Category: US & Canada

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US Retail & Light Vehicle Sales slow

Retail sales growth (excluding motor vehicles and parts) slowed to 2.4% over the 12 months to June 2017.

Retail Sales ex Motor Vehicles & Parts

Source: St Louis Fed & US Bureau of the Census

Seasonally adjusted light vehicle sales are also slowing.

Light Vehicle Sales

Source: St Louis Fed & BEA

Seasonally adjusted private housing starts and new building permits are starting to lose momentum.

Housing Starts & Permits

Source: St Louis Fed & US Bureau of the Census

The good news is that Manufacturer’s Durable Goods Orders (seasonally adjusted and ex Defense & Aircraft) are recovering.

Manufacturing Durable Goods Orders ex Defense & Aircraft

Source: St Louis Fed & US Bureau of the Census

Cement and concrete production continues to trend upwards.

Cement & Concrete Production

Source: US Fed

And estimated weekly hours worked (total nonfarm payroll * average weekly hours) is growing steadily.

Estimated Weekly Hours Worked

Source: St Louis Fed & BLS

All of which suggest that business confidence is growing and consumer confidence is likely to follow. Bellwether transport stock Fedex advanced to 220, signaling rising economic activity in the broader economy.

Fedex

Target: 180 + ( 180 – 120 ) = 240

The S&P 500 broke resistance at 2450, making a new high. Narrow consolidations and shallow corrections all signal investor confidence typical of the latter stages of a bull market. The immediate target is 2500* but further gains are likely.

S&P 500

Target: 2400 + ( 2400 – 2300 ) = 2500

The stock market remains an exceptionally efficient mechanism for the transfer of wealth from the impatient to the patient.

~ Warren Buffett

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New Bailouts Prove ‘Too Big to Fail’ Is Alive and Well | WSJ

By Neel Kashkari:

Three strikeouts in four at bats would be barely acceptable in baseball. For a policy designed to prevent taxpayer bailouts, it’s an undeniable defeat. In the past few weeks, four European bank failures have demonstrated that a signature feature of the postcrisis regulatory regime simply cannot protect the public. There’s no need for more evidence: “bail-in debt” doesn’t prevent bailouts. It’s time to admit this and move to a simpler solution that will work: more common equity.

Bail-in debt was envisioned as an elegant solution to the “too big to fail” problem. When a bank ran into trouble, regulators could trigger a conversion of debt to equity. Bondholders would take the losses. The firm would be recapitalized. Taxpayers would be spared……

The problem is that it rarely works this way in real life. On June 1, the Italian government and European Union agreed to bail out Banca Monte dei Paschi di Siena with a €6.6 billion infusion, while protecting some bondholders who should have taken losses. Then on June 24, Italy decided to use public funds to protect bondholders of two more banks, Banca Popolare di Vicenza and Veneto Banca, with up to €17 billion of capital and guarantees. The one recent case in which taxpayers were spared was in Spain, when Banco Popular failed on June 6……

The Minneapolis Fed President has hit the nail on the head. Conversion of bondholders to equity may be legally plausible but psychologically damaging. Similar to money market funds “breaking the buck’, conversion of bondholders to equity in a troubled bank would traumatize markets. Causing widespread panic and damage far in excess of the initial loss. Actions of Italian authorities show how impractical conversion is. Especially when one considers that the affected banks were less than one-tenth the size of behemoths like JPMorgan [JPM].

Banks need to raise more equity capital.

Source: New Bailouts Prove ‘Too Big to Fail’ Is Alive and Well – WSJ

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US adds 222 thousand jobs

From the Wall Street Journal:

U.S. employers picked up their pace of hiring in June. Nonfarm payrolls rose by a seasonally adjusted 222,000 from the prior month, the Labor Department said. The unemployment rate ticked up to 4.4% from 4.3% the prior month as more people joined the workforce…..

Job Gains

Source: St Louis Fed & BLS

Forecast GDP for the current quarter — total payrolls * hours worked — is rising, showing an improving economy.

Real GDP Forecast

Source: St Louis Fed, BLS & BEA

Declining corporate profits as a percentage of net value added (RHS) is typical of mid-cycle growth, while employee compensation (% of net value added) is rising at a modest pace. Peaks in employee compensation are normally accompanied by troughs in corporate profits…..and followed by a recession.

US Corporate Profits and Employee Compensation as percentage of Value Added

Source: St Louis Fed & BEA

Average wage rate growth, both for production/non-supervisory and all employees, remains below 2.5% per year. Absence of wage rate pressure suggests that the Fed will be in no hurry to hike interest rates to curb inflationary pressure.

Hourly Wage Rate Growth

Source: St Louis Fed & BLS

Which should mean further growth ahead.

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Canada: TSX 60 bear market

The TSX 60 followed-through below 890, after breaking primary support at 900, to signal a bear market. Decline of Twiggs Trend Index below zero would strengthen the signal. Immediate target for the decline is 865*.

TSX 60 Index

* Target calculation: 900 – ( 935 – 900 ) = 865

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Tillerson: Not many good North Korea options | Reuters

From Reuters:

U.S. Secretary of State Rex Tillerson said on Friday there would not be many good options left on North Korea if the peaceful pressure campaign the United States has been pushing to curb Pyongyang’s nuclear and missile programs failed….

The United States, Japan and South Korea agreed on Friday to push for a quick U.N. Security Council resolution to apply new sanctions on North Korea. U.N. diplomats said the United States had given China a draft sanctions resolution.

But Washington faces an uphill struggle to convince Russia and China to give quick backing to new U.N. sanctions.

