The market is going great so no need to worry, right?

The market is going great so no need to worry, right?

There are weeks when sitting down to write this piece is tough because not much worthy of note has happened in the markets or the economy outside of the usual noise. This week, that was most definitely not the case. Thank God it is Friday – we all need a break.

New Market Highs and the Economy Gets Uglier

Thursday the S&P 500 closed at a new all-time high and is now above its 50-day, 100-day and 200-day moving averages. The post Federal Reserve Open Market Committee meeting debrief gave the market essentially what it wanted, a significantly more dovish stance with plenty of reasons to believe future rate cuts are imminent. Perhaps the Marty Zweig adage, “Don’t fight the Fed,” has been flipped on its head to “Fed, don’t fight the markets.” Unemployment is at multi-decade lows with more job openings than unemployed persons, rising hourly earnings, and improving retail sales while the market hits all-time highs and yet the Fed is preparing to stimulate. Yeah, something’s off here.

Stocks may be partying like it is 1999 (for those who remember that far back) but the yield on the 10-year closed at 2.01% Thursday. To put that in context, on June 9th when the 10-year was down to 2.09%, the Wall Street Journal ran an article asserting that, “Almost nobody saw the nosedive in bond yields coming, but a few players were positioned well enough to profit. Some think there is more room for yields to fall further,” along with this chart. To be clear, despite not one respondent predicting the yield on the 10-year would fall below 2.5% in 2019, none of these economists are idiots, but the thing is they all tend to read from the same playbook.

The stock market is giddy over its expectations for lower rates, yet the spread between the 3-month and the 10-year Treasury has been inverted for four weeks as of this writing, not exactly a ringing endorsement for economic growth prospects. Every time this curve has been inverted for 4 consecutive weeks, it has been followed by a recession (hat tip @Saxena_Puru) for this chart. Note that the chart uses 10-year versus 1-year until the 3-month became available in 1982. Much of the mainstream financial media and fin twit believe this time is different. Time will tell.

The red arrows denote 4 consecutive weeks of inversion and the blue arrows mark bear-market lows (20% declines).

Then there is this, with a hat tip to Sven Henrich whose tweet with a chart from Fed went viral – that in and of itself says a lot.

Both US imports and exports have declined from double-digit growth in 3Q 2018 to essentially flat today. The recent CFO Outlook by Duke’s Fuqua School of Business found that optimism about the US and about their own companies amongst CFO’s had fallen from the prior year.

The shipments of goods being moved around the country have plummeted since the beginning of 2018, as shown by the Cass Freight Index.

The Morgan Stanley Business Conditions Index fell 32 points in June, the largest one-month decline in its history.

If all that doesn’t have your attention, consider that the New York Fed’s recession probability model puts the probability that we are in a recession by May 2020 at 30%. Note that going back to 1961, whenever the probability has risen to this level we have either already been in a recession or shortly entered one with the exception of 1967 – 7 out of 8 times.

But hey, the market is going great so no need to worry right? If that’s what you are thinking, skip this next chart from @OddStats.

Geopolitics – From Bad to Oh No, No No

Brinksmanship with Iran continues as in the early hours of Friday we learned that the US planned a military strike against Iran in response to the shooting down of an American reconnaissance drone. The mission was called off at the last minute after the President learned that an estimated 150 people would likely have been killed. Frankly, the official story sounds a bit off, but what we do know is that we are in dangerous territory and one can only hope that some cooler heads prevail, and the situation gets dialed back a whole heck of a lot.

Given we weren’t enjoying enough nail-biting out of the Middle East news, an independent United Nations human rights expert investigating the killing of Saudi journalist Jamal Khashoggi is in a 101-page report recommending an investigation into the possible role of the Saudi Crown Prince Mohammed bin Salam citing “credible evidence,” and while not specifically assigning blame to bin Salam, did assign responsibility to the Saudi government. This week the US Senate voted to block arms sales to Saudi Arabia, rebuking the President’s decision to use an emergency declaration to move the deal forward. This matters when it comes to investing because there are some seriously high-stakes games being played out that have the potential to suddenly rock markets without any warning.

