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: May 2016

NEW$ & VIEW$ (20 MAY 2016)

U.S. Leading Economic Indicators Firm

The Conference Board’s Composite Index of Leading Economic Indicators increased 0.6% during April (1.9% y/y), following an unrevised 0.2% March gain. It was the largest increase since June, and beat expectations for a 0.3% rise in the Action Economics Forecast Survey. The three-month change in the index improved to 2.3% (AR). A longer workweek, fewer initial claims for jobless insurance, more building permits, higher stock prices, a steeper interest rate yield curve and the leading credit index had the largest positive effects on the index. Weaker consumer expectations for business & economic conditions had the only negative contribution.

The coincident index increased 0.3% (1.8% y/y) after zero change. April’s gain was the largest monthly in three months. Three-month growth improved to zero (AR) after being slightly negative. Nonfarm payrolls, personal income less transfers, manufacturing & trade sales and industrial production each contributed positively to the index.

The lagging index increased 0.3% (4.1% y/y) after an unrevised 0.4% gain. Three-month growth increased to 6.8%, its strongest in three years. More C&I loans, a longer duration of unemployment and a higher consumer installment debt/personal income ratio contributed positively to the index rise last month.

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Chicago Fed National Activity Index Indicates Economic Improvement

The National Activity Index from the Federal Reserve Bank of Chicago increased to 0.10 during April, the first positive reading since January. It still suggested, however, that economic growth was slightly below trend. At -0.22, the three month moving average has been in negative territory since February 2015. During the last ten years, there has been a 77% correlation between the Chicago Fed Index and the q/q change in real GDP.

Each of the component series improved last month. The Production & Income reading moved up sharply to 0.19, the highest point in nine months. The Personal Consumption & Housing figure rose to -0.07, its best level this year. The Employment, Unemployment & Hours figure rose to a still-depressed -0.02. The Sales, Orders & Inventories figure was fairly steady at 0.00. The Fed reported that 45 of the 85 component series made positive contributions to the total while 40 made negative contributions.

Pretty weak heart beat as CalculatedRisk illustrates:

Philly Fed Back Down to Negative Territory

Philly Fed Table 051916Like its New York sibling, today’s report on manufacturing in the Philadelphia region weakened modestly this month and came in weaker than expected.  While economists were expecting a positive reading of 3.0, the actual reading remained sub-zero at -1.8.  The headline reading saw a nice bounce in March, but the last two months have seen all of that given back. Even though General Business Conditions showed a modest decline this month, the majority of components actually increased with the biggest jumps coming in Inventories, Number of Employees, and Shipments.  On the downside, the only declines were in Delivery Times, Unfilled Orders, and New Orders. (Bespoke)

Philly Fed Chart 051916

Pointing up Note that the prices received measure jumped to the highest level since October 2014.

Two-thirds of U.S. would struggle to cover $1,000 crisis: poll

(…) These financial difficulties span all income levels, according to the poll conducted by The Associated Press-NORC Center for Public Affairs Research. Seventy-five per cent of people in households making less than $50,000 a year would have difficulty coming up with $1,000 to cover an unexpected bill. But when income rose to between $50,000 and $100,000, the difficulty decreased only modestly to 67 per cent.

A third said they would have to borrow from a bank or from friends and family, or put the bill on a credit card. Thirteen per cent would skip paying other bills, and 11 per cent said they would likely not pay the bill at all.

Even for the country’s wealthiest 20 per cent – households making more than $100,000 a year – 38 per cent say they would have at least some difficulty coming up with $1,000. (…)

Despite an absence of savings, two-thirds of Americans said they feel positive about their finances, according to survey data released Wednesday by AP-NORC, a sign that they’re managing day-to-day expenses fine. (…)

The AP-NORC results also correlate with a 2015 study by the Federal Reserve in which 47 per cent of respondents said they either could not cover a $400 emergency expense or would have to sell something or borrow money.

And the struggle affects retirement savings as well. When AP-NORC asked if they will have enough savings to retire when they want to, 54 per cent of working Americans say they are not very or not at all confident they will have enough. Only 14 per cent say they are confident they can retire on time.

AP-NORC release is here.

Doug Short has a post on Five Decades of Middle Class Wages with these 2 charts among many others:

Real Hourly Earnings

Now let’s multiply the real average hourly earnings by the average hours per week. We thus get a hypothetical number for average weekly earnings of this middle-class cohort, currently at $723 — well below its $830 peak back in the early 1970s.

