the future, equity investors displaying cautious optimism about earnings, and that optimism Is reflected in their belief that the Dollar can be reasonably expected to rise on that strength.  For all intents and purposes, Gold was unchanged. 

    Is this a reasonable view?

    A great deal of the reason for that optimism stemmed from the way reports about Housing were reported and interpreted.  The Market responded strongly to a report from a national association of realtors.  This is data that we think is, for all practical purposes, silly to work with...simply put, we don't like the methodology.  Our twin inputs for Housing are the Case-Shiller Index and the government's reported data on sales of new, single-family homes.  Data for the latter came out this week...and, it's not that promising, in fact.

    Looking at the 12-month rolling average, the value of new homes sold in April dropped 0.2%.  That's the lowest the result has been since March 2011.  Does that sound promising to you? 

    How did that figure come about?  Interestingly, average prices eked out a small gain of 0.2%.  The culprit was volume, which dropped 0.4%.  If we look a little deeper, the culprit, really, is rising inventory.  It's a simple case of supply versus demand...and supply is starting to outstrip demand.  In fact, inventory has now risen for 15 consecutive months...and is at a level it was prior to the Financial Crisis.

    Longtime readers will recall a mantra that we bring out now and again...: there will be no move from recovery to expansion without sustained expansion in the Housing sector.

    We think that this week's data tells you plainly that no expansion for the economy as a whole is on the horizon.

    Grading the week?  That's tough since we believe that the Market handicapped the economy poorly this week and the economic data we got was not inspiring, but it's not a lot of data.  Based on what we got, though, we can't give the week any more than a D+.

  • INVESTMENT OUTLOOK - May 19, 2014

    Investment Environment

    More than ever, the key point you need to keep top of mind is the disjoint between reward and risk that is becoming greater and greater in some asset classes.

    But even as that occurs, Monetary Policy continues to make the march to riskier asset classes inexorable.  If there's a time to begin meditating on the kind of conditions that make a Financial Collapse or Crash a probability, this is it. 

    Think long and hard on it: investors are not being properly compensated by Equities for the risk they're assuming, but they don't know where to turn...and, as long as nominal yields from Equities are as little as 1.0% above what they can obtain in yield from money market accounts, the march to Equities is inexorable.

    At the same time, we firmly believe that in some economies, Monetary Policy is setting the stage for rising Inflation.

    If you think professional investors and money manager are confused (and, indeed, they are), wait until this time next year when, unless we miss our guess, Inflation in some markets will be eroding yields significantly, even as economic growth continues to grow very modestly.

    Investment Classes

    Equities: We have said recently that it's very hard to forecast a collapse in the short-term, as long as the Federal Reserve continues to be successful in pumping money into the economy, which it is, despite that inefficient connection between monetary easing and effect.  But with the Market at a near high, mixed corporate profits, high Margin Debt, and the return of the retail investor, it's hard to avoid the sense that a Black Swan is out there, just waiting.  Money Managers are most definitely confused, but as long as the economy seems unprepared to expand, Money Managers are being inexorably lured to Equities. 

    Let's be clear: we are not outright bearish on Corporate Profits.  It's simply that the Market is too highly priced for the reward it's handing investors.  What would change the way Investors feel about the Market?  Simple: rising interest rates.  Were the economy to pick up significant speed and the Fed raised short-term interest rates, especially to the level of the dividend yield of the S&P500, this would this would significantly diminish the incentive of investors to prefer equities over short-term investments.

    The wild card in all this?  Inflation.  We haven't stopped talking about Inflation for months, and we're not going to stop.  We are projecting that Inflation will pick up speed faster than the economy in general, and even corporate profits.  If you think Money Managers are confused now, wait until this time next year. 

    Having said all of that, we have some recommendations for those who are brave about looking to foreign markets.  Believe it or not, not all markets are configured in the same way relative to Monetary Policy as the United States.  Some spots we think you could consider based on the fact that their markets are not overpriced, i.e. reward is in line with risk:   Japan, Hungary, Poland, Sweden, Switzerland, Hong Kong, and Israel.   