Over in Europe more and more data points pointing to a slowing economy, which led to European Central Bank President Mario Draghi to announce that more stimulus could be in the works if inflation fails to accelerate. At the ECB’s annual conference in Sintra, Portugal Draghi stated that, “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” It isn’t just inflation that is troubling the region. Euro Area Industrial Production (ex Construction) has only seen increases in 2 of the last 11 months.

Italy continues to struggle with its budget deficit outside the limits allowed by the European Union, leading to a battle between Rome and Brussels. Friday Deputy Prime Minister Matteo Salvini (head of the euro-skeptic Lega party) threatened to quit his position if he is not able to push through tax cuts for at least €10 billion. While the US has been laser-focused on the Fed (and the president’s tweets) the Italian situation is getting more tense and a time when UK leadership with respect to Brexit is also getting a lot more tense. To put the Italian problem in perspective and understand why this problem is not going away, look at the chart below.

Today, Italy’s per capita GDP is 2.8% BELOW where it was in 2000 while Germany is 24.8% higher. Even the beleaguered Greece has outperformed Italy. Italy’s debt level is material to the rest of the world, its economy is material to the European Union, its citizens are losing their patience and its leadership consists of a tenuous partnership between a far-right, fascist-leaning Lega and a far-left, communist(ish) 5 Star movement lead by folks that very few in the nation respect. So that’s going well.

As if the European Union didn’t have enough to worry about as its new parliament struggles to find any sort of direction or agreement on leadership, the parliamentary process for selecting the next Prime Minister of the UK is down to two finalists. Enthusiam is rampant.

A hard Brexit is looking more likely and that is not going to be smooth sailing for anyone.

The Bottom Line

All this is a lot to take in, but there is a bright light for the week. Anna Wintour, Vogue’s editor-in-chief and eternal trend-setter, has given flip-flops her seal of approval. So, we’ve got that going for us. If that didn’t put a little spring into your step, I suggest you check out this twitter feed from Paul Bronks. Your soon-to-be more swimsuit ready abs will thank me, but your neighbors will wonder what the hell is going on at your place.

Empire Fed Joining Recent Economic Data Downhill Slide

Empire Fed Joining Recent Economic Data Downhill Slide

Today’s Empire Manufacturing report came in (are you ready for this?) below expectations. Shocker, right? This has been the accelerating norm of late, yet we keep hearing some in the mainstream financial media claiming the economy is strengthening. Go figure. Expectations were for the index at 15 but it came in at 9.8, with expectations for conditions six months from now also down from 41.7 to 34.9 – the lowest level since prior to the election.

Internal breadth was also weak, with more companies reporting decreases than increases in seven out of the nine components, namely: New Orders, Shipment, Unfilled Orders, Delivery time, Inventories, Number of Employees and Average Employee Workweek. Only Prices Paid and Prices Received saw increases. (Hat tip to Bespoke for the chart)

Those declining Number of Employees and Average Workweek don’t exactly support the narrative of rising wages with an increasingly tight job market.

As we head into the August lull, the economic data continues to point to an economy that is decidedly weaker than was anticipated earlier in the year. Expectations for accelerating growth in the second half of the year, which is necessary for those S&P 500 earnings expectations to be met, is becoming increasingly less likely. That means that either stock prices will need to fall or valuations will be stretched even further. We do not yet see signs that the stock market is getting ready to change direction, but these fundamentals cannot be ignored. Downside risks are rising while upside potential continues to fade.

More Rolling Over from JOLTS and NFIB

More Rolling Over from JOLTS and NFIB

Yesterday’s JOLTS reports from the Bureau of Labor Statistics led further credence to our assessment that the economy is in the later stages of this business cycle, with many areas showing signs of rolling over.

Like much of the data we’ve seen lately, Job Openings came in below expectations, with 5,666k openings versus expectations for 5,950k with rather profound drops in Mining and Lodging, (not a shock given what’s been going on with crude oil) and Health Care and Social Assistance, (which is likely reflective of the very high-profile battle over the future of the Affordable Care Act. What is surprising is how much June’s openings fell from the prior month, down 301k. We’ve only seen such a large drop five other times during this business cycle, which makes this a rare event indeed.