Real Weekly Earnings

Scandal-hit VW agrees to 4.8% pay hike for workers

Auto maker Volkswagen and Germany’s industrial union have agreed on wage increases that will see pay rise 4.8 per cent by next year, the kind of deal that could help the 19-country euro zone raise inflation from current dangerously weak levels.

The company said Friday that workers would get 2.8 per cent more on Sept. 1 and then another 2.0 per cent on Aug. 1, 2017. (…)

Dudley joins chorus of Fed officials seeing rate hikes soon The U.S. economy could be strong enough to warrant an interest rate increase in June or July, New York Federal Reserve President William Dudley said on Thursday, cementing Wall Street’s view that the Fed will tighten policy soon.

Mish Shedlock takes Dudley to his words in Hikes Data Dependent Says NY Fed: So, Let’s Look at the Data, and concludes like I do:

I do not pretend to know where interest rates should be.

The Fed is even more clueless because they don’t know either, but they believe they do.

So, I am not arguing the Fed should not hike. Rather I present the case the Fed has no idea what the hell they are doing. (…)

The solution is to get rid of the Fed, get rid Davis Bacon and all the prevailing wage laws, and be thankful that innovation lowers costs of living.

Instead, we have to deal with and listen to a bunch of central planning fools prove they have no idea what they are doing with clueless acts to produce inflation then deal with the consequences when they do.

Palos Management’s Hubert Marleau adds this interesting info on the FOMC meetings:

Two Sigma, a large hedge fund, utilizes advanced technological applications using ordinary language processing techniques to analyse the Fed’s minutes. (…)Two Sigma research’s more technical analysis points out the following:

1. There is big emphasis on the financial markets. Although this emphasis is less than it was in late 2008, it accounts for about 22% of the meeting time.
2. Inflation—specifically, the fact that it’s increasing—is gaining a lot of attention. Discussion concerning this topic takes as much as 24% of the meeting time.
3. Only 5% of the meeting time is devoted to discussion regarding employment.
4. Growth is of major concern. The Fed spends 24% of the meeting time on this topic.
5. Policy takes up another 19% of meeting time. I suspect that this concerns normalisation.
6. Trade only takes up 4% of meeting time.

China’s Debt Bomb: No One Really Knows the Payload

As an addendum to my Wednesday post Certain Uncertainties, this great chart from Visual Capitalist:

China's Debt Bomb [Chart]

There is a lot more on this in ValueWalk’s China’s Debt-To-GDP Set To Reach 300 Percent In 2020.

U.S.-based stock funds continue trend of outflows in latest week: Lipper Investors pulled another $3.9 billion from U.S.-based stock funds during the week that ended May 18, Lipper data showed on Thursday, bolstering a trend of outflows that has persisted most of this year.

(…) Year-to-date outflows from U.S.-based stock funds now total $45 billion, rivaling the $50 billion in outflows for all of 2011, the last year of major cash withdrawals. The funds bled more than $72 billion in 2008, at the peak of the financial crisis, Lipper data show. (…)

During the latest week, U.S.-based funds focused on domestic shares accounted for 62 percent of the stock outflows. European and Japanese stock funds posted their 16th straight week of outflows, according to the data. (…)

NEW$ & VIEW$ (19 MAY 2016)

Obamacare Rates Rise in New York, and So Does Political Risk

New York’s health insurers are seeking to raise the amount that customers pay for individual Obamacare plans by an average of 17.3 percent for 2017. That’s alongside sharp increases in Florida, where insurers are looking for 17.7 percent more, and Washington State, where health plans are seeking a 13.5 percent increase from customers. (…)

New York’s insurance regulator does have an option to push back — like some other states, it can push the requested rate increases back down. Last year, insurers in the state requested a 10.4 percent increase for individual policies, on average, and were allowed to boost rates by 7.1 percent.

Yet many of New York’s insurers are losing money on their Obamacare policies, which may limit how harsh the state will be, lest companies pull out of the market entirely.

CareConnect, owned by the Northwell Health hospital system on Long Island, is asking for an increase of 29.2 percent on average. Chief Executive Officer Alan Murray said he doesn’t expect the state insurance regulator to cut his requested increase by much, since it reflects a much more complete understanding of how expensive it’ll be to care for customers. (…)

Oscar Insurance Corp., a closely held startup that lost about $105 million last year, is requesting to boost individual rates by 18.4 percent on average, while UnitedHealth is seeking to boost New York premiums by 45.6 percent — the second-highest request in the state. (…)

Last year, rates for individuals increased about 8 percent on average in states using the Federal healthcare.gov marketplace, according to the Department of Health & Human Services. Some individuals get government subsidies to help them afford coverage, cushioning the effect of rising costs.

The U.S. CPI-Medical Care index is up 3.0-3.5% YoY so far this year but the monthly trend has accelerated to +4.3% annualized since January.

Employers Weigh In on Overtime-Pay Rule Employers preparing for a new federal overtime-pay regulation say the change will lead them to slow hiring, reduce workers’ hours and cut pay, bonuses and benefits.

(…) The regulation, finalized Wednesday by the Labor Department, will make 4.2 million employees newly eligible for overtime pay when they work more than 40 hours a week, and will clarify that millions more have already been eligible but haven’t been getting the pay to which they are legally entitled.

When the rule takes effect in December, the threshold under which salaried workers will automatically qualify for overtime pay will double to $47,476 a year, from $23,660. Workers who are paid hourly are generally eligible for overtime pay, regardless of their annual earnings. (…)

The regulation will have a sweeping effect on workers, employers and industries across the nation including retail, fast-food, universities and nonprofits. Store managers, front-line supervisors and postdoctoral associates at colleges are among the many jobs expected to be affected. It marks one of the most far-reaching regulations issued during President Barack Obama’s administration, which has made boosting wages and strengthening the middle class a core part of its mission. (…)

Warning: labor distortions of many kinds ahead…

Fed to Markets: June Rate Increase Is on the Table Federal Reserve officials sent skeptical investors a sharp warning Wednesday that an interest-rate increase is still in play for June’s policy meeting if the economy keeps improving.

(…) “Participants generally agreed that the risks to the economic outlook posed by global economic and financial developments had receded over the intermeeting period,” the minutes said. (…)

Some also cited as an uncertainty the U.K.’s June 23 referendum on whether to leave the European Union, which falls a week after the Fed meeting. Participants also raised concerns about “unanticipated developments” associated with how China manages its exchange rate. (…)

Still, Fed officials signaled they weren’t overly worried about the apparent [Q1 GDP] slump, judging it was temporary and “could partly reflect measurement problems and, if so, would likely be following by stronger [gross domestic product] growth in subsequent quarters,” the minutes said.

The view wasn’t unanimous. Some officials worried that softness in consumer spending and declines in business investment may be a sign of a more persistent slowdown in economic activity. (…)

The Federal Reserve (Fed) faces a big challenge as it seeks to raise interest rates this year: The central bank already missed the “window of opportunity” for normalizing rates in a manner that doesn’t hamper the recovery.

This is evident when you take a close look at two charts depicting BlackRock’s proprietary Yellen Index, which tracks a suite of indicators that Fed Chair Janet Yellen has cited as being critical for Fed movement and that have coincided with historical Fed moves.

chart-yellen-index

chart-momentum2

(…) Looking forward, as payrolls tend to track corporate profits by about six months, I expect to see a continued weakening in jobs numbers as the year progresses.

The slowing-payroll dynamic places the Fed in a difficult position. It implies that rate hikes will occur at a much slower pace than market watchers had anticipated at the start of the year. Two rate hikes this year aren’t out of the question, but one hike is more likely, and a Fed that remains on hold remains a distinct possibility.

(…) But U.S. realized inflation, inflation expectations and inflation breakevens are poised to grind modestly higher, so the Fed will eventually have to reconsider the importance of price stability versus other more global factors. The bottom line: The Fed’s job will only get tougher from here.

(…) Although it has achieved full employment, the Fed continues to maintain excessively low interest rates in order to move toward its inflation target. This has created substantial risks that could lead to another financial crisis and economic downturn.

The Fed did raise the federal-funds rate by 0.25 percentage points in December, but interest rates remain excessively low and are still driving investors and lenders to take unsound risks to reach for yield, leading to a serious mispricing of assets. The S&P 500 price-earnings ratio is more than 50% above its historic average. Commercial real estate is priced as if low bond yields will last forever. Banks and other lenders are lending to lower quality borrowers and making loans with fewer conditions.

