Sunday, March 26, 2017

Output Gap mental disorder


The output gap increasing.

The economists at the Federal Reserve Bank say the output gap has closed and that is why they can increase interest rates now.  The output gap didn’t close, they only over the last five years have been calculating it closing as all their efforts have failed to actually close it.

Here is a picture of the output gap that was created from the great recession.  Can you see what is wrong here?


Here is a close up of it.  Not only has it not closed, the gap is getting wider.


This is really sick.  The Fed actually publishes their calculation of the output gap and they have closed it.  They needed to do that so they could raise rates.  What they are saying to us in reality is this is as good as it gets.  They are out of ideas what to do.  In fact, they have been blaming others for the problem.  For instance, they blame drug addicted white people who are too lazy to work.  They blame secular stagnation.  Meaning it isn’t their fault.  It is natural that the economy hasn’t done better.  They blame skills mismatch.

This has social consequences.

In 24 States, 50% or More of Babies Born on Medicaid; New Mexico Leads Nation With 72%


Saturday, March 25, 2017

Earnings Optimism Q4 2016

It seems the near recession in 2016 has ended.  It has been a long time since trailing 4 quarter earnings have exceeded $100 per share.  The projection for the first quarter of 2017 does push the trailing 4 quarters above $100.  We shall see.



{click to enlarge}

It is not surprising that all economic indicators had turned down when you see this slump which started in the 4th quarter of 2014.  It took the stock market since then, after several serious down turns, to return to a new high all the way to 7/11/16.  It was a year and a half of no growth in the stock market and a slump in the economy.

I am not making any forecasts from here.

Friday, March 24, 2017

Inflation Expectations as of 3/22/17

5 year is rolling over



10 year is rolling over



5 year 5 year is not and until it does I don't think there is a problem.



BUT THE REFLATION TRADE SEEMS TO BE ON THE ROCKS

Yield Curve Compression as of 3/22/17



The compression is not healthy but it isn't diseased.  So ok for now.

Monetary Review REQUIRED RESERVES as of 3/15/17

Sideways but at a nice rate.  Most recently dropping below the lows but looks like it is still hanging in there.


Monetary Review MONETARY FLOWS as of 03/13/17

There have been positive flows since 4/11/16 when monetary flows bottomed having contracted at a rate of 3%.  The sideways movement in recent times seems to be squeezing into a narrower channel.






Friday, March 3, 2017

Monetary Review MONETARY FLOWS 03/03/17





These better not get any worse.

Monetary Review REQUIRED RESERVES 03/03/17




Above:  we need it go go above the down sloping black line.
Below: it better not go below the up sloping black line.


Yellen spoke and the markets fell to sleep 03/03/17

I can't stand Yellen.  But it isn't personal as I can't stand any of them.  World wide economists and financial people hang on every nuance of every thing the Fed people say.  What egos they must have in spite of them not being able to predict anything nor fix anything.



So the world is still left guessing what the FOMC will do on March 15.  I have an opinion.  If the jobs report March 10 is strong they will likely raise rates.  If weak, they won't.  If middling then I will have to look at this:



Why does it matter?  If they don't raise rates I don't think it will be a big deal.  But if they do, because it is done only three months after the last rate hike, it will be perceived as a very hawkish stance and more rates are likely to come faster than anticipated.  The world will have to react because they feel it will cause a massive capital flow out of their countries into the U.S.  It might increase the value of the dollar and lower commodity prices for EMs.

Is that bad for stocks, bonds and real estate?  It is a disaster for bonds.  Probably good for real estate as long as sensitivity to higher mortgage rates suppresses buying.   But stocks is something else.  It is complicated.  I think if the yield curve tightens stocks will react negatively.  First of all, a flattening yield curve immediately hurts banks.  Then banks pull back on lending.  Reduced lending decelerates the money supply.  And that reduces economic activity.  At some point reduced economic activity could pull the positive sentiment out from under the stock market.

Reading the tea leaves of the yield curve and monetary flows is hard.  But I will show some things soon.

Monetary Review REAL M1 & M2

Shrinking money supply is death to the economy.  Real M1 is best observed on a 3 month moving average.  Deceleration of the Money Supply at the same time the yield curve is flattening is a sign of caution. The yield curve is not flat but it is beginning to flattening.  See two posts ago.

Real M1 growth has been declining.  Recently, June 2015 the grow went negative but it bottomed then and had a nice run but that ended May 2016.  Most recently the growth went slightly negative but thankfully rebounded from there.  It is important that the next report takes the blue line above the down sloping short term line.



Thursday, March 2, 2017

Economy Review NEW HOME SALES 03/02/17

New home sales (like the stock market) is strong.  It is continuing on its trend with higher highs and higher lows.



And this even with prices going higher and higher.  Actually, higher prices probably entice people to buy as they probably think prices will continue to rise.

Monetary Review COMPREHENSIVE YIELD CURVE 03/02/17



Squeezed together doesn't matter as an harbinger of recession until the 3 month joins the squeeze.  But in the mean time, flattening isn't good for banks and rising 10 year isn't good for the future of mortgage rates.

Economy Review CONSTRUCTION SPENDING 03/02/17

Total Construction Spending didn't recovery yet.



If the definition of recovery is getting back to where you were then higher this doesn't qualify as recovery.



And finally, without comment.




Economy Review GDP minus FEDERAL DEBT 03/02/17

This is really delayed data.  It is only as of the third quarter of 2016.  We are four months away from this presentation.  But it is instructive.  Since the 1950s the economy grew without incurring much federal debt.  It wasn't until really the start of the "Great Moderation" in the early 1980s, our magic times, that debt was increased.

This chart shows the effectiveness of federal debt.  Obviously it is increasingly ineffective.  Yes, I know, the Camelot period of Bill Clinton showed increasing effectiveness.  But it was a false economy that ended in a bust and the massive corporate fraud during Bill Clinton's regime ended with the Sarbanes-Oxley laws and all that corporate governance stuff that corporations now do.

We did not recover from the dot com bust during the 2000s.  Interestingly, and heralded as an Obama success is that the economy grew with less increases in federal debt.  But as you can see that all came to an end towards the end of the Obama regime.  It is now, as of Q3'16 looking ugly again.

Economy Review COMMERCIAL & INDUSTRIAL LOANS 03/02/17

It sure looks like this is rolling over.  That is ominous to me.



Looking at the percentage change from a year ago confirms the slow down.



But what is really alarming to me is the delinquency rate. That is because this looks like an early warning indicator of recession.  The good news is that it isn't getting worse.



Looking at it year over year looks really bad because it show a more rapid rate of growth than in previous cycles except for the great recession.  Again, the good news is that it isn't getting worse.




Economy Review GROSS PROFIT 03/02/17

You have read how high corporate profits had gotten.  This is considered good as it theoretically leads to more investment.

I chose to look at gross profit instead.  That is sales minus directly variable expenses like materials and labor. This is not affected by depreciation and inventory adjustments nor taxes and extraordinary items.

The charts below are growth rates from a year ago.  The top one is simply the rate of change of the dollars of gross profit.  As you can see the good news is that it has stopped getting worse.



Next is a bad sign.  It is the gross profit by units.  Above, gross profit is growing because sales are growing even if more slowly.  Good.  Volume is growing.

But when looking at the gross profit per unit produced, we see that margins are really shrinking.  Again the good news is that it looks like it isn't getting worse.




Economy Review INDUSTRIAL PRODUCTION & DOMESTIC INVESTMENT 03/02/17

While the consumer is about 70% of the economy, Industrial Production is something like 14% I think I read.  So it not growing isn't so bad.  But it isn't a good sign.  The good is that it isn't getting any worse.



↑ There never was a recovery if you define recovery as coming back to where it was before then going higher.

↓ There was never a recovery in Domestic Investment which is the other remaining big piece of he economy.  The good news is it isn't getting worse.



Above is the year over year percentage change.

Economy Review INCOME & SPENDING 03/02/17

INCOME AND SPENDING

Real PCE YoY - does this look good?  We almost had a recession in 2012 which led to QE3.  How well have we recovered from that low?  What is good is that it doesn't appear to be getting worse.



The PCE inflation index shows that the deflationary period of low oil prices is over.  YoY percentage change.




YoY the PCE less food and energy inflation index shows that general prices are flat.  So what is good is that it doesn't appear to be getting worse by going down or worse by going up.



Real Personal Income YoY is going the wrong way.



Obviously Real Personal Income per Capita going down from a year ago is not good.



What about the direct earnings category? I am persuaded the aggregate indexes are the best at reflecting what is going on.  Here I compare both hours and earnings to inflation.  This picture is not going in the right direction.



However, earnings vs inflation isn't confirming a bad situation.  Inflation may very well be going up but weekly earnings are steady.