This chart shows that while job openings have been on a long-term upward trend, the rate of growth has been slowing since late 2014 and is moving towards a negative year-over-year trend. This is exactly what we would expect to see in the later stages of the business cycle.


The source of weakness in job openings looks to be in two main areas: Health Care and Mining.

While brick and mortar retail has been getting seriously slapped around thanks to the forces behind our Cash Strapped Consumer and Connected Society investing themes, retail job openings haven’t seen the same kind of downturn as health care and energy.

We have also see the pace of hirings moderating since late 2015, which is also as would be expected at this stage of the cycle.

The NFIB Small Business Optimism Index also disappointed, coming in at 103.6 in June versus expectations for 104.4 and below May’s 104.5. This metric has now been negative for five consecutive months and is now at a seven-month low. Four of the index’s components improved, while five declined and one remained flat. Looking through the various components, rollover is the phrase of the day.

The component for “Now is a good time to expand” dropped all the way to a seven-month low, erasing the post-election enthusiasm.

The metrics for expecting the “economy to improve” really bombed, after reaching 50 after the election, then falling in five of the past six months to sit at a seven-month low of 33 in June. This measure is matched in its rather dour outlook by sales expectations, which have dropped to 17 from 31 at the beginning of 2017, with actual sales turning down faster than expectations.

Bottom Line: More and more indicators are flashing warning signs that the economy is slowing. The economy and the market, however, are two very different things and as history has shown many times over, an over-priced market can get even more over-priced.  This economic data shows that there are increasing downside risks with shrinking upside potential for the broader markets as a whole, but it isn’t a reliable timing tool. Our investing thematics seek to identify those areas that can experience growing demand thanks to long-term trends that extend beyond cyclical forces.

The Real Jobs Picture with Lenore Hawkins on Boom Bust

The Real Jobs Picture with Lenore Hawkins on Boom Bust

Earlier this week I spoke with Lindsay France on Boom Bust about the reality of the employment situation in the United States. We keep hearing talk out of DC about how this policy or that is going to ignite the economy, and while we would dearly love to see that happen, we rarely hear anything that addresses the only two factors that truly affect the growth rate of the economy: The growth rate for an economy is the sum of the growth of the labor pool and productivity.

The actual data coming in tells us a lot about the structural headwinds limiting the potential growth rate in the economy. The total available labor pool shrank again in May and has now contracted for four consecutive months by nearly 1 million people: this reduces the potential growth rate for the economy.

Yet, we continue to hear from those in D.C. and the mainstream financial media that the economy is going strong and starting to accelerate to the upside. Errr what? The jobs data tells a very different story. Earlier this month the Bureau of Labor Statistics nonfarm payrolls report for May showed that only 138,000 jobs were added during May, well below expectations for 182,000 and we saw 66,000 removed from the March and April new jobs. Looking at the trend:

  • Average net new jobs added per month over the past 12 months – 189,000
  • Average net new jobs added per month over the past 6 months –  161,000
  • Net new jobs added in May — 138,000

That is not a story of an improving economy.

The recent JOLTS (Job Openings and Labor Turnover Survey) report from the Bureau of Labor Statistics reveals a continuation of a concerning trend that we’ve been watching for quite a few years. The number of job openings hit yet another record high at over 6 million, while hirings continue to lag.  The spread between openings and new hires has also reached a new record high. Even more concerning, the number of new hires has fallen in two out of the past three months, as companies struggle find the right match for their needs. This reduces productivity because when positions remain empty, everyone needs to work around the void, impacting their ability to take care of their own workload, so here we have a hit to both the labor pool and productivity.

From the post-recession lows, the economy has added about 14 million jobs, yet we’ve seen no real wage pressures. This is partly because we have 23 million Americans, (more than the entire population of NY) in the prime working age that are not engaged in the labor pool, which is 25% above the historical average level – that’s some serious deadweight on the economy.






Economic Data Continues to Paint Peaking Picture

Economic Data Continues to Paint Peaking Picture

This view never gets old.