Experts say North Korea’s ICBM launch on Tuesday was a major step forward in its declared intent to create nuclear-tipped missiles capable of hitting the United States. Some U.S. experts say the missile appeared to have the range to hit Alaska, Hawaii and parts of the U.S. Pacific Northwest.

Washington has warned it is ready to use force if need be to stop North Korea’s weapons programs but the consequences of that could be catastrophic and it prefers global diplomatic action.

Source: Not many good North Korea options if pressure fails: Tillerson | Reuters

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Warsaw: Trump unequivocally commits to Article V | CNN

….As long as we know our history, we will know how to build our future. Americans know that a strong alliance of free, sovereign and independent nations is the best defense for our freedoms and for our interests. That is why my administration has demanded that all members of NATO finally meet their full and fair financial obligation.

As a result of this insistence, billions of dollars more have begun to pour into NATO. In fact, people are shocked. But billions and billions of dollars more are coming in from countries that, in my opinion, would not have been paying so quickly.To those who would criticize our tough stance, I would point out that the United States has demonstrated not merely with words but with its actions that we stand firmly behind Article 5, the mutual defense commitment. (Applause.)

Words are easy, but actions are what matters. And for its own protection — and you know this, everybody knows this, everybody has to know this — Europe must do more. Europe must demonstrate that it believes in its future by investing its money to secure that future.

That is why we applaud Poland for its decision to move forward this week on acquiring from the United States the battle-tested Patriot air and missile defense system — the best anywhere in the world. (Applause.) That is also why we salute the Polish people for being one of the NATO countries that has actually achieved the benchmark for investment in our common defense. Thank you. Thank you, Poland. I must tell you, the example you set is truly magnificent, and we applaud Poland. Thank you. (Applause.)

We have to remember that our defense is not just a commitment of money, it is a commitment of will. Because as the Polish experience reminds us, the defense of the West ultimately rests not only on means but also on the will of its people to prevail and be successful and get what you have to have. The fundamental question of our time is whether the West has the will to survive. Do we have the confidence in our values to defend them at any cost? Do we have enough respect for our citizens to protect our borders? Do we have the desire and the courage to preserve our civilization in the face of those who would subvert and destroy it? (Applause.)

We can have the largest economies and the most lethal weapons anywhere on Earth, but if we do not have strong families and strong values, then we will be weak and we will not survive. (Applause.) If anyone forgets the critical importance of these things, let them come to one country that never has. Let them come to Poland. (Applause.) And let them come here, to Warsaw, and learn the story of the Warsaw Uprising….

Source: Trump’s speech in Warsaw (full transcript, video)

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America should stand for more than just wealth, says Warren Buffett

Judy Woodruff from PBS with Warren Buffett in a wide-ranging interview:

  • Why you should invest in America
  • Why health care in the US is sick and needs fixing
  • Why America should stand for more than just wealth

Buffett on Wells Fargo: “It was a terrible mistake. They incentivized bad behavior. Incentives work. But they work in either direction.”

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S&P 500 selling pressure

The S&P 500 is experiencing warns of medium-term selling pressure, signaled by bearish divergence on Twiggs Money Flow. The last correction was shallow, typical of stage III in a bull market, and this one is likely to be too. Respect of support at 2400 would signal another primary advance. A correction to test primary support at 2300 is unlikely, but would warn that investors are jumpy and taking profits. This would signal stage III is closer to a top.

S&P 500

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Investment the key to growth

Elliot Clarke at Westpac recently highlighted the importance of investment in sustaining economic growth:

The importance of sustained investment in an economy cannot be understated. Done well, investment in real capacity begets greater production volume and employment as well as a productivity dividend. Its absence in recent years is a key factor behind sustained soft wage inflation and the US economy’s inability to consistently grow at an above-trend pace despite the economy being at full-employment and household balance sheets having more than fully recovered post GFC.

The graph below highlights declining US investment in new equipment post GFC.

S&P 500

source: Westpac

There are three factors that may influence this:

  1. Accelerated tax depreciation allowances after the GFC encouraged companies to bring forward capital spending in order to stimulate the recovery. But the 2010 to 2012 surge is followed by a later trough when the intended capital expenditure was originally planned to have taken place.
  2. Low growth in personal consumption, especially of non-durable goods and of services, would discourage further capital investment.

US Net Debt & Equity Issuance

  1. The level of stock buybacks increased as companies sought alternative measures to sustain earnings (per share) growth. The graph below shows debt issuance has soared while net equity issuance remains consistently negative.

US Net Debt & Equity Issuance

source: Westpac

Net capital formation (the increase in physical assets owned by nonfinancial corporations) declined between 2015 and 2017. While this is partly attributable to the falling oil price curtailing investment in the Energy sector, continuation of the decline would spell long-term trouble for the economy.

US Net Capital Formation

The cycle becomes self-reinforcing. Low growth in personal consumption leads to low levels of capital investment ….which in turn leads to low employment growth…..leading to further low growth in personal consumption.

Major infrastructure investment is needed to break the cycle. In effect you need to “prime the pump” in order to create a new virtuous cycle, with higher investment leading to higher growth.

It is obviously important that infrastructure investment target productive assets, that generate income, else taxpayers are left with increased debt and no income to service it. Or assets that can be sold to repay the debt. But the importance of infrastructure investment should be evident to both sides of politics and any attempt to obstruct or delay this would be putting political ahead of national interests.

Australia

Australia is in a worse position, with a dramatic fall in investment following the mining boom.

Australia: Business Investment

source: RBA

If we examine the components of business investment, it is not just Engineering that has fallen. Investment in Machinery & Equipment has been declining for the last decade. And now Building Investment is also starting to slow.

Australia: Components of Business Investment

source: RBA

You’ve got to prime the pump…. You’ve got to put something in before you can get anything out.

~ Zig Ziglar

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