The majority of millennials are living paycheck to paycheck.
A recent survey of millennials by HowMuch.net found that 51.8% of those aged 18-34 have less than $1,000 held between bank accounts and cash savings.
This echoes previous data we’ve seen – not just on millennials, but Americans in general. For example, we know that 14% of Americans have “negative” wealth. We also know that 62% of Americans don’t have emergency savings that could cover a $1,000 hospital visit or a $500 car repair. (…)
Export orders fell 3.4 per cent in July compared to the previous year, intensifying from contraction of 2.4 per cent in June and far sharper than the median forecast from economists who anticipated a fall of only 0.9 per cent.
Orders fell to $35.1bn in July, down 1.9 per cent compared to the previous month and bringing contraction of orders during the year to date to 6.8 per cent.
Improvements seen in June in shipments to a number of major trading partners fell back in July, with contraction in orders from Japan widening from 3.3 percentage points to 19.7 per cent, while US orders dipped 1.6 per cent year-on-year. However, orders for mainland China and Hong Kong rose 0.7 per cent for the period.
Orders in most major export categories fell: those for electronics dipped 1.8 per cent for the period to $9.3bn, while those for information and communication products fell 3.3 per cent to $9.5bn.
Don’t panic: money markets
During the 2008-10 financial crisis, dollar Libor—the interest rate at which banks borrow greenbacks from each other—became a measure of terror, as fears spread that some firms might collapse. Now dollar Libor rates are spiking again; on Friday the one-month and six-month figures both hit seven-year highs. Time to ring the alarm bells? Probably not. The cost to insure the debt of American banks (another measure of anxiety) has not risen. And the spike is partly caused by regulatory changes, due in America in October, that will lead investors in money-market funds to put more cash in government bonds and lend less to firms and banks. Regulation, not fear, is driving Libor higher. But that still means borrowers around the world will pay more, putting strain on some firms’ and banks’ balance-sheets: borrowers outside America now owe a record-high dollar-denominated debt of about $9 trillion.
The above is from The Economist. Cumberland Advisors’ David Kotok is a lot more concerned as we should all be:
(…) Rules have changed for the big banks worldwide. The former paradigm of huge, unrestricted excess bank reserves deposited with the central banks has given way to the absorption of those reserves by Basel III rules regarding High-Quality Liquid Asset (HQLA) tests and Liquidity Coverage Ratio (LCR) tests. We have written about that in the past. (See http://www.cumber.com/hqla-and-lcr/.) (…)
Now we have a set of rules changing the nature of money market funds. There will be two types of funds. One will not “break the buck,” and it will hold short-term paper similar to the HQLA 100% test. The other type will likely pay a higher interest rate and will hold paper not meeting 100% under HQLA rules. The second one includes commercial paper (CP). The rules on money market funds take effect in mid-October. Market agents have been moving toward them for the last 6–10 weeks. (…)
Now we see the impact of the money market rule change. LIBOR is rising. It reflects the interest rates that are impacted by the non-HQLA subset. Ties to LIBOR are also rising. We can see this in LOIS (the LIBOR-Overnight Index Swap spread). We can see it in the TED spread (the difference between Eurodollar futures and US Treasury futures). We can see it in the cross-currency interest rate swaps. (A cross-currency swap involves converting a floating rate to a fixed rate with a swap and also doing one side in one currency and the other side in another currency.) (…)
The spread between the highest-quality shorter-term securities like the interest rate on Treasury bills and other non-HQLA instruments is widening. Market agents are saying that phenomenon is temporary due to the restructuring of the money market funds. They may be right. But we think they may also be wrong. We are not sure. And we cannot find anyone else who is. There are many opinions and assertions, but there are no facts.
What we do know is that the rates in LIBOR and related metrics are rising faster than the central bank’s policy rate. Example: the Fed has raised its policy rate one time and by 25 basis points during the last year. Meanwhile, 3-month LIBOR was about 30 a year ago and is now over 80 and rising. LOIS was 20 basis points two months ago; it is now over 40. “Japanese banks face dollar funding pressure,” Joe Abate of Barclays observed on August 11. That pressure is about $100 billion in size. Australian, Canadian, Swiss, and US banks fund themselves with CP in the hundreds of billions.
So all these rates are rising, which means that the cost of funding to lending institutions is rising, as is the pass-through of that cost to the borrowers. (…)
The complacent side of the market seems to be dominant today. Thus stocks hit new all-time highs, and policy debates focus on when the Fed may move the rate up (best guess is a 50-50 chance in December). But the spreads are telling us a different story. They are sounding alarm bells, and those bells are getting louder. (…)
Kotok wrote an update to the above last Friday:
“Because US dollar (USD) LIBOR is used in such a large volume and broad range of financial products and contracts, the risks surrounding it pose a potential threat to the safety and soundness of individual financial institutions, and to U.S. financial stability.” (Federal Reserve Alternative Reference Rates Committee, “Interim Report and Consultation,” May 2016:https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2016/arrc-interim-report-and-consultation.pdf)
At the June 21, 2016, Roundtable on the Interim Report of the Alternative Reference Rates Committee, Fed Governor Jerome Powell referenced a $300 trillion number as the worldwide total of instruments tied to LIBOR. Powell’s remarks are available here: http://www.federalreserve.gov/newsevents/speech/powell20160621a.htm. We thank Peter Boockvar for sending us the link to Powell’s comments.