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

    Currencies: It took a while, but we think some opportunities in Currencies are opening up. The best stories for the medium-term, we think, will be in the Canadian Dollar, the Denmark Krone, the Norwegian Krone, the Turkish Lira, and the Singapore Dollar.  We are mildly bullish on all.  You know that disconnect we talk about in the United States between monetary policy and effect?  Well, the unifying theme among all of these countries is an improvement in that disconnect.  We think all of these economies are set to improve in some modest way and that's going to translate to a tightening monetary policy...in some cases, notably Turkey, combined with favorable carry-trade opportunities. 

    On the other hand, we think wise investors will cast a wary eye on the currencies of Poland, Chile, and Mexico where we think economic growth will not be enough to support carry-trade considerations or sovereign risk considerations.   

    We continue in our phlegmatic view of the U.S. Dollar for the medium-term. 

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

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

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

    Commodities: Given the twin conditions of a softening Dollar on the horizon and suppressed prices in some commodities, we think a wise investor would do well to look very closely at Aluminum, Copper, Steel, Zinc, and Wheat.  We are moderately bullish on all, in equal reasons to these twin factors.   

     

  • ECONOMIC & MARKET ANALYSIS - May 19, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.4%.

    S&P 500 Index - The Index finished at 1877.86, unchanged from last week

    US Dollar Index - The Index finished at 80.04, down 0.2% from last week.

    Gold - Gold finished at 1293.84, unchanged from last week.

    Industrial Production - The 12-month rolling average, in April, rose, on an annualized basis, 3.7%.

    Capacity Utilization - The 12-month rolling average rose 0.1% to a level of 78.6 in April.

    Business Sales - The 12-month rolling average of Business Sales rose 1.0% in March.

    Retail Sales - The 12-month rolling average rose 0.3% in April.

    Well, isn't this interesting?

    The three-month average change in Industrial Production remained basically unchanged in April from March.  In point of fact, however, month-over-month, the 12-month rolling average change declined a little, from 0.35% to 0.26%.  This increase is the lowest increase in seven months.  We won't say it's not a respectable result, but as you can guess, not only is it, on its face, a slowdown in growth, it's not remotely a level of change we associate with expansion. You remember, just a few months ago, that the nearly everyone was proclaiming that the slowdown in the winter months was only about the weather, and we declined to join that view?

    Now, we have held strongly to our belief that rising Inflation is right around the corner...and this month's experience supports that: Capacity Utilization rose only modestly, but it's the consistent rate at which Utilization has been rising that should be making you concerned.  Further, it is now at an index level of 78.6.   Except for the most recent two months, this figure is the highest it's been since July 2008.  Is this a level that denotes high pressure?  No, but it's definitely at the upper threshold of moderate pressure.

    We do believe, of course, that most of the Inflation threat is still in the future, but...there are indications that it is already starting to kick in.  Price levels of all goods for most consumers rose 2.0% year-over-year in April.  That contrasts with a 1.5% change year-over-year, last month.  To be fair, though, the 12-month rolling average, if annualized, clocked in at just 1.5%.  And--if we exclude food and energy, the year-over-year increase is a bit more modest, just 1.8% (vs. 2.0%), but like overall Inflation, it's the highest in seven months, and the three-month average comes out to 1.7%, actually higher than 1.5%.

    Now, we get to the data that's particularly interesting...: we were a little surprised, but...Retail Sales spiked slightly in April.  If you remember, last month, it spiked, as well, compared to February.  And therein lies the key point.  The change in Retail Sales in March and April came in at increases of 0.25% and 0.39%, respectively.  These are respectable figures, and fairly sizable spikes over January and February increases of 0.18% and 0.11%, respectively.  Here's the problem: (1) These "spikes" are no more than in line with results for most of last year, i.e. the results in January and February are artificially making the result for March and April look better than they are and (2) these results are not nearly expansionary...they would need to be roughly double where they are to be expansionary in size.

    Now if you're looking for a further reason to be phlegmatic, if we remove all auto-related sales from the total of all retail sales, the 12-month rolling average increase falls from 0.25% to 0.13%.  If we look at the month-over-month change alone (i.e. not averaging the most recent three months), the result looks more promising: it's an increase of 0.3%, the highest such increase since July 2013, but...while this figure is relatively high, the fact is that it's roughly in the range of results we got both six months before and after.   Again, the most recent month's result is misleading.

    All around, not an especially inspiring week.  Grading it, we'd give it a B.

