Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: January 2018

THE DAILY EDGE (31 January 2018)

Travelling this week.

U.S. Personal Spending Outpaces Income

Individuals extended the recent buying trend and dipped into savings last month. Personal consumption expenditures increased 0.4% (4.6% y/y) during December following a 0.8% November rise, revised from 0.6%. A 0.4% improvement had been expected in the Action Economics Forecast Survey. During all of last year, spending increased 4.5%, the strongest gain since 2011.

Adjusted for price inflation, personal spending increased 0.3% (2.8% y/y) after a 0.5% gain. Real durable goods purchases strengthened 0.8% (7.3% y/y) after a 1.1% rise. Motor vehicle buying increased 1.0% (2.7% y/y) after a 1.3% decline. Real spending on home furnishings & appliances rose 0.9% (10.1% y/y) after three consecutive months of even stronger increase. (…) Real spending on services gained 0.3% (2.0% y/y), the same as in November. Real recreation spending increased 0.2% (1.5% y/y) after a 1.0% jump. Real health care outlays nudged 0.1% higher (2.5% y/y) following a 0.3% rise, while housing & utilities expenditures improved 0.5% (1.2% y/y), the strongest gain in nine months.

Personal income rose 0.4% (4.1% y/y) last month following an unrevised 0.3% November gain. A 0.3% rise had been expected. During all of last year income rose 3.1%. Wages & salaries rose 0.5% following a 0.4% increase. Growth from December-to-December rose to 4.9% from 0.8% in 2016.(…)

Disposable income gained 0.3% (3.9% y/y) for the third straight month. Adjusted for price changes, take-home pay improved 0.2% after m/m stability. The December-to-December increase of 2.1% was improved from roughly no change during 2016.

The personal savings rate declined to 2.4%, the lowest level since September 2005. Personal saving declined by 20.6% y/y.

The PCE chain-type price index improved 0.1% (1.7% y/y) after a 0.2% rise. Excluding food & energy, prices rose 0.2% (1.5% y/y) following a 0.1% gain. (…) Services prices improved 0.2% (2.3% y/y) for a second straight month.

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In Q4’17:

  • real DPI rose 0.4% (1.6% a.r.);
  • real PCE rose 0.9% (+3.7% a.r.);
  • Wages and Salaries rose 1.1% (4.5% a.r.)!
  • Core PCE deflator rose 0.5% (2.0% a.r.).

Wages are clearly accelerating per this metric. They were up 4.9% YoY in December. The BLS data is nowhere near that!

  • Will incomes rise sufficiently to justify the brisk consumer spending? Will it happen before higher interest rates make consumer debt much more expensive? (The Daily Shot)

Source: @GregDaco

U.S. Employment Costs Rise 0.6% Compensation for American workers grew at a slower pace in the fourth quarter, but picked up strongly for the year as a whole, signaling historically low unemployment might be starting to put upward pressure on wages and benefits.

The employment-cost index, a measure of wages and benefits for civilian workers, rose a seasonally adjusted 0.6% in October through December, the Labor Department said Wednesday, matching expectations of economists surveyed by The Wall Street Journal.

Wages and salaries, which account for 70% of total compensation, rose 0.5% from the prior quarter. Benefit costs—which include health coverage, retirement benefits and paid leave—advanced 0.5%.

The total index increased 2.6% over the past year, matching the largest annual increase since 2015, when compensation also increased at a 2.6% rate. Growth in the index hasn’t exceeded 2.6% since 2008.

Private workers saw compensation rise 0.5% in the fourth quarter, a slowdown from the previous quarter. Meanwhile, state and local government workers saw compensation pick up in the fourth quarter to a 0.8% increase. (…)

Other metrics have pointed to modest wage growth. Average hourly earnings for private-sector workers rose 2.5% in December from a year earlier, the Labor Department reported earlier. This is similar to the pace maintained over the past three years. Confused smile

THE GOOD PLACE

Steve Blumenthal’s latest On My Radar (Are We In A Bubble) is a must read, offering great info and wisdom on various credible scenarios.

Steve’s summary of Mohamed El-Erian’s presentation at the recent Inside ETFs Conference is particularly interesting. More specifically:

  • El-Erian pointed out that economic growth is synchronized and real (it’s not about leverage or debt, but consumption, investment and trade);
  • there is more focus on pro-growth policies, especially in the U.S., where there’s been deregulation, tax reform and the potential for increased infrastructure spending;
  • “It’s not the old type of growth that we had 15 years ago that was finance driven. It’s not about leverage or central banks; this is much more genuine”;
  • there was no central bank policy mistake; there were no major disruptions to international trade; there was no surge in inflation; there was no surge in yields; there was no dollar appreciation; and there was no geopolitical shock to speak of.

Nothing phony, nothing made up, nothing excessive, nothing missed.

For good measure, El-Erian reportedly listed three big risks:

  • “Geopolitics matter,” said El-Erian. “Markets cannot price in geopolitical shocks easily. If you get a shock, you could get a shift in markets that could be quite violent.”
  • Central Banks: How successful will they be at normalizing their unconventional monetary policies.
  • A market accident, particularly from index funds and ETFs with exposures to illiquid underlying assets.

In all, El-Erian said that “for the first time in a very long time, there’s reason to be optimistic about fundamentals gaining enough traction to validate asset prices.”

In plain words, this time is different!

Reading El-Erian’s arguments, I could not help but think of NBC’s “The Good Place” where people enter their afterlife in a utopian neighbourhood designed by an apparently benevolent Michael who, eventually, proves to actually be a bad person experimenting with human beings.

The world of “genuine growth” El-Erian describes was actually designed by Ben Bernanke and Mario Draghi.

Have we lived in this world long enough that we now forget its artificiality?

Have we lived in this world long enough that we now forget that it has been built on a mountain of government debt and central banks’ QE experiment?

Have we lived in this world long enough that we now forget that the “benevolent engineers” eventually must return the neighbourhood to its normal state and that they have no experience and no proven method to reverse the alchemy?

Back on earth, we will surely be faced with certain inconvenient facts unseen in El-Erian’s world:

  • Global Debt Hits Record $233 Trillion.
  • Interest rates remain artificially low throughout the curve and throughout the world.
  • The U.S.government’s tax reform will significantly increase the U.S. budget deficit over the next several years.
  • The Fed has already begun its Great Unwind.
  • Most of the debt is short-term so rising interest rates will swiftly impact consumers, corporations and governments.
  • The U.S. output gap has closed, right when a big fiscal stimulus is unleashed.
  • Europe’s capacity utilization rate is now 84% and rising rapidly towards its historical peaks of 86%.

It is rather interesting that El-Erian makes no mention of inflation risk which, significantly, is one of the fundamentals gaining traction that would seriously invalidate asset prices.

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