Hiking Into a Slowdown

It becomes ever more tempting to conclude that the timing of the Fed’s rate hike was really quite odd, even from the perspective of the planners – even though the U3 unemployment rate has fallen to a mere 5% and they are probably correct about the transitory nature of the currently very low headline “inflation” rate (as we have recently pointed out, actual monetary inflation currently stands at almost 8% y/y).

 

industrieImage credit: Fotolia

 

Recent economic reports have by and large not shown any noteworthy improvements – on the contrary. District manufacturing surveys are going from bad to worse, existing home sales just had another truly terrible month (this time bad weather can obviously not be blamed, but apparently there is a problem with filling in simplified forms) and even the Markit services PMI has suddenly undercut the entire range of economists’ expectations. Meanwhile, the growth rate in ECRI’s coincident index has just hit a 21-month low:

 

1-coincident indexECRI’s coincident index growth rate keeps falling. The weekly leading indicator has recovered from its lows (while remaining in negative territory), but we dislike the fact that this indicator is evidently strongly influenced by the stock market. In our opinion the stock market has long ceased to tell us anything about the economy.

 

In her press conference, Ms. Yellen inter alia went on about the “strong consumer” – as if one could consume oneself to prosperity. Both stronger employment and stronger consumption are a consequence of economic growth, not a cause of it. To believe otherwise, one needs to put the cart before the horse, based on the primitive Keynesian flow model of the economy (however, this model does not depict how the economy actually works).

A difficulty consists of the fact that capital consumption – i.e., a net loss of wealth – tends to masquerade as growing prosperity during a credit expansion. This is why the planners erroneously believe that growing the supply of money from thin air and artificially suppressing interest rates improves the economy. It is a bit like watching the erection of a Potemkin village and believing that there is actually something behind the facade.

Ms. Yellen always reminds us are that empirical data are the main guide informing Fed policy, but even those seem to contradict her point about consumers – to wit, growth in real personal consumption expenditures has just hit a 15 month low:

 

2-real PCEAnnual growth in real personal consumption expenditures by sectors

 

We have to briefly interpose here that we are not about to suggest what the Fed should or shouldn’t do. We are not armchair central planners proposing “better plans” for interventionists. Our only plan with respect to central banks is to argue for the urgent need to abolish them and adopt a completely unhampered free market in money and banking.

We are mentioning this because we don’t want new readers to confuse us with the many would-be social engineers that can be found elsewhere on the intertubes. The reason why we discuss central bank policy is the fact that it exists and that we all have to live with its consequences.

With that out of the way, we want to show a collection of updated charts from our friend Michael Pollaro, on what we think are key economic data points. We also want to point readers to a recent critical discussion by Mish regarding an “economic snapshot” paper produced by the NY Fed (we agree with his counterarguments).

As we have stressed on previous occasions, our focus is primarily on the business side of the economy, and within that, on the part that produces the greatest share of gross economic output, namely manufacturing. This is of course in keeping with the cause-effect vector mentioned above. The charts below show a somewhat broader array of data, i.e. they are not only about manufacturing.

 

Economic Data Snapshot

The aggregate data on business sales, inventories, employment, etc. are mainly updated until the end of October, resp. November. This is simply due to the respective official update frequencies. However, we can already infer from recent more up-to-date data releases (such as the Fed district surveys), that the trends shown in these charts are so far persisting.

 

3-Business SalesAnnual growth in business sales (red), inventories (green) and the inventory-to-sales ratio (blue) – click to enlarge.

 

Obviously, the last time declining business sales and a rising inventory-to-sales ratio were considered good things was “never”.

 

4-Business-sales-by-sectorBusiness sales by sector: y/Y change rate in overall sales (red), retail sales (green), wholesaler sales (purple), manufacturers sales (magenta) vs. the inventory-to-sales ratio (yellow area) – click to enlarge.

 

In typical business cycle fashion, industries in the higher stages of the production structure (further removed from the consumer) are showing the greatest volatility and are currently suffering the most due to the incipient downturn.

 

5-Busniness Inventories by sectorThis chart shows overall business sales in the yellow area and disaggregates the inventory-to-sales ratio (I/S) by sector. Retail I/S (purple), overall business I/S (blue), wholesalers I/S (green), manufacturers I/S (red) – click to enlarge.

 

6-Manufacturers, sales, orders, inventoriesSpotlight on manufacturing: y/y growth in new orders (green), sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

7-Retail sales and inventoriesSpotlight on retail sales: y/y growth in sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

8-Wholesale sales and inventoriesSpotlight on wholesalers sales: y/y growth in sales (purple), inventories (red) and the inventory-to-sales ratio (blue) – click to enlarge.

 

The next two charts show growth in total business sales and inventories relative to growth in employment:

 

9-Business sales vs employmentYear-on-year change rate in total business sales (red), non-farm payrolls/ establishment survey (light green) and employment/ household survey (blue) – click to enlarge.

 

10-Business inventories vs. employmentYear-on-year change rate in the overall business inventory-to-sales ratio (red), non-farm payrolls/ establishment survey (light green) and employment/ household survey (blue) – click to enlarge.