    Now, it's interesting: we have long believed that the relationship among price changes in Gold, the S&P 500 Index, and the US Dollar tells you an awful lot about the economy and how investors view the economy...as well as, in a subtle way, prospects for the stock market, as well.  As a matter of fact, we have long held that, if you tell us where results for two of the three came out, we can pretty easily tell you where the third came out.

    This week, these market-based indicators do tell you something.  Basically, all three were unchanged over last week.  What is that telling you?  It should be telling you that the Market is viewing the economic and investment pictures in a way that's consistent with the economic data that came out: basically a continuation of the status quo.  The economic data didn't support a view of accelerating growth, and apparently, investors took the same view.

    As the next few months unfold, we will be increasingly repetitive on three themes:  (1) that Inflation will be rising in the medium-term (2) economic growth will be very modest, and likely below the rate at which Inflation will grow and (3) the case for Equities will become weaker and weaker as both corporate profits don't keep up with Inflation and general price levels result in yields that are short of rewarding you appropriately for risk.

    For more on this topic, you might want to read the Investment Outlook, which was updated this week.

  • EDITOR'S LETTER - May 12, 2014

    Editor's Letter

    Every now and then we issue what like sounds like a pretty monolithic statement.  There are, after all, in our estimation, rules about how to interpret, navigate, and survive economic data and trends.  The question is knowing and remembering those rules.  One of those monolithic statements we sometimes make, but haven't in a long time, is this:  bond traders are the smartest people on Earth.

    It's largely true, you know.  Chat up a bond trader, some time...not someone who got into the field because of a social or familial connection, but someone who earned a spot at the table on her own.  Engage her in any subject you care to...astrophysics, mathematics, the arts...you'll likely find that your trader-acquaintance has a depth of incisive understanding of a panoply of topics that will surprise.

    Why is this relevant?  It's relevant because the trading behavior of the bond market community is a linchpin to understanding trends.

    For weeks and weeks, we've been telling you that one of the most important trends developing, later this year, is going to be an uptick in Inflation.  You always care about Inflation because Inflation, as we know, acts, essentially like a tax, eroding your earnings. 

    We've been pretty insistent and frequent in our warning that Inflation is due to pick up shortly...we think you can bet a whole lot that the conversation in the Business Press about the economic picture as it relates to Inflation is going to be far different in six months' time...say, late this year.  And we've been pretty clear in our message as to why.  If you break it down, we think that roughly a quarter of the upward pressure on prices will come from levels of factory utilization that both continue to rise and are now skirting the lower threshold at which we think inflationary pressures will build.  However, most of the pressure will come from downward pressure on the Dollar.

    We are already starting to see this direction take hold: six months ago, the U.S. Dollar Index stood at 81.30; three months later it stood at 80.69; and as of this week's end, it stood at 79.87.  All of this is courtesy of economic improvement in Europe and Japan that has proceeded at a pace that has outdone the U.S.  And, unless we miss our guess, gains will continue in both Japan and Europe, particularly the former.  

    But there's more to this picture.  And that's the market for ten-year U.S. government bonds.

    When you think of the market for ten-year government bonds, you should be thinking about Inflation...that is, the direction and rate of Inflation.  Nothing destroys a bond's value more than Inflation.  If you're holding a ten-year government bond that's paying you a yield of 2.5%, think about what a rise in the rate of Inflation from 1.5% to 2.5% does to the purchasing power of your income from that bond.  

    In other words, when Inflation is projected to be rising, professional bond investors will tread lightly; and conversely, when Inflation is projected to fall, long-term bonds look very attractive to bond traders.

    Guess in which direction rates are trending.  You guessed, didn't you?

    Adjusted for current Inflation, in March 2012, the yield on the 10-year U.S. government bond was -0.48%.  A year later, that inflation-adjusted yield had risen to 0.49%.  And by March 2014, that yield rose to 1.21%.  That's a swing of 1.7% in two years.  Think about that.  What that's telling you is, first, that yes, rats of return have risen and look more attractive.  It's also telling you that investors are eschewing these bonds at a fairly moderate pace.

    Again--Bond Traders: the smartest people on Earth.

    They know what most of the Business Press is ignoring: that Inflation will shortly rise and "eat into" the fixed stream of income they derive from bonds.

    We'd be pretty foolish if we considered the sentiment of Bond Traders to be a primary economic indicator...but we'd also be pretty foolish if we didn't take it strongly into account and seek to harmonize it with everything else we're seeing.  