This view never gets old.While this was a shortened week with the Memorial Day holiday, it was certainly packed with economic data. Yours truly fell a bit behind coupled with the short week and another one of my trips from Southern California back to my other home base in Italy, so this is a longer than usual post. No matter how many times I do that trip, and my frequent flier miles balance can attest to the level of insanity, I am endlessly amazed at how I can get into a steel tube in one part of the world and end up, after just one tube change in London, roughly 7,000 miles away without much fuss. Hat tip to British Airways for a lovely trip despite the pain felt by tens thousands over the holiday weekend – our thoughts on that calamity were shared on last week’s Cocktail Investing Podcast. The view from 30,000 this week was quite useful given the onslaught of data!

The week started with the Bureau of Economic Analysis inflation report which was in-line with expectations, showing the Personal Consumption Expenditures, price index was up just 1.7 percent on a year-over-year basis.

The Core PCE Price Index, which excludes food and energy, was also lower from prior periods, up just 1.5 percent year-over-year versus an increase of 1.8 percent at the beginning of the year. As we expected and called out a few times, the base effects are wearing off.

Real Personal Consumption Expenditures, which is a measure of consumer spending, weakened on a year-over-year basis, down from 3.1 percent in March to 2.6 percent in April. The peak for these expenditures during the current business cycle was back in January 2015 at 4 percent, which was below the prior business cycle peak of 4.7 percent in February 2004. We see this as confirming our Cash-Strapped Consumer theme remains solidly in the forefront of the economy.

Yes spending has been muted, but more concerning for the longer-term growth potential of the country is the ever-weakening population growth rate. The Bureau of Economic Analysis’ most recent data showed yet another drop in the growth rate to the lowest level on record with the BEA, at 0.7 percent, reinforcing our Aging of the Population theme. Over 600,000 people dropped out of the labor force just last year.

Keep in mind when you hear talk about expanding GDP growth rates that,

There are only two core factors that impact the potential growth of an economy, growth of labor and improvements in productivity.

Shipping looks to be strengthening, which is a good gauge of growth in the overall economy, but remains below longer-term normal levels and is still within the muted growth rate we’ve seen during this business cycle.


The Conference Board measure of Consumer Confidence fell more than expected in May, after having declined in April as well, although overall optimism is still relatively high. The index dropped to 117.9 in May versus expectations for 119.8, down from its peak of 125.6 in March, the highest level since December 2000.

The exceptionally large spread between “soft” sentiment data and the actual hard data has been narrowing, but that has been primarily driven by declining sentiment data.



Housing prices remain strong with the S&P/Case-Shiller Home price index coming in with 5.9 percent annual growth rate versus expectations for 5.7 percent, driven in part by exceptionally low inventories. We’d argue that this is consistent with our Asset-Light investing theme, as Millenials, in particular, show a great affinity for renting homes and using ride-sharing services than owning such assets, particularly those like cars that have inherently low utilization levels.



The US Pending Home Sales number disappointed in April, falling below last year’s levels with a 1.3 percent decline. The National Association of Realtors Existing Home Sales index was 3.3 percent lower this April than in April 2017.


The rate of price increases in homes is well above the annual rate of wage growth, which makes the current pace unsustainable unless we see wages start to catch up. We may just start to see that with the improvement in job creation we saw this week from ADP, with Private Nonfarm payrolls rising 253,000 versus expectations for 180,000. The report saw jobs in construction and professional/business services rise notably, with the later experiencing is the largest one-month increase in around three years.

So things were looking pretty good on the jobs front until Friday’s payroll report from the Bureau of Labor Statistics which came in well below expectations at 138,000 new jobs versus expectations for 185,000. The Labor Force Participation rate dropped from 62.9 percent to 62.7 percent and to add insult to injury, the BLS revised the April job creation numbers down from 211,000 to 174,000.

While payrolls in construction rose in the ADP report, the Census Bureau was more in line with the weaker BLS report when it reported a month-over-month decline in US Construction Spending, falling 1.4 percent versus expectations for an increase of 0.5 percent. On a year-over-year basis, spending is up 6.7 percent, with that increase coming from residential, which rose 15.6 percent in April on a year-over-year basis while total public construction spending was down 4.4 percent in April on a year-over-year basis. Residential construction is rising on a year-over-year percent basis, but the overall level is still subdued compared to what we’ve seen in prior business cycles.