If Powell is correct, the numbers we used in our estimates on LIBOR are only one-tenth of the full impact of rising rates. Our recent commentary is available at http://www.cumber.com/libor/.
Here are some bullets.
1. The Fed will certainly be talking about LIBOR at Jackson Hole. Will Yellen mention it? We will soon find out.
2. So far the LIBOR-related rate structure is impacting the entire private sector, but it is not impacting the Treasury bill sector since the demand for HQLA is intensifying.
3. For the private sector this money market rule change is having the same impact on worldwide finance, in terms of US dollars, as a Fed rate hike of a quarter point would have had.
4. Remember that the LIBOR rise isn’t over, and its intensity grows as we approach the mid-October implementation of the new money market fund rules.
5. We estimate the additional LIBOR intensification will work as if the Fed had instituted a second quarter-point hike.
6. Thus private-sector finance is facing the effects of back-to-back Fed hikes even as the Fed has done and continues to do nothing but talk. That is the power of a rule change as we described it on Tuesday.
7. There is complacency in markets today because market agents think post-October rates will reverse this intensity such that its effect proves temporary. They may be right. But they may also be wrong.
8. We think there are risks in LIBOR and widening LIBOR-related spreads because those spreads are going to be determined by the new rules, which are dramatically widening the gap between 100% HQLA and non-100% HQLA.
Seller’s Paradise: Companies Build Bonds for Central Bank to Buy The ECB in two instances has bought bonds directly from European companies through private placements, a startling example of how banks and firms are adapting to the extremes of monetary policy.
(…) The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy. (…)
(…) “l think it’s difficult to assess the true risk of these strategies,” Mr. Loftis said. He added, “one of the great untold stories of the pension world is how we have underestimated risk.” (…)
Factset’s weekly summary:
- With 95% of the companies in the S&P 500 reporting earnings to date for Q2 2016, 71% have reported earnings above the mean estimate and 54% have reported sales above the mean estimate.
- Earnings Growth: For Q2 2016, the blended earnings decline for the S&P 500 is -3.2%. The second quarter marks the first time the index has recorded five consecutive quarters of year-over-year declines in earnings since Q3 2008 through Q3 2009.
- Earnings Revisions: On June 30, the estimated earnings decline for Q2 2016 was -5.5%. Seven sectors have higher growth rates today (compared to June 30) due to upside earnings surprises, led by the Information Technology and Consumer Discretionary sectors.
- Earnings Guidance: For Q3 2016, 72 S&P 500 companies have issued negative EPS guidance and 30 S&P 500 companies have issued positive EPS guidance. [This is similar than at the same time after Q1 and at the same time last year].
Including Consumer Staples (+0.4%), six sectors recorded declining EPS in Q2. Consumer Discretionary was, again, the big surprise at +11.5% vs +6.3% expected. Buybacks have been a factor in CD boosting EPS growth by 30%. CD companies beat came in spite of the fact that 41% missed on revenues against 35% beating.
Thomson Reuters’ tally shows Q2 EPS down 2.3%, about half the –4.5% expected on July 1. TR data on guidance is more worrying that Factset’s as TR shows 63 negative guidance for Q3 so far, better than last year’s 71 but a meaningful increase from the 54 at the same time during Q2’156.
TR now sees Q3 EPS down 0.4% from +2.0% on July 1. Factset is at –2.0% from +0.4%.
Trailing operating EPS are now $115.20 per TR. With core inflation at 2.2%, fair P/E under the Rule of 20 is 17.8x or 2050 on the S&P 500 Index. This 6.7% overvaluation is the highest since January 2016 (+9.5%).
Stephanie Pomboy: A Grim Outlook for the Economy, Stocks MacroMavens’ founder says investors ignore data that proves the financial crisis changed everything.
