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)

Invest with smart knowledge and objective odds

THE DAILY EDGE (25 July 2017)

Sharpest expansion of US private sector output for six months in July
  • Flash U.S. Composite Output Index at 54.2 (53.9 in June). 6-month high.
  • Flash U.S. Services Business Activity Index at 54.2 (54.2 in June). Unchanged vs. last month.
  • Flash U.S. Manufacturing PMI at 53.2 (52.0 in June). 4-month high.
  • Flash U.S. Manufacturing Output Index at 54.3 (52.6 in June), 4-month high.

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(…) Higher levels of business activity were supported by a robust and accelerated upturn in new work during July. Measured overall, the latest increase in new orders received by private sector companies was the strongest for six months.

(…) latest data revealed the strongest upturn in new work received by service sector firms for exactly two years.

Private sector payroll numbers expanded at a solid pace in July, with the rate of job creation the fastest so far in 2017. (…)

Anecdotal evidence suggested that higher staff salaries had placed upward pressure on costs, which lower fuel bills had helped moderate the overall pace of input cost inflation in July. Softer cost inflation led to the slowest rise in average prices charged for three months. (…)

Manufacturers linked higher volumes of new work to improving demand conditions and signs of reduced risk aversion among clients. Greater sales contributed to robust and accelerated rise in input buying in July, with the rate of expansion the fastest for five months. (…)

The surveys are historically consistent with annualized GDP growth of approximately 2%, but the signs are that growth could accelerate further in coming months.

Most encouraging was an upturn in new order inflows to the second-highest seen over the past two years, which helped push the rate of job creation to the highest so far this year, indicative of non-farm payrolls growing at a rate of around 200,000.

The principal weak spot in the economy remained exports, with foreign goods orders dropping – albeit only marginally – for the first time since last September, often blamed on the strength of the dollar.

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  • Markit vs ISM:

Source: Capital Economics (via The Daily Shot)

Existing-Home Sales Slide as Prices Surge on Tight Supply

Existing home sales fell 1.8% in June from the previous month to a seasonally adjusted annual rate of 5.52 million, the National Association of Realtors said Monday.

The median sales price in June hit a record high of $263,800, up 6.5% from a year earlier. Adjusted for inflation, prices remained about 9% below the 2006 peak. (…)

First-time buyers accounted for 32% of sales in June, down slightly from 33% both in May and a year ago. NAR said the annual share of first-time buyers in 2016 was 35%, a significant improvement from recent years.

Foreign buyers also are putting pressure on demand. NAR revealed a surprising jump in Canadians buying U.S. properties in the year ending in March. In all, foreign buyers and recent immigrants purchased $153 billion of residential property in the U.S. in the year ended in March, a nearly 50% jump from a year earlier, according to a National Association of Realtors report released Tuesday. Foreigners purchased roughly 10% of existing U.S. homes, compared with 8% a year earlier. (…)

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OPEC Takes Blame for Low Oil Prices Internal discord among OPEC members and big oil-producing allies spilled into public view as the group struggles with its efforts to raise prices for crude. Officials said they were contemplating a crackdown on members that aren’t keeping their promises to limit output.

(…) OPEC officials expressed frustration with a new truth of the oil market: The group no longer has much power to lift prices, but it can certainly send prices lower with too much production. Iraq, the United Arab Emirates and others haven’t cut as much output as promised.

“We are not doing this to allow other countries to free ride and undercut the agreement by overproducing,” said Khalid al-Falih, the Saudi Arabian energy minister, in unusually blunt remarks following a meeting Monday with national representatives from oil-producing countries.

Mr. Falih said Saudi Arabia, the world’s top oil exporter, announced it would go further than cutting its production and would also limit its exports at 6.6 million barrels a day in August. He said he wanted other countries to follow suit, noting troubling figures that showed some were still exporting huge amounts of oil even as they say they are cutting output. (…)

Mr. Falih’s focus on exports was new. He pointed to discrepancies between countries’ production and export figures, calling the difference “a matter of concern.” (…)

A new Saudi cut to its exports could have a real effect on the balance of supply and demand, said Bjarne Schieldrop, a commodity analyst with the Nordic bank SEB. The kingdom exported an average of 7.2 million barrels a day from January to May, he said, so the new action would theoretically remove an additional 600,000 barrels a day from the market.

But Saudi Arabia generally reduces exports in the summer when it faces rising domestic demand for crude oil to be burned to create electricity for air conditioning.

The limit on Nigeria, however, is less likely to result in helping reduce the oil glut. Nigeria has agreed to limit its production to 1.8 million barrels a day, OPEC officials said. The African country produced about 1.6 million barrels a day in June, giving it substantial room to keep increasing.

Another OPEC member exempted from last year’s deal, Libya, has a target of 1.25 million barrels a day, still higher than its June production of 820,000 million barrels a day.

Beyond Libya and Nigeria, Iraq, OPEC’s second-biggest producer, and the U.A.E. have been pumping more than their agreed-upon limits. (…)

(…) “Today, rig count growth is showing signs of plateauing, and customers are tapping the brakes,” said Dave Lesar, Executive Chairman.

“This tapping of the brakes is happening all over the place in North America.”

Earlier this month, senior vice president for global business development and marketing at Halliburton, Mark Richard, told Reuters the U.S. shale drilling boom is likely to ease next year as demand on the industry’s service sector is unsustainable.

Richard expected rig count to rise to 1,000 by the end of the year, but not beyond that. (…)

(…) Hours after Halliburton Co. warned Monday that explorers are “tapping the brakes” on drilling, Anadarko Petroleum Corp. said it’s trimming spending in the first earnings report this quarter from a major shale producer. (…)

“The current market conditions require lower capital intensity” given the “volatility” facing the market, Chief Executive Officer Al Walker said in the statement. “As such, we are reducing our level of investments.” (…)

SEASONALITY STATS

From Callum Thomas (info@topdowncharts.com)

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BANKING ON BANKERS

According to Moody’s, the investment banks’ total legacy litigation provisions between the 2008 global financial crisis and 2016 amounts to $273 billion. About half of those total provisions were connected to lawsuits around residential mortgage-backed securities. The second-biggest category was mis-selling and misrepresentation, which was about a third of the total. (Via ValueWalk)

legacy litigation

The BKX index is still 21% below its 2007 peak level…partly because of the likes of GS and MS but mainly because of C which, you may need to be recalled, peaked at $564 in December 2007 and now trades at $66. Chuck Prince to the FT in July 2007:

The Citigroup chief executive told the Financial Times that the party would end at some point but there was so much liquidity it would not be disrupted by the turmoil in the US subprime mortgage market.

He denied that Citigroup, one of the biggest providers of finance to private equity deals, was pulling back.

“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said in an interview with the FT in Japan.

Well, the music did stop, didn’t it. But Prince is still dancing, like most other bankers of that period…

BTW:

GLOBAL DEBT

According to the highly-respected Institute of International Finance (IIF), global debt levels reached an astronomical $217 trillion in the first quarter of 2017—that’s 327 percent of world gross domestic product (GDP). Notice that before the financial crisis, global debt was “only” around $150 trillion, meaning we’ve added close to $120 trillion in as little as a decade. Much of the leveraging occurred in emerging markets, specifically China, which is spending big on international infrastructure projects. (Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors)

total global debt stands at all time high

(…) Regulators had thought it was equivalent to 42pc of on-balance sheet business at the end of 2015. They have revised this drastically, admitting that it reached 110pc by the end of last year. (…)

In a move that will send shivers up the spines of local party officials, President Xi Jinping said they will be held accountable for the rest of their lives for debts that go wrong. Any failure to identify and tackle risks will be deemed “malfeasance”. (…)

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The PBOC is particularly worried about an array of asset management products (AMPs) issued by securities firms, funds, and insurers. These are a key reason why Chinese banks have built up exposure to assets equal to 650pc of GDP. (…)

Nearly 60pc of new credit this year is being used to repay old loans. It takes four times as much new credit to generate a given amount of  extra of GDP as it did a decade ago. (…)

The credit-to-GDP gap tracked by the Bank for International Settlements as an early warning indicator is currently at 24pc, far above the threshold level of 10pc that usually foretells a banking crisis within three years.

Most of the debt is domestic, the local savings rate is high, and foreign reserves are huge. All this offers some protection but JP Morgan argues that much the same was true of Japan before it slid into intractable slump. (…)

NEW$ & VIEW$ (8 JUNE 2016): The Complacent Fed;

THE COMPLACENT FED

During her Monday speech, while using the words “uncertain” and “uncertainties” 20 times, even qualifying “uncertainties” as “considerable” and “sizeable”, Mrs. Yellen concluded that she is seeing

good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones”

Yet, the Labor Market Conditions Index which uses her own 19 datasets peaked in October 2015, 7 months ago, turned negative in January and has been falling for the last 5 months.

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Difficult to find “positive forces supporting employment growth” on her own dashboard. These are conditions to ease, not to tighten.

Maybe the Fed’s own Beige Book gives her comfort since the June 1st Beige Book described the economy as expanding at a “modest or moderate” pace in 7 of the 12 districts, about the same as in recent editions. In general, optimism regarding the economic outlook far outweighed pessimism throughout the Beige Book, as it has for the past two years or so…

But LPL Financial Research offers its own analysis of the Beige Book:

We believe the Beige Book is best interpreted by measuring how the descriptors change over time. (…) To evaluate the sentiment behind the entire Beige
Book collage of data, we created our proprietary Beige Book Barometer (BBB). The Beige Book Barometer is a diffusion index that measures the number of times the word “strong” or its variations appear in the Beige Book less the number of times the word “weak“ or its variations appear. When the Beige Book Barometer is declining, it suggests that the economy is deteriorating.

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Here in 2016, although oil prices have rebounded more than 80% off the February 2016 lows, oil production has continued to fall, and the continued weakness in the oil patch has weighed on the overall barometer.

Pointing up However, most of the decline in the BBB since its 2015 peak has come in the non-energy-producing districts of the U.S., suggesting that there has been some spillover from lower oil prices and lower oil production to other parts of the economy.

Mrs. Yellen must know that her staff is positively biased:

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Why the focus on tightening? Samuel Rines, Senior Economist and Portfolio Strategist at Avalon Advisors in Houston, TX​. shares his views on that:

Why the Fed Needs to Make a Policy Error

(…) By so consistently telegraphing interest-rate hikes, the Fed has backed itself into a corner. It may be a policy error to continue raising rates at this point, but backing away from higher rates could spark a crisis of confidence, which would be even worse. The Fed is setting up to commit a policy error, and an error may be the best possible outcome now. (…)

Fed presidents frequently reiterate the primacy of data dependency in their policy-determination process, while emphasizing the lack of a preset course for future policy. But the language is typically unidirectional—always focused on what data are needed to justify a rate hike. No one talks about what would constitute evidence for a reversal. And this creates complications for the Fed’s ability to prudently conduct both present and future monetary policy. (…)

The reasoning to normalize policy is more that “it must be done” than that “it needs to be done.”

The logic as to why the Fed must remain on a tightening path is that it cannot afford to lose credibility. More accurately, it cannot afford to lose credibility in that way. By committing the policy error of misreading the economy, and significantly slowing an economic expansion, the Fed risks less credibility than it would by backtracking on it policy path. The Fed must maintain faith in the execution of its commitments and policies. (…)

Unconventional policy relies heavily on Fed credibility. Credibility allows the Fed to commit to achieving a certain outcome, and have markets believe it will happen. (…)

At the pace of the Fed’s own dot plot, interest rates will rise on a trajectory that almost guarantees an error. But it is an error the Fed needs to commit. Regardless of whether the policies are good or bad, the Fed cannot risk its credibility—credibility is critical to the efficacy of the tools it will use in the next downturn. The Fed must commit an error.

Weak Productivity, Rising Wages Putting Pressure on U.S. Companies U.S. companies are facing a toxic combination of dismal productivity growth, accelerating wages and sluggish demand, raising the risk they will slow hiring, cut spending further and weaken an already-fragile economy.

Labor productivity, or the amount of goods and services employees produce per hour worked, fell at a 0.6% annual rate in the first quarter, the Labor Department said Tuesday. (…)

Hourly compensation, encompassing everything from salaries to retirement benefits and health care costs, surged at a 3.9% annual rate in the first quarter, Tuesday’s report showed. It rose 3.7% over the past year, marking the biggest annual gain in two years. (…)

When wage compensation outruns productivity, the result is an acceleration in labor costs per unit of output. In the first quarter, those costs rose 4.5% at a yearly rate and 3% from a year earlier. If companies can’t boost productivity, they must either absorb the costs in their profit margins or raise prices.

Corporate profits are being squeezed as a result, and the worry is that companies will slow hiring and further slash spending.

A different worry for the Fed is that firms will react to higher labor costs by raising prices, pushing inflation above the central bank’s 2% target. (…)

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U.S. Consumer Credit Increased at 4.49% Pace in April

Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $13.42 billion in April from the prior month, the Federal Reserve said Tuesday. The 4.49% seasonally adjusted annual growth rate is a slowdown from March’s downwardly revised 9.57% pace.

Revolving credit outstanding, mostly credit cards, rose at a 2.08% annual pace in April, the slowest pace since January. That is a steep drop-off from a downwardly revised rate of 13.34% in March, its fastest pace since February 2001.

Nonrevolving credit outstanding, including student and auto loans, rose at a 5.35% annual pace in April compared with March’s downwardly revised 8.22% growth rate. (…)

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Household Spending Spurs Eurozone Growth

(…) The European Union’s statistics agency said the combined gross domestic products of the eurozone’s 19 members was 0.6% higher in the first quarter than in the final three months of 2015, and 1.7% higher than the first three months of last year. Eurostat had previously estimated that the economy grew by 0.5% on the quarter, and 1.5% on the year. On an annualized basis, the economy grew by 2.2%.

Eurostat also raised its growth estimate for the fourth quarter of last year, and now calculates that GDP increased by 0.4% on the quarter and 1.7% on the year, having previously estimated growth at 0.3% and 1.6% respectively. (…)

The pickup in growth during the first quarter was driven by an increase in household spending, which was up 0.6% from the final three months of 2015, doubling its growth rate in that latter period and recording its fastest expansion since the final quarter of 2014.

Rising government and investment spending also contributed to growth, while weaker export growth was a drag on the recovery. (…)

  • Low Yields Go Lower in Europe Yields on the 10-year government debt of Germany and the U.K. fell to all-time lows, a stark demonstration of the modern era of scant inflation, weak growth and outsize monetary policy.
China central bank holds line on growth forecast but sees more pain to come

China’s central bank slashed its forecast for exports on Wednesday, predicting a second straight annual fall in shipments, but said the economy will still grow 6.8 percent this year.

The People’s Bank of China (PBOC) also warned in its mid-year work report that the government’s push to reduce debt levels and overcapacity could increase bond default risks and make it more difficult for companies to raise funds. (…)

The report was released shortly after monthly data showed China’s exports fell an annual 4.1 percent in May, more than expected and the 10th decline in the past 12 months.

Imports were more encouraging, declining only marginally and much less than expected, pointing to improving domestic demand and adding to views that the economy may be slowly stabilising. Preliminary commodity trade data showed sharp rises in imports of copper and iron ores.

However, some economists cautioned that imports from Hong Kong may have once again been inflated by fake trade invoicing to disguise speculation on the yuan, which came under renewed depreciation pressure last month as the U.S. dollar surged. (…)

Despite cutting its forecast for exports to minus 1 percent from growth of 3.1 percent, the PBOC saw a domestic recovery remaining on track.

It upgraded its forecast for fixed-asset investment growth to 11 percent, an increase of 0.2 percentage points from estimates it made late last year. (…)

World Bank Cuts Growth Outlook The World Bank cut its forecast for this year’s growth of the global economy, citing troubles in developed and developing nations alike.

The bank’s latest projection pegs global growth at 2.4%, down from the 2.9% forecast in January and slower than last year’s weak pace. The bank also cut its forecast for growth in 2017 to 2.8% from 3.1%.

“The global outlook faces pronounced risks of another stretch of muted growth,” said World Bank chief economist Kaushik Basu. “A wide range of risks threaten to derail the recovery.”

Commodity exporters such as Brazil, Russia, Nigeria and Angola suffered some of the largest downward revisions. Governments have been forced to cut spending due to the price collapse in metals, energy and other commodities.Weakening currencies also are forcing central banks to raise interest rates to curb rampant inflation. And higher borrowing costs are weighing on investment and putting many company balance sheets deep into the red.

The bank pared its projections for the world’s largest economy, the U.S. A wounded energy sector, strong dollar and anemic international demand contributed to a 0.8-percentage-point cut in growth expectations—to 1.9%—for the year. (…)

Policy makers’ room to maneuver is shrinking. Although debt levels have moderated in many advanced economies, central banks are starting to run out of monetary-policy options. And politicians are reluctant to use government balance sheets to fund major injections of stimulus.

Options are even fewer among emerging-market exporters. Debt levels are rising, budget deficits are deepening and central banks are having to raise rates instead of cutting them to temper rising prices as their currencies weaken. Those countries, such as Angola, Kazakhstan, Malaysia, South Africa and Venezuela, are running average budget deficits of 5% of gross domestic product.

One major indicator of global weakness—trade growth—remains muted at 3.1%, well below precrisis trends. (…)

One bright note in the outlook: Emerging-market importers aren’t suffering the same downturn as exporters. In countries such as India, Hungary, Thailand and Vietnam, government deficits are actually lower than the bank forecast two years ago and debt levels as a share of economic output are falling. 

OECD lead indicator flags first signs of growth stabilization

Signs are emerging that a downturn in the United States and China, the world’s two biggest economies, may have bottomed out, the OECD’s monthly leading indicator showed on Wednesday.

The Paris-based Organisation for Economic Cooperation and Development said its leading indicator (CLI) for the United States improved to 98.95 in April from 98.93 in March, the first increase in the reading since July 2014.

The index for China rose to 98.41 in April from 98.38 in March, its second consecutive monthly increase. The reading fell below the 100 mark in October 2014.

The OECD said its indicators showed stable growth momentum in the euro zone as a whole, including Germany and France, while the reading for Britain pointed to easing growth.

The index for the euro zone fell to 100.38 in April from 100.42 in March but has been above its long-term average of 100 since October 2013.

The OECD was also positive on the outlook for Brazil and Russia, which have suffered from a sharp downturn driven by a collapse in commodities prices.

“Amongst major emerging economies, CLIs for Brazil and Russia confirm the signs of positive change in growth momentum flagged in last month’s assessment,” the OECD said.  image

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HAVE A GOOD SUMMER!

image(Bluehawk Wealth Management)

Chinese Jets Intercept U.S. Spy Plane Over East China Sea The U.S. says one of two Chinese J-10 fighters intercepting a U.S. Air Force reconnaissance plane on routine patrol Tuesday closed on it at an “unsafe excessive rate.”