 

What is noteworthy about the foregoing two charts is that a large gap has developed between employment growth and business sales – the last time such a gap was seen was when it occurred to the upside, as the recovery in business sales (not surprisingly) led the the recovery in official unemployment data after the GFC.

It is fair to assume that business sales haven’t lost their leading indicator qualities. Keep in mind though that employment data have become quite skewed though by the surge in part-time jobs (which leads to what used to be counted as one job being counted as two) and the sharp decline in the labor force.

Another comparison chart worth looking at is the following, which contrasts business sales with junk bond spreads. The negative correlation between these two data series is more direct, although slight leads and lags do of course happen as well:

 

11-junk vs business salesBusiness sales growth (green) vs. junk bond spreads (blue) and the FF rate (red) – click to enlarge.

 

Lastly, as an addendum to the data on retail sales, here is a chart of the Redbook Index (weekly y/y growth rate in same-store sales). Over the past year this indicator has weakened considerably:

 

12-RedbookRedbook Index: a sales-weighted index of year-over-year same-store sales growth in a sample of large US general merchandise retailers representing about 9,000 stores.

 

None of this looks particularly encouraging, but it needs to be stressed that there is no guarantee yet that this weakness will lead to an official recession in the near term. However, if a recession is indeed in store, we should expect more definitive signals to this effect to emerge quite early next year.

 

Additional Remarks – Production Structure and Yield Curve

The long period of ZIRP and historically strong money supply growth has kept our boom-bust index – the ratio of capital to consumer goods production – moving sideways at an extremely elevated level for an unusually long time. We can infer from this that there is probably more capital malinvestment in the economy than is superficially obvious.

 

13-Cap vs. Consumer goods productionThe ratio of capital goods (business equipment) to consumer goods production, a rough indicator of the distribution of factors of production between the different/opposing stages of the capital structure. Typically it rises sharply during credit booms and contracts during bust periods – click to enlarge.

 

Finally, we wanted to briefly mention the yield curve. As a result of the Fed’s oddly timed rate hike, the yield curve has flattened quite rapidly recently. This brings us to the question whether it is necessary for the curve to invert before a recession can be forecast with confidence. As we have previously discussed (see The Yield Curve and Recessions), per experience this is actually not the case in ZIRP (zero interest rate policy) or near-ZIRP regimes.

Below we reproduce a chart from said article that shows the past six recessions in Japan contrasted to the Japanese yield curve (represented by very short and very long durations, i.e., 3 months vs. 10 years). Only one of them – the one that began immiediately after the major bubble of the 1980s had burst – was actually preceded by an inversion. We suspect that a mere flattenig of the curve must already be seen as a major warning sign during or on the heels of a ZIRP regime.

 

14-Japanese-yieldsJapan: the yield curve and recessions – there have been five recessions in the past 2 decades that were not preceded by an inversion of the yield curve. What they all had in common was that they occurred during the ZIRP era – click to enlarge.

 

Conclusion

We are a bit worried that a consensus seems to be emerging lately that the Fed will soon “backtrack” from its rate hike. For the time being we believe so as well though, based on the data backdrop discussed above. It could however be that the Fed will get one or two more hikes in (even the BoJ once managed to implement two consecutive rate hikes – back when most of today’s stock market traders were still pimply teenagers).

This will largely depend on whether the above trends persist in the near term, as well as on asset prices, especially the stock market. All of this will in turn depend on whether the overarching downtrend in money supply growth rates continues (or perhaps even accelerates), or reverses again. So there are a great many moving parts, and we will have to wait and see how they develop. We would however say that it mainly comes down the question of whether the backtracking happens somewhat “sooner” or “later”.

 

Addendum: Modified Ned Davis Method Signal

We actually forgot to alert readers that according to Frank Roellinger, the Modified Ned Davis Method has gone 50% short the Russell 2000 as of Friday, December 11. However, net-net no major move has taken place yet since then (the RUT is actually a trifle higher as we write this). As always, the system’s signal to switch from flat to partly short represents an additional short to medium term warning signal for the stock market until it is rescinded again.

 

Charts by: ECRI, Michael Pollaro, St. Louis Federal Reserve Research, investing.com

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...
  • Unleashing Wall Street
      To Unleash or Not to Unleash, That is the Question... LOVINGSTON, VIRGINIA –  Corporate earnings have been going down for nearly three years. They are now about 10% below the level set in the late summer of 2014. Why should stocks be so expensive?   Example of something that one should better not unleash. The probability that a win-lose proposition will develop upon meeting it seems high. It wins, because it gets to eat... Image credit: Urs Hagen   Oh,...
  • Boondoggles for the Swamp Critters
      Monster or Mozart? BALTIMORE – Investors seem to be holding their breath, like a man hiding a cigarette from his wife. It’s just a feeling, and it’s not the first time we’ve had it... but it feels as though it wouldn’t take much to send them all running.   Actually, they're not going anywhere yet... but there is a lot of overconfidence by those who were very worried when prices were a lot better - click to enlarge.   Meanwhile... we’re coming to a deep...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com