(…) But what’s really causing this slowdown in spending is that the post-crisis consumer is determined to save, and do it the old-fashioned way. Historically, when rates go down, people save less. In this cycle, things have completely reversed. Over the same stretch of time that the two-year note has gone from 4% to 1%, the savings rate has doubled. There are mountains of evidence to support my thesis. But every Wall Street analyst and the Fed is using the pre-crisis analytical framework to look at an economy that is fundamentally challenged. (…)
This will lead us to the next phase in global economic policy—fiscal stimulus funded by helicopter money. (…)
We’re all dealing with an aging population. This is another great flaw in the logic of monetary-policy makers. They’ve pushed rates to and below zero in an effort to boost growth. But they did so against a population that is aging and needs more than ever to get returns on what they’ve set aside. By lowering rates, they’ve actually intensified the saving urge. (…)
Growth and inflation are slowing, and it has to do with this aging demographic. Add the emotional and financial scares from the housing-bubble bust, and policy makers have really got it ass-backwards. They’re taxing the economy, not stimulating it. (…)
More QE isn’t the solution. But policy makers aren’t ready to concede defeat. So, the Fed will abandon rate hikes and eventually re-up QE in some form. I do see helicopter money getting here, but that kind of fiscal stimulus has a substantially longer fuse. You’ve got to come up with a proposal, get everyone to agree, enact it, implement it. There will probably be some risk-off move that causes the Fed to panic and an interim QE attempt to calm the markets before we get that helicopter in the air. (…)
The July payroll number was a barnburner on the upside. But that report is the exception. Jobless claims, the NFIB small business survey, the employment component of both the ISM manufacturing and nonmanufacturing surveys—they all suggest things are rolling over [getting worse]. Importantly, the No. 1 input into hiring—corporate profits—has posted five consecutive quarterly declines, which suggest employment growth will follow. Employment is going to look a lot softer over the next six months.
(…) Everyone is looking for a significant second-half rebound for earnings and GDP—when the clouds will part and the sun will come out. I strongly believe that won’t happen, in large part because of inventories. Inventory accumulation has been explosive. (…)
In prior inventory liquidation cycles, nominal GDP growth is cut in half during the liquidation phase. As for profits, we’re starting with five negative quarters and we haven’t even begun the inventory liquidation cycle. So the second half will be a real eye-opener. (…)
No. 1, we have basically bankrupted corporate and state and local pensions by having rates at these repressive levels. If you lay on top of that a decline in equity prices, there will be a scramble to plug holes in pensions. Obviously if a state or local government has to divert funds to plugging its pension, it won’t build more roads. The corporate sector has the luxury of kicking the can down the road, and because their spending has been on buybacks, not plants and equipment, the economy would suffer less. For S&P 1500 companies, the pension deficit is roughly $560 billion, but for state and local governments, it’s $1.2 trillion. According to the Center for Retirement Research, if you used a more conservative discount rate, the unfunded liability would go to $4 trillion.
No. 2, you’re pushing consumers to the brink as they try to save enough for retirement at zero rates. You’re already seeing a reluctant return to credit-card usage, a clear sign of distress—they are charging what they previously paid with cash. The credit-card delinquency rate is picking up. (…)
The consensus is forecasting GDP to more than double in the second half, from 1% to roughly 2.5%. We are far more likely to stay in the 1% area or go lower. Nominal GDP growth for the full year should average around 2%. It is currently 2.4%. This will trigger a major move to risk-off: When it becomes clear that the weakness in the second half, and in 2015 and 2014 before that, wasn’t temporary. (…)
Perception and reality are furthest apart on the consumer discretionary stocks, where people doubled down, unaware of the monster inventory overhang. The correction will drag down most of the market. We could easily go back to the 2009 lows. I could see 2017 being a pretty nasty year.
Because economic growth won’t be a catalyst to push rates higher, I continue to like government bonds. Look for a re-pricing of credit risk with the spreads between investment-grade and junk bonds widening out. We’ll also have a renewal of QE in the U.S. and are seeing it elsewhere. And as Fed tightening goes out the window and the dollar sells off, we’ll have another meaningful leg up in gold.
Investors questioning whether record high U.S. stock prices mean it is time to bail out of equities should look beyond the elevated levels found in the widely used valuation tool, the price-to-earnings (P/E) ratio, experts say. (…)
Investors who favor stocks point to two factors why that ratio may not tell the whole story.
First, there is the possibility that valuations appear inflated because corporate profit levels are particularly depressed. Second is the relative appeal of equities in a low bond-yield environment. (…)
One reason for the higher P/E is that S&P 500 companies in aggregate have reported falling earnings over the past four quarters, weighed down by weak results in the energy sector.
A recent stabilization in oil prices is expected to help bolster energy company results. (…)
Comparing bond yields and earnings yields – a measure of earnings divided by the stock price – also favors stocks.
The earnings yield for the S&P 500 is currently about 5.8 percent, while the Merrill Lynch U.S. High Yield index .MERH0A0 has a yield of 6.4 percent.
This makes stocks look relatively more attractive, on an historical basis. In this case, the earnings yield is 90 percent of the yield on those bonds, a variation that, on average, has been 54 percent for the past 30 years, according to Brian Reynolds, chief market strategist at New Albion Partners in New York. (…)
The Daily Shot has the chart to support the above:
Yes, bond yields are extraordinarily low. In fact they are artificially low thanks to our experimenting central banks. Still, accepting that, the current EY would be right on the line offering a 38% fit. But the chart suggests the possibility of substantially higher EY at the current bond yields. Doesn’t it sound like we’re in a used car dealer lot?
I will have something more convincing later this week.
Meanwhile, surprises are fewer, all of a sudden (Yardeni charts below):
And this alignment is almost perfect: