martes, 19 de enero de 2016

martes, enero 19, 2016

Bull Economy 2

by: The Nattering Naybob

Summary

- Discussion of the potential effects on equity, bond, commodity, capital and asset markets regarding:

- Inventories to sales; imports and exports; and manufacturing new orders.

- Industrial production; and industrial production and S&P 500.

- Real GDP; and final summation.

 
Continuing our journey from Bull Economy Part 1, we ferret out more "robust bull" economic indicators.
From Martin at Macronomics: "Government bonds are always correlated to nominal GDP growth, regardless if you look at it using "old GDP data" or "new GDP data." So, if indeed GDP growth will continue to lag, then you should not expect yields to rise anytime soon making our US long bonds exposure still compelling regardless of what some sell-side pundits are telling you. From a "risk-reversal" perspective, we think, the current sizable "short positioning" from the "Leveraged crowd," offers a good contrarian punt, given the "weaker" outlook as of late of the US economy."
Rising Inventories to Sales?
 
 
Above, note since 2011, inventory to sales ratios have spiked from 1.25% to 1.375%, demonstrating that inventory is backing up, not due to overproduction, but due to declining demand. Declining real wages, income and spending is the cause. Lacking sales, restock orders and production will decline, leading to layoffs and further declines in income and spending, resulting in further contraction in imports and exports.
 
Decline in Imports and Exports?
 
Above, note since Q2 2010, YoY growth in imports of all goods and services has contracted from 26% to -3.5%.
 
 
Above, note since Q2 2010, YoY growth in export of all goods and services has contracted from 19% to -5%. In both cases, food and petroleum are not excluded, so that is everything coming in and going out, which means the contraction is not limited to US demand, and extends to global demand, as industrial production contracts.
 
Negative Manufacturing New Orders
 
 
Above, note since April 2010, YoY % change in new factory orders contracting 125% from 22.5% to -4.22%. This combined with the inventory to sales build paints a robust picture of a collapsing economy.
 
Industrial Production Swoon?
 
 
Above, note that since 1919, the majority of times YOY growth in industrial production has gone negative, a recession has ensued.
 
Above, note since 1950 (modern times), when YOY industrial production growth has gone negative, a recession has ensued 10 out of 14 times. Meh, that's only batting .710...
Recessionary Industrial Production and S&P 500?
 
 
Above, note, since 1950, when YOY industrial production growth has gone negative and the S&P 500 has gone below its 12-month MA, a recession has ensued 10 out of 10 times, batting 1.000. That critical threshold was just breached for an 11th time. Get ready for a recession?
 
Decelerating Real GDP?
"The deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and decelerations in exports, in PCE, in nonresidential fixed investment, and in state and local government spending that were partly offset by a deceleration in imports." - Q3 2015 GDP Report
The deceleration in Q3 2015 real GDP to +2% reflected less investment in idle inventory, decelerating exports, partly offset by a deceleration in imports. The only accident there is the math.
 
Were it not for the GDP accounting chicanery of excess inventory and regulatory healthcare insurance payments being counted as a positive, and the phantom accounting of owner occupied "rent" equivalent as productive economic activity (the largest single component of services GDP and total GDP), advertised GDP would already have been negative for a majority of quarters since the crisis, already putting us in a recession.
 
Summation
 
In closing, let's add it all up from Part 1:
  • Declining average wage growth 1% below pre crisis levels;
  • since 1999, real median household income -7.2%;
  • 1.8M out of the labor force; 33% above pre-crisis levels;
  • working part time involuntarily +33%; 2007: 4.6M; 2015: 6M;
  • underemployed levels at 10%; 25% above pre-crisis levels;
  • long-term jobless 26.3% vs. 16.1% avg. 20-year pre crisis;
  • Dec. 2015 employment: Contractions in labor force, participation rate and employed. Prime earning age 25-54 years -335K;
  • last three years, savings rate declined 50% from 11% to 5.5%;
  • since July 2010, total consumer credit +$1T or 41%;
  • since mid-2014, with a -36% YoY decline in gasoline prices, YoY total retail sales growth -70% including and -58% ex-gas; and
  • advertised average +270K jobs per month in Q415, yet Q4 GDP est. at anemic 0.8%.
And Part 2:
  • Since 2011, inventory to sales spiked from 1.25% to 1.375%;
  • since Q2 2010, imports YoY growth 26% to -3.5%;
  • since Q2 2010, exports YoY growth 19% to -5%;
  • since 04/2010, new factory order YoY growth 125% to negative; and
  • since 1950, when YoY industrial production growth has gone negative and S&P 500 below its 12-month MA, there has been a recession 10 out of 10 times, and this just happened again.
None of the above is happenstance. In the creation of a "burgeoning and robust economic" or "robust bull" narrative, certain simple facts have been omitted, misrepresented and neglected.
 
Income is either spent on consumption, saved or invested, and one's spending is another's income. Savings and investment are future consumption or spending. The key word is FUTURE, as that discretionary income is not spent on current consumption. All the money sequestered in bank reserves and financialism (and not invested in PCE or durable economic endeavor) is not spent in the present.
 
If the numbers are to be believed, with real median incomes falling an advertised 7.2% since 1999, this leaves only disposable income and/or incurred debt to fuel consumption spending and provide the income of others; and with that failing, no economic foundation or future to fall back on.
From Jeffery P. Snider: "When looking back at that catalog of increasing financial and economic carnage, the pattern should be immediately recognizable to economists as "shrinking" or "tightening" money supply; all the symptoms are there and apparent. It is the classic replay of that condition, as reductions in money supply lead to monetary deflation (commodities and certain markets, including stocks that have, for almost a year and a half, gone, at best, nowhere, and for a great many places have already sunk quite significantly) and depressive economic conditions. To the orthodox economist, however, that just cannot be since ZIRP and QE are both "stimulative" while the latter is sold as "money printing."
Despite popular belief and its rhetoric, it is readily apparent that central banks have been engaging in contractionary monetary policies. A contraction or tightening of monetary conditions reduces growth in spending, revenue, production and jobs and income. With the attendant side effects of petro and eurodollar contraction or "dollar" squeeze, this is a self reinforcing loop.

"But even as the macro picture is hopelessly obscured by the mischievous tinkering of bureaucrats, the county-level data reveals the dismal truth: according to a new study by the National Association of Counties, 93% of America's counties have not yet recovered from the recession." - Zero Hedge
All the signs ahead are flashing danger red for an imminent "recession," and given the evidence, there is doubt that any meaningful recovery from the prior crisis has occurred.

Despite the "robust bull" media narrative, we may already be mired in a long running recession, which is potentially about to get much, much worse. I do believe they call it a depression? TBD.
 
Since the market potential is broad in both scope and scale, our conclusion could not be more specific than the discussion already had. Again, more grief in the dollar "short" or squeeze and its associated liquidity issues, with the potential to adversely affect capital, commodity, equity, bond and asset markets. Will it happen? TBD, and forewarned is forearmed.
 
In brief, this is the eighth in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely affect capital, commodity, equity, bond and asset markets.
 
I wish to dedicate this missive to one of my mentors, Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence in not masticating and spoon feeding the baby ducks, as in learning the hard way, by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard.
 
As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this would tie into any list of investments or assets.

Those listed below happen to influence the indices more than most.
 
Would like to thank you folks fer kindly droppin in. You're all invited back again to this locality. To have a heapin helpin of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!

Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.
 
Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial advisor.
 
Prospective investors should read the prospectus carefully before investing.

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