Private investment is declining as a percentage of GDP. Not a good sign when you consider that a similar decline preceded previous recessions.
Click graph to view full-size image.
Also a concern, when private credit is rising as a percentage of GDP while investment is falling. Crossover of the two lines would indicate that the private sector is borrowing more than it is investing. That is not likely to end well.
From Harlan Ullman:
Frozen conflicts are not in Russia’s long-term interest. Of course, while the short-term aim of preventing Georgia and Ukraine from joining NATO because of contested borders is working, the long-term economic damage done to Russia will prove politically destructive. Putin certainly is riding a political tiger. However, he has no clear exit strategy for safely dismounting this dangerous beast. That is a fundamental predicament….
What should the United States do? First, common sense and not confrontation is the best means to exploit Putin’s political weaknesses. By threatening Russia, his public will rally around Putin. This does not mean granting concessions. It means being smart not petulant. It also means shifting NATO’s strategy to local defense based on a “porcupine” posture with emphasis on Stinger-like anti-air and Javelin anti-vehicle missiles all reinforced by alliance capabilities to blunt Russian cyber, propaganda, intimidation and other non-conventional forms of war.
Second, the United States needs to dial back on belligerent rhetoric. By all means plan for “full spectrum war.” But do not use a PR bullhorn to announce what is being done. Teddy Roosevelt applies — speak softly but carry a big stick….
Source: Why Russian President Vladimir Putin will fail – UPI.com
10-Year Treasury yields have rebounded off their all-time low, shown here on a monthly chart, but remain in a secular down-trend. Only recovery above 3.0 percent (a long way off) would signal that the long-term down-trend has reversed.
The 5-year breakeven inflation rate (5-year Treasury Yield – 5-year TIPS yield) suggests that the long-term outlook for inflation is low. But growth in Hourly Non-Farm Earnings and Core CPI (excluding Food and Energy) has started to rise.
One would expect the Fed to be preparing for another rate increase to tame inflationary pressures. But there are still concerns about the strength of the recovery.
Growth in estimated total weekly Non-Farm Earnings has been declining since early 2015; calculated by multiplying Average Hourly Earnings by Average Weekly Hours and the Total Non-Farm Payroll.
If we examine the breakdown, growth in the Total Non-Farm Payroll is slowing and Average Weekly Hours Worked are declining.
Not what one would expect from a robust recovery.
Quantitative easing (QE3) ended in the second half of 2014 after the Fed announced it would taper asset purchases in December 2013. The graph below shows that total assets leveled off at $4.5 trillion and have been maintained at that level since.
But the graph also shows that the Fed continues to drip-feed the financial system by running down excess reserves on deposit from a high of $2.7 trillion in August 2014 to $2.25 trillion in August 2016.
Commercial banks are required to hold certain reserves at the Fed but in times of financial stress will deposit excess reserves at the Fed, when trust in the interbank market breaks down. The Fed commenced paying interest on reserves in October 2008 and increased the rate to 0.50% in December 2015. This has encouraged banks to retain excess reserves at the Fed where they earn a risk-free rate of 0.50%.
By raising or lowering the rate payable on excess reserves the Fed can attract or discourage deposits, tightening or easing the availability of funds in the interbank market. Banks have withdrawn $450 billion in excess reserves over two years, which suggests that they can achieve more attractive risk-reward ratios elsewhere. The Fed has not responded, indicating that they are happy for this back-door easing to continue.
Only when the red and blue lines in the first graph converge will the Fed have commenced monetary tightening. That still appears some way off.
The Yield Differential, calculated by subtracting 3-month from 10-year Treasury Yields, is trending lower. This warns that the yield curve is flattening but we are still above the danger area below 1.0 percent.
A flat yield curve squeezes bank interest margins and often precedes a credit contraction.
But there is little sign of slowing credit growth so far.
The St Louis Fed Financial Stress Index (STLFSI) continues to indicate low market stress.
The STLFSI measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together.
The S&P 500 is retracing for a test of short-term support at 2150. Respect of the rising trendline would signal a test of 2200. Breakout above 2200 would complete an inverted scallop (or fish hook) with a target of 2400*. Declining Twiggs Money Flow, however, warns of selling pressure. Breach of 2050 would test medium-term support at 2100.
* Target calculation: 2100 + ( 2100 – 1800 ) = 2400
The Dow Jones Industrial Average also displays a potential inverted scallop on the weekly chart. Follow-through above 18600 would confirm but bearish divergence on Twiggs Money Flow again warns of selling pressure. Tall shadows on the last two candles also suggest short-term selling pressure. Breach of support at 18000 would warn of a test of primary support at 17000.
* Target medium-term: 18500 + ( 18500 – 18000 ) = 19000
10-Year Treasury yields are retracing to test the recent support level at 1.60 percent but the trend remains upward.
The Chinese Yuan is easing against the US Dollar, with USDCNY in a gradual up-trend as the PBOC manages the decline in order to conserve foreign reserves. This is likely to alleviate immediate selling pressure on the Yuan, both from capital flight and borrowers covering on Dollar-denominated loans.
Spot gold respected support at $1300/ounce. Breakout above the falling wedge (and resistance at $1350) would signal another advance.
* Target calculation: 1375 + ( 1375 – 1300 ) = 1450
Rising interest rates and low inflation are bearish for gold but uncertainty over US elections, Europe/Brexit, and the path of the Chinese economy contribute to bullish sentiment.
Gold stocks serve as a useful counter-balance to growth stocks in a portfolio. If there are positive outcomes and a return to economic stability, growth stocks will do well and gold is likely to underperform. If there is instability and growth stocks do poorly, gold stocks are likely to outperform.
From Bob Doll’s weekly newsletter:
The strong patch of summer U.S. economic data may have ended. Following weak Institute for Supply Management readings in previous weeks, August retail sales declined 0.3%. This marks the first pullback since March, and bears watching for a broader downtrend into September…..
Corporate earnings expectations are climbing slowly. Following a modest second quarter improvement, analyst expectations for future quarters have climbed in recent weeks…..
Equities may continue to climb in 2016, based on historical trends. Strategy group Fundstrat shows that since 1940, when stock prices increased more than 5% by mid-September, 87% of the time they rallied further in the last three-and-a-half months of the year. As of Friday’s close on September 16, the S&P 500 Index is up 6.3%….
As you can see from Bob’s commentary, there seems to be a divergence between economic data (retail sales in this case) and technicals which tend to be more focused on the earnings expectations. I have seen something similar.
Retail sales have fallen in July/August but of greater concern is the longer-term down-trend. Continued growth below core CPI would warn of a contraction in real terms.
Light Vehicle Sales are also below trend, reinforcing the down-turn in consumer outlook.
The decline in sales is reinforced by the decline in growth of average weekly earnings (all employees).
Technicals, on the other hand, remain reasonably strong for the present. Until declining sales impact on corporate earnings.
https://youtu.be/7Ee_0KgPxhc
Apologies for the sub-titles but this Hard Talk interview has an important message.