Despite weaker inflation data and the weaker jobs report, the CME fed fund futures market is still predicting, with over 90 percent probability, that the Fed will raise rates at the June meeting to a target of between 100 and 125 basis points. The probably of an additional September hike is now below 25 percent. YOU SHOULD SAY WHY YOU AGREE THE FED WILL HIKE EVEN THOUGH THE EMPLOYMENT REPORT WASN’T “GOOD ENOUGH” (OR WAS IT?)

The manufacturing PMI from the Institute for Supply Management (ISM) came in slightly better than expectations, at 54.9 from 54.8 in April versus expectations for 54.5 with New Orders, Employment and Inventories rising versus weaker Production.


However, the Markit survey presents a slightly different picture, with US Manufacturing PMI down to 52.7 in May from 52.8 in April, sitting at the lowest level in 8 months with a moderate improvement in New Business.


Both surveys agreed on falling input prices for manufacturers as inflation looks to be easing across the board. That sound you hear is falling prices, not us patting ourselves on the back for seeing this ahead of the herd.

Auto sales continue to decline in May with sales coming in at the second weakest in the past 26 months, surpassed only by March’s weaker read. Unit volumes are at a roughly 11 percent decline versus Q1, which experienced a 17.5 percent decline.


Bottom Line on the economy is that the data is still mixed, but when we distil it all down, we see an economy that is highly unlikely to accelerate to the upside from here with distinct indications that we are nearing the end of this business cycle. This view is further reinforced when we see President Trump’s approval rating at 40 percent with a disapproval rate at 54 percent. Much hope was based on campaign promises that will be difficult to pass through Congress without support from the other side of the isle, support that is less likely with those kinds of approval ratings given the number of Democrats up for reelection at the mid-term.

Friday’s January Job Report a Blowout, But There’s More You Need to Know

Friday’s January Job Report a Blowout, But There’s More You Need to Know

This morning’s January Employment Report showed the economy added 227K  jobs in January, beating consensus expectations for 170K jobs.  This comes after the surge in January private sector jobs to 246K vs. the expected 165K reported by ADP earlier this week. Great to see some data to back up the uber-optimistic market these days, but there is a bit more to this story.

While the headline number looked great, digging beneath the headline and into the details the report wasn’t as rosy. If we take into account that revisions to the prior two months reduced jobs by 39k, the average is closer to expectations and the 3 month moving average is less impressive.

We also saw a decline in employment in the key working age group of 25-54-year-olds of 305k, which was partially offset by a 195k increase in 55+ employment – more near retirement working and fewer in prime working years isn’t a positive sign. Looking at the bigger picture, job growth averaged 239k in 2014, falling to 213k in 2015 and this report brings the recent 12-month average to 182k. The pace of job growth continues to slow,  total payrolls rose now up 1.6 percent year over year versus 1.9 percent in the first quarter of 2016, which is typical with an economic recovery that is rather long in the tooth.

We also saw an increase in those working part-time because they cannot find full-time work by 232k – we’d obviously prefer to see that decline. Those expecting a Fed rate hike soon should note that this is one of Fed Chair Yellen’s favorite metrics.


Along these lines, we saw the underemployment rate (as measured by the U6) rise to a three-month high of 9.4 percent from December’s 9.2 percent.

Along with that increase in part-time workers, we saw the change in weekly hours worked drop to a rate not seen since the recession, which indicates that future strong job growth is less likely.


More frustrating is the lack of meaningful wage growth, rising just 0.1 percent month over month and 2.5 percent year over year, the weakest year over year gain since last March. Average weekly earnings saw the weakest gain in six months at 1.9 percent.


One of the biggest challenges facing the employment situation is the mismatch between available labor and business needs. Small businesses are finding it increasingly more difficult to find qualified talent for the position they are looking to fill, which clearly negatively impacts their ability to grow – another headwind to the economy. This is also reflected in the record level spread between job openings and hirings we see every month in the JOLTS report. Our next take on that data comes next week with the December report.


All this those doesn’t address the much bigger issue the country is facing and this is what investors need to understand far more than the monthly fluctuations.

