Economy Archives - Page 16 of 136 - the patient investor

November 6, 2021November 8, 2021

Retail sales, missing workers and the inflation threat

The October labor report shows hours worked were roughly unchanged from September and still 100K below the pre-pandemic high (5.25m). But GDP of 19.5 trillion is up slightly when compared to 19.2T in Q3 2019, indicating that productivity has improved.

Real GDP & Hours Worked

Monthly retail sales for September, on the other hand, were way above trend.

Retail Sales

People are spending Dollars they didn’t earn, courtesy of record government stimulus.

That is one of the primary causes of rising consumer prices (red below): when demand outstrips supply.

Average Hourly Earnings & CPI

A rising CPI in turn causes second run inflation through higher wage demands (green and gray above) if central banks fail to act quickly. They become embedded and difficult to dislodge.

The combined effect of the pandemic and government stimulus has had a profound impact on the US labor market. The economy added 5.8 million jobs in the 10 months to October, at an average of 580K per month. That rate is likely to slow as the economy reopens and enhanced unemployment benefits end.

We are missing 4.2 million employees, compared to the pre-pandemic peak of 152.5m jobs, and seem unlikely to find them, judging by the 10.4 million job openings in September. High levels of job openings are likely to exert continuing upward pressure on wages.

Non-farm Payroll & Job Openings

The missing workers — aided by government handouts — have either retired, quit their jobs to day-trade Tesla and crypto-currencies, or have re-assessed their work-life priorities. No doubt there will be a trickle back to the workforce — as day-traders encounter reversion to the mean and/or savings run low — but the Fed needs to reassess its full employment target. Failure to do so would leave interest rates too low for too long and allow second run inflation to become entrenched. The only way to then dislodge it is with the kind of drastic measures that Paul Volcker used in the early eighties, with the fed funds rate peaking at 20%.

Fed Funds Rate under Paul Volcker

Colin Twiggs

Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.

October 31, 2021November 1, 2021

David Woo: Prelude to volatility

The bond market had a heart attack last week. Rising inflation caused a massive back up in bond yields in the short end of the market. The market is now pricing in two rate hikes in 2022. The Fed will have to raise real interest rates in order to tame inflation.

Real interest rates are falling. The stock market is taking its cue from the bond market and is rising. Stock prices represent discounted future cash flows, so negative real interest rates make a big difference to earnings multiples.

The Democrats are determined to spend their way to a mid-term election victory, with a $1T infrastructure bill and $1.75T social spending, both light on tax revenue. The GOP will try to stop them when the debt ceiling issue returns in December but they don’t have much leverage.

Financial conditions will have to tighten a lot more in 2022. The Fed is way behind the curve and is going to have to play catch-up.

Conclusion

Inflationary pressures in the US economy are growing, while the Democrats plan a further $2.75T in fiscal stimulus which is light on tax revenues.

Long-term yields lag far behind inflation, with real interest rates growing increasingly negative. The assumption is that the Fed will tighten sharply in 2022 to curb inflation. We expect that the Fed will taper but is not going to rush to hike interest rates for three reasons:

The Fed would be tightening into a slowing economy, with growth fading as stimulus winds down;
High energy prices will also help to cool demand; and
US federal debt levels — already > 120% of GDP and likely to grow further with proposed new stimulus measures — are a greater long-term threat than inflation. The Fed and Treasury are expected to work together to boost GDP and tax revenues through inflation, keeping real interest rates negative to alleviate the cost to Treasury of servicing the excessive debt burden.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 12, 2021October 13, 2021

Job openings flag upward pressure on wages

Job openings fell by 660k in August, from 11.10 million to 10.44 million. Unemployment fell by less, from 8.70 million to 8.38 million (-320k), as absentees return to the workforce. Unemployment declined steeply (-710k) to 7.67 million in September and we expect an even larger decline in job openings as more return to the workforce.

Job Openings & Average Hourly Wage Rates

Job openings in August exceed unemployment by 2.06 million. While this is expected to reduce over the next few months, as stragglers return to the workforce, the persistent gap is likely to add upward pressure to wages. Average hourly earnings growth, currently at 4.6% YoY, is expected to rise in the months ahead.

The number of people who quit jobs voluntarily – to work for another company that offered higher wages and benefits and a signing bonus; to change careers entirely; to stay home and take care of the kids; to spend more time with their money; or whatever – spiked by another 242,000 people to a record of 4.27 million in August, up 19% from August 2019…….This enormous number of quits is the hallmark of a tight and competitive labor market that encourages workers to switch jobs to seek the greener grass on the other side of the fence. (Wolf Richter)

Job Quits

Conclusion

The economy is recovering but the persistent gap between job openings and unemployment suggests that upward pressure on wages is likely to continue into next year. Rising wage rates add pressure on prices of consumer goods and services, adding to the inflationary spiral.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 12, 2021October 12, 2021

Deconstructing Evergrande’s effect on China

Elliot Clarke at Westpac says that China will be able to withstand the shock of Evergrande’s collapse and that power outages are a bigger threat.

We still think that the property sector contagion is part of a broader issue that China will struggle to overcome, as Michael Pettis succinctly explained:

China’s debt problem

Tweeted by Prof. Michael Pettis:

In the past — e.g. the SOE reforms of the 1990s, the banking crisis of the 2000s, SARS in 2003, the collapse of China’s trade surplus in 2009, COVID, etc. — whenever China faced a problem that threatened the pace of its economic growth, Beijing always responded by accelerating debt creation and pumping up property and infrastructure investment by enough to maintain targeted GDP growth rates. It didn’t adjust, in other words, but rather goosed growth by exacerbating the underlying imbalances.