When interest rates return to normal there will be substantial losses to investors, lenders and borrowers. The adverse impact on the overall economy could be very serious.

A fundamental problem with an explicit inflation target is the difficulty of knowing if it has been hit. (…)

With a margin of error that large, it makes no sense to focus monetary policy on trying to hit a precise inflation target. The problem that consumers care about and that should be the subject of Fed policy is avoiding a return to the rapidly rising inflation that took measured inflation from less than 2% in 1965 to 5% in 1970 and to more than 12% in 1980.

Although we cannot know the true rate of inflation at any time, we can see if the measured inflation rate starts rising rapidly. If that happens, it would be a sign that true inflation is also rising because of excess demand in product and labor markets. That would be an indication that the Fed should be tightening monetary policy. (…)

Not only are nominal wages and incomes not falling in the U.S. now, they are rising at about 2% a year. The negative true inflation rate means that true real incomes are rising more rapidly than the official statistics imply.

The Federal Reserve should now eliminate the explicit inflation target policy that it adopted less than five years ago. The Fed should instead emphasize its commitment to avoiding both high inflation and declining nominal wages. That would permit it to raise interest rates more rapidly today and to pursue a sounder monetary policy in the years ahead.

Mexico set for recession, forecaster says

(…) The forecast of recession comes from World Economics, which produces a family of sales managers’ indices or SMIs, based on replies from a panel of salespeople across the services and manufacturing sectors, which it claims is the most forward-looking data series available.

Although these SMIs are little known, World Economics’ parent company is Information Sciences, which developed the widely followed purchasing managers’ indices or PMIs, now owned by Markit.

The headline SMI reading for Mexico came in at just 47.3 in May and has been below 50 — the cut-off between an increase or decrease in activity — since February, as the first chart shows. All five sub-components — confidence, market growth, sales, prices and staffing — have also slumped below 50. (…)

Across Latin America as a whole, World Economics saw the recession deepening in May, with the headline SMI reading falling to 45.2, its fourth straight decline since hitting 49.8 in January and the 13th successive sub-50 monthly reading, as the second chart shows. (…)

 Mexico. Headline sales managers index Latam. Headline sales managers index

Cash crunch:

Saudi Arabia Considers Paying Contractors With IOUs

Saudi Arabia is considering using IOUs to pay outstanding bills with contractors and conserve cash, according to people briefed on the discussions.

As payment from the state, contractors would receive bond-like instruments which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private. Companies have received some payments in cash and the rest could come in the “I-owe-you” notes, the people said, adding that no decisions have been made on the measures.

Saudi Arabia has slowed payments to contractors and suppliers, tapped foreign reserves and borrowed from local andinternational banks in response to the decline in crude oil, which accounts for the bulk of its revenue. The country will probably post a budget deficit of about 13.5 percent of economic output this year, according to International Monetary Fund estimates, pushing the government to borrow an estimated 120 billion riyals ($32 billion). (…)

The Saudi government owes approximately $40 billion to the country’s contractors, estimated Jaap Meijer, managing director of research at Dubai-based Arqaam. (…)

THE MOST HATED BULL MARKET IN HISTORY

Here’s why: everybody missed it:

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Well, not quite everybody: image

TAKE-OVERS

As the great minds of the world ponder all the game-changing implications of a world featuring autonomous cars, along comes Barrie Kirk to say what we’ve all really been wondering about.

“I am predicting that, once computers are doing the driving, there will be a lot more sex in cars,” Kirk, of the Canadian Automated Vehicles Centre of Excellence, told The Canadian Press on Monday.

“That’s one of several things people will do,” Kirk continued, “which will inhibit their ability to respond quickly when the computer says to the human, ‘Take over’.”

  • Rolling on the floor laughing More traffic!

Contrary to the widely held belief that self-driving vehicles could ultimately eliminate traffic congestion, at least one transportation expert is saying the opposite.

“​We could end up with a lot of cars on the road,” AnnaLisa Meyboom, director of the Transportation Infrastructure and Public Space Lab research group at UBC, told CBC’s The Early Edition on April 25. “You’ve all sorts of potential extra people on the road that don’t currently drive, including kids, dogs and people who are blind.”