The growth of an economy is dependent on just two things: the size of the available workforce and productivity levels. For an economy to grow one or ideally both of those need to be rising.

It has become a popular refrain to refer to President Trump as the next Ronald Reagan, implying that his policies will lead to the type of economic boom that the country experience during and after Reagan’s presidency. We’d love nothing more than for the country to see that kind of growth again, but the fundamentals today are very different from those in the 1980s.

When Reagan took office median baby boomers were moving into their prime working age and the percent of women in the workforce was rising significantly.


When Reagan took office, less than 50 percent of women were employed. That number peaked in 2000 at 58 percent but has declined to just 54.1 percent in January.


The weak employment relative to total population though isn’t all about the baby boomers retiring as the percent of those in the prime working age cohort ages 25 to 54 years rose dramatically from the early 1980s to just over 72 percent to a peak of over 81 percent in 2000. As of January, 78.2 percent are employed, a level we haven’t seen, outside of a recession, since the late 1980s.

You might have heard as well that fertility rates in developed economies have been slowing dramatically. In many European nations the rate has dropped below replacement levels, which means that without immigration, the total population of those countries would be declining. In the U.S. the rate of growth of the working population, either through immigration or native births has been slowing significantly.


The potential growth rate of the U.S. economy is materially different today than during Reagan’s era because of significant changes in the dynamics of the labor pool. Today the percent of people choosing to be in the workforce is lower than it has been in decades. Compounding this problem, the growth rate in the working age population has slowed dramatically from where it was in the 1980s.

To increase the potential growth rate for the economy, outside of any handicaps placed on it through legislation, regulation or taxation, the population of those in the workforce needs to increase and/or productivity needs to rise.

When it comes to productivity, it is all about capital investment and for years we’ve seen companies choosing to buy back shares rather than reinvest in their own productive capacity… but that’s a topic for next time!


Job's Report Not So Solid

Job's Report Not So Solid

Friday’s jobs report, the first of 2017, came in weaker than expected with 156k jobs created in December versus expectations for 176k. This report tends to be volatile month-to-month, so we like to look at the twelve month moving average to get a better idea of the longer-term trends. From that lens we can see that new job creation peaked back in February of 2015 and has been trending downward ever since. Today the twelve month moving average is back to February 2014 levels – not exactly painting the picture of an accelerating economy.

On the other hand average hourly earnings increased by 2.9% on a year-over-year basis as the labor force participation rate, which is still at early 1980s levels, rose slightly from 62.6% to 62.7%. The uptick in wages could be partially attributable to the calendar because the survey is typically conducted during the week of the 12th day of the month which was a Saturday in November but a Monday in December, so that those who get paid on a bi-monthly basis would be counted in December. Taking a look at the longer-term average, average hourly earnings on a 3-month and 12-month moving average basis have been solidly trending upwards along with the monthly number.

Bottom Line: This report is likely to make another rate hike by the Fed more likely rather than less likely, although we still see major structural problems with the labor market given the multi-decade low level of employment in the working age cohort coupled with the ever widening gap between Job Openings and Hirings that indicate a mismatch in the nation between the skills companies want and those available in the population.

Economy Strengthening?

Economy Strengthening?

We keep hearing, particularly from the Federal Reserve and those in DC, that the economy is improving. Hmmm, let’s look. With consumer spending responsible for roughly 70% of the economy, how about retail sales?


Ok, so maybe not there. How about employment? We keep hearing about how strong employment has become.

The percent of working-age people who are actually employed is back where it was over 30 years ago. That doesn’t look like a recovery to me.

What about new jobs? The level of job openings looks to be rolling over as well.

As for inflation concerns?



Not so much there.

But then it is tough to get inflation going when we have a heck of a lot more productive capacity than we need!

As for industrial production, that peaked way back in 2014.

As for that painfully weak GDP growth, if we strip out healthcare costs which have been on the rise as a percent of household spending in recent years, we get an economy that is nearing stall speed.



Bottom Line: The data is not painting a clear picture of an economy that is strengthening, but rather one that is rolling over, having never achieved even the typical average rate of growth. Keep this in mind when looking at equity markets sporting historically rich valuations.