    We're not that foolish...and we hope you aren't, either.

  • ECONOMIC & MARKET ANALYSIS - May 12, 2014

    Economic & Market Analysis

    Latest Economic Indications

    Initial Jobless Claims - The four-week moving average of initial claims rose 1.4%.

    Money Supply - The 12-month rolling average, in March, rose 0.8%.

    Well, it's another one of those weeks in which there's a scant amount of significant data that came out...data that we consider significant and worth working with, at least.

    It is ironic that the most key data we have to talk about this week is the Money Supply.  We normally don't talk a lot about the actual movement in the change in the Money Supply.  Why?  Well, because that disconnect between the change in Money Stock and the resulting effect is so large that we'd need to see an extra-large deviation from normal changes to actually see it have any meaningful effect.

    It is useful to put recent trends into context, though.  

    When we talk about the Money Supply, we're always talking about what the Fed refers to as M1, the amount of money in non-interest bearing bank accounts...in other words, funds presumably intended for transaction purposes.  If we're referring to something else, we will always define it.

    Now, understand that a change/increase of 0.8% in the Money Supply in the 12-month rolling average in one month's time is very much in the range of where monthly increases have been since the onset of the Financial Crisis.  In fact, 0.8% is actually toward the lower end of where changes have been coming in.  However, it's important to put that size of change in perspective.  Let's go back to March 2006...a good moment to look at because it was a time when the economy was still in the middle of an expansion before the slow decline that led into the Financial Crisis.  For that month, the 12-month rolling average rose 0.1%.  And, if we look at an earlier similar month, March 1996, a time of similar expansion, the Money Supply actually declined by 0.2%.

    Do you get the point?  If not, we'll be explicit: you normally don't need increases of 0.8% to keep the economy chugging along, but here we have exactly that, and we're far from any kind of expansion.

    Now, the real point is not to bang into your head the fact of that disconnect between Monetary Policy and economic effect, as we do so much anyway.  No, the point is to respond to the nearly incessant reports from all quarters that economic growth is picking up.  It's coming from every angle you can imagine.  And we are here to say that you should not expect to see us reporting figures in coming months that reflect that kind of pick-up in growth.

    We are extremely confident, despite that nice jump in Industrial Output last month, that sustained and accelerating pace of growth is not on the horizon.  And a great deal of why we say this has to do with the fact that we have detected zero change in the disconnect between M1 growth and effect.  Economies undergoing expansion all exhibit the same characteristic: increasingly effective implementation of Monetary Policy.  And that's not what we have here.

    You are asking why most economists are calling for expectation of rising growth.  We don't intend to waste too much time pondering the foibles and follies of others.  However, if we had to hazard one guess, it's that too many people are placing undue stress on winter weather-related factor, the past months, as well as that one-month spike in Industrial Production.  Our guess: too many economists are behaving the way retail investors do with regard to the stock market...:  jumping on a band wagon, in the wake of an economic result, rather than proudly and accurately prognosticating based on objective criteria.

    We think you should be very surprised to see a strong result in Consumer Spending and Industrial Output this month.  And we'll know the truth soon enough.

    And let's not forget Inflation, which almost no one is talking about.  In Europe, the greater fear right now is that the Euro Zone will struggle to keep price levels at a satisfactory level.  Consider this: some think that Europe could be looking at a deflationary situation in the short-term.  On the other hand, there's the possibility that growth in Europe could continue and pick up a small amount of steam.  Either situation will have moderate consequences for the Dollar, pushing it down.

    All of this is by way of trying to give you some perspective as your friends and colleagues quote surveys of economists or the Fed's published notes.  

  • SCORECARDS - May 12, 2014

    Current Scorecard - Domestic

    May 2014

    Quick View:

    Weighted Average:  0
    Current Month:        3

    Consumer Confidence

    Current Month:    7
    Last Month:         2
                                                        
          

    Full Scorecard:

                                                       Current                   Four                           12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                     2

                    9

                   -4

    Leading Indicators

                10

               15  

                3 

    Confirming Indicators

                 9

               25  

                11

    Foundation

               -28

              -33 

               -48 



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

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

    We have a lot of confidence in our measure of Consumer Confidence.  That is, we think we've got a pretty accurate measure on how consumers are likely to feel--and therefore behave--in the very near future.  This month's figure reveals a lot.  Three things: (1) Consumer Confidence is very low (though not negative)  (2) Consumer Confidence, this month, is up, a small amount from last month, and lastly (3) Consumer Confidence, though it may have appeared to have ticked up a marginal amount is actually down from a reading of 11 six months ago.  In fact, excepting the past three months, Consumer Confidence is lower than anytime since April of 2012 (two years ago).  We'd say that dovetails pretty well with recent gloomy reports that have come out on Consumer Spending and the Government's first-pass at first quarter GDP of 0.1%.