That is why it had always been “successful” in seeing off a crisis. But when the main problem threatening further growth becomes soaring debt and the sheer amount of non-productive investment in property and infrastructure, it is obvious, or should be, that accelerating debt creation and pumping up property and infrastructure investment can no longer be a sustainable solution. All this can do is worsen the underlying imbalances and raise further the future cost of adjustment.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

October 7, 2021

End game for the Dollar

The end game for the Dollar: China vs the US, with Grant Williams and Luke Gromen:

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

August 11, 2021August 11, 2021

The error of a Dollar reserve currency

The era¹ of US Dollar reserve currency status started in 1971, when Richard Nixon ended convertibility to gold. The present issues have taken a long time to evolve but are a consequence of that decision.

Yesterday we showed how GDP had declined against the M2 money supply² since the global financial crisis in 2008-09. Liquidity soared but GDP growth failed to respond to quantitative easing and ultra-low interest rates.

GDP/M2

Even when we adjust M2 money supply for recent actions that remove liquidity — commercial bank investment in Treasury & Agency securities and overnight reverse repo from the Fed — there is a sharp fall in money velocity.

GDP/M2 Adjusted for Commercial Bank Treasury Investments & Fed Reverse Repo

With the 2020 pandemic, the Fed doubled down, boosting liquidity and cutting interest rates even further. Bank credit has slowly started to recover.

Commercial Bank: Loans & Leases

But results are miniscule compared to the Fed’s $3.9 trillion liquidity injection.

M2 Money Stock

Declining bank credit relative to M2 over the past two decades tells a similar story.

Commercial Bank: Loans & Leases/M2 Adjusted for Commercial Bank Treasury Investments & Fed Reverse Repo

With GDP also declining relative to bank credit.

GDP/Commercial Bank: Loans & Leases

And unlikely to recover in the foreseeable future.

Conclusion

Fed monetary policy — with quantitative easing and record low interest rates — has not achieved a recovery in GDP growth over the past two decades. It was never designed to do that. Its primary purpose is to fund the federal deficit.

Federal Deficit

The only way to achieve a true economic recovery, with robust GDP growth, is to end the Dollar’s reserve status. The US has been forced to run massive current account deficits to support the Dollar’s reserve status, eroding the competitiveness of domestic industry in export markets and against imports in domestic markets.

Current Account

Eliminate the current account deficits and you will eliminate the primary need to run federal deficits — and for the Fed to expand its balance sheet to support them. You will also enhance the competitiveness of US industry.

The longer the Dollar continues as global reserve currency, the higher federal debt will rise, while GDP growth falls.

Notes

Intentional (era >> error).
In economics jargon the ratio GDP/M2 is referred to as the velocity of money.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

August 6, 2021August 6, 2021

Australian economy: Gold medal or wooden spoon?

A quick health check from the RBA chart pack:

Our trade balance is in robust good health.

Australia: Current Account

Boosted by record high iron ore prices. Sadly, this is nearing an end.

Australia: Exports

On the domestic front, we have a decent chance of a bronze medal placing for the biggest housing bubble. But Canada, UK and NZ are vying for gold.

Australia: Housing

While on the business front, we are competing for the wooden spoon, with the lowest investment rate since the early ’90s.

Australia: Current Account

Conclusion

Economic policy is completely cock-eyed. We are driving up prices in an already over-heated housing market — in an attempt to generate short-term jobs — a ponzi scheme that puts the entire financial system at risk. And starving the one sector that has the potential to generate jobs and grow GDP, ensuring long-term stability.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

July 6, 2021

RBA tapers

From Bill Evans at Westpac:

The Governor of the Reserve Bank has announced the intention to reduce the weekly purchases from $5 billion to $4 billion and not to extend its Yield Curve Target from the April 2024 bonds to the November 2024 bonds – two clear signs that policy is tightening…..

The decision to not extend the Yield Curve Target program to the November 2024 bonds….Giving up the option to extend the purchases at 0.1% to a 3 year 4 month bond from a 2 year 9 month bond, is effectively tightening policy.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

July 2, 2021

Global minimum corporate tax rates

There appears to be widespread support for a global minimum corporate tax rate of 15%.

From CNBC:

Treasury Secretary Janet Yellen announced Thursday that a group of 130 nations has agreed to a global minimum tax on corporations, part of a broader agreement to overhaul international tax rules.

If widely enacted, the GMT would effectively end the practice of global corporations seeking out low-tax jurisdictions like Ireland and the British Virgin Islands to move their headquarters to, even though their customers, operations and executives are located elsewhere.

Conclusion

We expect a global minimum tax on corporations of 15% to be passed and are adjusting our valuation models to ensure that all earnings projections include a minimum tax rate of 15% on international income.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.

June 25, 2021June 25, 2021

Fed’s favorite inflation indicator surges

The Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Index grew by 3.9% in the 12 months ended May ’21, while Core PCE (excluding food & energy) came in slightly lower at 3.4%.

Personal Consumption Expenditure Index: Annual Change

We still have to watch out for base effects, because of the low readings in May last year, but growth for the past 6 months is even higher, registering 5.3% (PCE) and 4.6% (core PCE) annualized gains.

Personal Consumption Expenditure Index: 6-Month Change

Conclusion

Excluding temporary price spikes due to supply chain disruption, we expect inflation to average a minimum of 4.0% over the next three years.

Colin Twiggs

Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.