On Economy

     

 

 

Turn on, Tune in, Drop out

Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).

 

Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a reminder that monetary inflation has a considerable effect on the purchasing power of the US dollar over time. [PT]

 

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Interesting Times Arrive

“Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.

 

Ancient Chinese curse alert… [PT]

 

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One and the Same

 

“God gave me my money.”

– John D. Rockefeller

 

Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.

 

One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at hand. In reality he probably said something like it, but it is almost certain he didn’t say it verbatim (contrary to Mr. Blankfein, who is indeed on record for stating that Goldman Sachs was “doing God’s work”). We mention this because we have long noticed that the best-known quotes attributed to all sorts of long dead famous people – the ones one immediately finds on the first page that pops up when googling their names – are more often than not either garbled beyond recognition, or misattributed, or at times even completely made up. A genuine quote is a rare find indeed; at a minimum the most famous quotes have almost always gone through the Chinese horse-whisperer treatment (known as “telephone” in the US). What Mr. Dunne said about Rockefeller is rather more certain, since he put it in writing in the Chicago Evening Post in 1895 – albeit in his “Mr Dooley” voice, imitating an Irish accent. Dooley was a figure Dunne had invented for his satirical columns, the fictional owner of a fictional Irish pub located on the South Side of Chicago (so the quote actually read: “He’s kind iv a society f’r the previntion of croolty to money…”, etc.).  [PT]

 

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Fake Responses 

One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.

 

As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]

 

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A Warning Signal from Market Internals

Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.

 

HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the zero line shortly before the selling started. They briefly returned to positive territory after the first dip, and after a third or fourth dip in close succession the sell-off commenced. What is currently of interest to us is that the sell-offs themselves generated deeply oversold readings in HLP in excess of -30. Only then did the market bottom and reverse back up. This is interesting because the early February sell-off has only managed to generate a warning signal so far. We have seen two dips below the zero boundary since then, but an oversold reading has not been generated yet. Based on this indicator, we are now merely in the phase prior to the actual sell-off. Looking at the third and fourth panels from the top, note that while the percentage of stocks below the 50-dma (purple line) did reach comparable “oversold levels” in February, the percentage of stocks below the 200 dma (red line) did not. Currently both percentages are almost at the same level they inhabited just before the August 2015 sell-off.

 

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Demanding More Debt

Consumer debt, corporate debt, and government debt are all going up.  But that’s not all.  Margin debt – debt that investors borrow against their portfolio to buy more stocks – has hit a record of $642.8 billion.  What in the world are people thinking?

 

A blow-off in margin debt mirroring the blow-off in stock prices. Since February of 2016 alone it has soared by ~$170 billion – this is an entirely new level insanity. The current total of 643 billion is more than double the level of margin debt at the tech mania peak and 15.4 times the amount of margin debt just before the crash of 1987. [PT]

 

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Serenely Grows the Debtberg

We mentioned in a recent post that we would soon return to the topic of credit spreads and exotic structured products. One reason for doing so are the many surprises investors faced in the 2008 crisis. Readers may e.g. remember auction rate securities. These bonds were often listed as “cash equivalents” on the balance sheets of assorted companies investing in them, but it turned out they were anything but. Shareholders of many small and mid-sized companies learned to their chagrin that quite a bit of this “cash” had for all practical purposes evaporated when the markets for these bonds suddenly froze.

 

Surprise and shock at the sudden emergence of exotic securities in unexpected places at an inconvenient moment.

 

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Extracting Meaning from PPP

 

“An alternative exchange rate – the purchasing power parity (PPP) conversion factor – is preferred because it reflects differences in price levels for both tradable and non-tradable goods and services and therefore provides a more meaningful comparison of real output.” – the World Bank

 

Headquarters of the World Bank in Washington. We have it on good authority that the business of ending poverty is quite lucrative for its practitioners (not least because employees of multilateral organizations such as the IMF and the World bank have to pay no taxes whatsoever on their income – and the perks certainly don’t end there). A number of long-serving employees of the institution we have met over time have struck us as quite cynical and not particularly convinced that their efforts in developing countries were achieving much (and it was not for lack of trying). That is of course not the official line and merely represents anecdotal evidence based on a limited sample size. Experience tells us though that we should not dismiss such evidence out of hand – especially not if it rings true. The agency’s views on PPP are a sign that its economists probably don’t get out much. [PT]

Photo credit: Simone D. McCourte

 

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A Finite Life Span

We have been promising to get back to the topic of capital destruction, which we put on hiatus for the last several weeks to make our case that the interest rate remains in a falling trend. Today, we have a different way of looking at capital destruction.

 

A Soviet propaganda poster extolling the virtues of the plan… a succession of such plans ultimately ended in economic collapse – eventually, not even basic staples could be supplied to the population anymore. It was easily the biggest bankruptcy in history.  [PT]

 

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Peculiar Behavior

As I have shown in previous issues of Seasonal Insights, various financial instruments are demonstrating peculiar behavior in the course of the week: the S&P 500 Index is typically strong on Tuesdays, Gold on Fridays and Bitcoin on Tuesdays (similar to the S&P 500 Index).

 

The quest for profitable foresight…[PT]

 

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Whipsawed

Frank Roellinger has updated us with respect to the signals given by his Modified Ned Davis Method (MDM) in the course of the recent market correction. The MDM is a purely technical trading system designed for position-trading the Russell 2000 index, both long and short (for details and additional color see The Modified Davis Method and Reader Question on the Modified Ned Davis Method).

 

The Nasdaq pillar…

 

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Economic Activity Seems Brisk, But…

Contrary to the situation in 2014-2015, economic indicators are currently far from signaling an imminent recession. We frequently discussed growing weakness in the manufacturing sector in 2015 (which is the largest sector of the economy in terms of gross output) – but even then, we always stressed that no clear recession signal was in sight yet.

 

US gross output (GO) growth year-on-year, and industrial production (IP) – note that GO continues to be published with a lag of two quarters. As the upper half of the illustration shows, growth in manufacturing output turned negative in 2014 – 2015, while y/y growth in “all industries” GO fell to zero by Q3 2015. The lower half shows the culprit: the mining sector, which includes upstream oil and gas production. While the sector is small, it is very volatile and accounted for an uncommonly large share of capex due to the shale oil/fracking boom. This was confirmed by the action in credit spreads during this time period as well, as junk bond spreads exploded mainly due to a relentless sell-off in energy company debt in the wake of plunging oil prices. Although happy times are here again following the oil price recovery, GO has begun to weaken slightly again in Q1 and Q2 2017 (note: the surge in IP since then does not tell us much, as GO leads IP).

 

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