    That's the bad news.  There is some good news, though.  In the Editor's Letter, we're showcasing our general forecast of economic direction for the major economies.  We explicitly say that the U.S. economy can reasonably be expected to continue along at a very modest rate of growth.  And that is the truth.  While there is absolutely no case to be made for an acceleration, there is, likewise, no case to be made for a contraction or even stall.  

    Does that mean that you can expect Consumer Confidence to pick up?  Maybe a small amount, but that's all.  We have calibrated our measure of Consumer Confidence to be finely attuned to a general economic expansion.  In other words, any expansion should be borne out in Consumer Confidence first.

    However, there are two factors that are impossible to escape.  First, interest rates being what they are (ultra-low), investors' predilection for the Equity Market as a preferred investment class isn't likely to wane significantly for the foreseeable future.  Although we sticking by our statement that the Equity Market has now reached a point that we believe it is not offering enough reward to compensate for risk, this fact, to our minds, will not be a significant deterrent for the larger investing community.  Yes, we believe that the stage is being slowly set for a Black Swan Event to wreak havoc with the Market, but that's irrelevant with regard to investors who are desperately reaching for yield.

    The second point has to do with Monetary Policy.  Though we are not getting the full benefit of Monetary Policy, because of growth-restricting Fiscal Policy, some stimulus is coming through.  It's not what we'd call an amount that's comparable to what we were getting, say, in 2010, when the economy first exhibited a strong recovery, n terms of speed of improvement, but we'd now characterize the net stimulus as being modest...just enough for the economy to eke out modest gains. 

    An excellent illustration of the limitations of the success of Monetary Policy: in April, looking at the Labor picture, more jobs were added, but not enough to offset the number of people who left the work force, thus artificially cutting the unemployment rate, while the employment rate remained unchanged.  In like fashion, Disposable Personal Income has not shown meaningful improvement.

    We have said it in recent columns of the Editor's Letter: barring a significant change to Monetary or Fiscal Policy, the most significant risk to the economy in the medium-term is rising Inflation.  Expect us to be nothing short of shocked if, by November or December or this year, Inflation isn't running at a rate that is at least 0.5 percentage points higher than it is today.

    And, if growth in Inflation begins to pick up faster than Income, Employment, and Industrial Production, you can expect to see the most serious national discussion about the economy you are likely to see in your lifetime...and yes, once we start to see concrete evidence of this turn of events, we promise to offer you strategies for your lifestyle and investments.

    Current Scorecard - Global

    May 2014

    Full Scorecard:

                                                        Current                   Four                         12
                                                         Month                Mos. Ago                Mos. Ago

    OVERALL GRADE

                    9

                    8 

                  N/A

    Leading Indicators

               13

               14  

               N/A  

    Confirming Indicators

               11

                7  

               N/A

    Foundation

                 0 

               (2)

               N/A

     
    Studying things closely this month, we see we may have missed a slight bump-up in activity that we should have projected in January  We're getting some of that, now, notably in a strong comeback in Japanese industrial output, as well as a modest rebound in Europe.

    Having said that, we don't think that, globally, that kind of continued improvement can be recommended as being expected to continue...at least not at the same rate.  Based on what our Leading Indicators are telling us, we think we're looking at continued very modest growth, but at a slower rate than we ended up getting in the first quarter.

    By far, our strongest leading indicator at the moment is no surprise: it's the performance of global equity markets. Having said that, most global economies are the beneficiaries of very accommodative monetary policy, resulting in modest economic stimulus.  

    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. 

    But, if the prognosis is not expansionary on a wide level, the outlook is one of modest growth.  Yes, the rate of growth will be slower than that of the first quarter, but we project it will be favorable: fiscal policy--globally, not domestically--has improved a marginal amount; combining that with monetary stimulus is going to result in modest, but respectable growth.  Some more reason to be optimistic: we think that Inflation will remain in check, as well, as many of the world's most important economies are likely to receive some kind of modest bum-up, thus resulting in contemporaneous upward pressures on interest rates, neutralizing a currency war.

    More good news: fiscal budget balances are under control; globally, budget deficits, on a weighted average basis, are hovering in a respectable range.  Unemployment, however, continues to be a global problem.  

    We never tire of talking about the disconnect between monetary policy and effect, but it's time to face two important points:  (1) despite that disconnect, almost all major central banks are being successful in bringing about some stimulus and (2) the pace at which that disconnect is diminishing is slowing, but it is, in fact, diminishing at a slow rate.

    Combine both of those factors with a global equity market that's likely to continue to show gains, and it's not difficult to forecast that the near future for the globe will be one of modest economic gains.  

    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 - May 5, 2014

    Economic & Market Analysis

    Latest Economic Indications

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

    Case-Shiller Index - The 12-month rolling average of prices of previously-owned homes rose 1.0% in February.

    Commercial Lending - The 12-month rolling average of lending levels by domestically-chartered banks rose 0.2% in March.

    Real Estate Lending - The 12-month rolling average of all real estate lending was flat in March.

    Employment - The Employment Rate was unchanged in April at 58.7%.

    Disposable Personal Income - The 12-month rolling average rose 0.3% in March.

    Consumer Spending - The 12-month rolling average rose 0.3% in March.

    The story in Case-Shiller, this month, is much like last month's: the 12-month rolling average continues to rise, at a nice clip, but...that rolling average is obscuring a strong slowdown in the Housing sector: February is the fourth consecutive month for which the Index fell month-over-month.  (Case-Shiller is one of only a couple of indicators for which we use seasonally-adjusted data, so the month-over-month comparison is valid to use here.) If the current trend continues, we think it's fair to assume that by the time April's data comes out (in two months' time), the 12-month rolling average will start to catch up with the month-over-month trend, and show a decline. This disconnect does not invalidate the 12-month rolling average methodology; the greater point is that home prices rose so strongly during the first six month of the latest 12-month period that the 12-month rolling average gives a proper reading on where price levels are, even if they are weakening.

    Now, we'll not argue that trends in Real Estate Lending are slightly more of a lagging indicator than a leading one when it comes to looking at trends in real estate prices, but Lending is only a slightly lagging indicator.  So, it's interesting and a little alarming that among all commercial banks in the U.S., all real estate lending was exactly flat in March...that's right: flat.  You don't need more evidence to know that it's unrealistic to expect housing prices to pick up speed in the near future.

    The rest of the lending picture isn't much prettier: an increase of 0.2% in the rolling 12-month average...that's what we got from (1) domestically-chartered banks (2) all banks domiciled here and (3) all consumer lending by all banks domiciled here.  An increase of 0.2% is an increase, but...two points:  (1) it's nowhere near an expansionary level (think more like 0.5% for that) and that increase has remained roughly the same for 18 months.

    The marquee data, of course, is the Employment data, and that came out late in the week.  The Government reported that, in April, the Unemployment Rate dipped 0.4 percentage points...and, in fact, the number of new people employed in April beat expectations.   It sounds good, but it wasn't really all that simple, however.  

    It's true that the 12-month rolling average of people employed rose 0.1%...and that's about the same rate at which the ranks of those employed have been rising for two years.  It's also true, however, that the 12-month rolling average of those no longer in the labor force rose 2.0%.  Some pertinent facts: in April, 677,000 new employees were added to payrolls.  But, 964,000 people left the labor force.  That's a deficit of people joining the ranks of the employed.  That's a difference of 287,000 net people who left the work force and are not being counted as looking for work. As a result, the Employment Rate (the percentage of all people employed) remained unchanged, at 58.7%.  This, regular readers should already know, is a low figure.  The lowest the figure hit in the wake of the Financial Crisis, was 58.2%.  During normal, boom times, the figure should hover around 62.0%.

    Lastly this week, we'll address Income and Spending.  Both figures came in with increases of 0.3% in March.  This is a figure we associate with being just shy of solidly respectable.  In this lower inflation environment, however, we can cautiously characterize these increases as respectable, but just barely, and certainly no more than that, since growing the value of Income through a decline in Inflation is hardly what you'd call a growth mode.

    All around, not an inspiring week.  Grading it, we'd give it a C-.