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

THE DAILY EDGE (7 June 2017)

U.S. JOLTS: Job Openings Strengthen While Hiring Falters

The Bureau of Labor Statistics reported that the total job openings rate increased to 4.0% during April and returned to its record high. Despite the increase, the hiring rate fell to 3.5%, its lowest level in 12 months. Improvement in the job openings rate was broad-based. (…)

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The number of private-sector hires declined 5.2% (+0.7% y/y) to 4.718 million. Hiring in education & health services fell 10.5% (+2.4% y/y) and reversed the prior month’s increase. Hiring in trade, transportation & utilities fell 7.5% (-2.7% y/y) to the lowest level since January 2014. Factory sector hiring declined 5.2% (+18.9% y/y), and the number of leisure & hospitality jobs fell 3.0% (+0.8% y/y). Professional & business service sector hiring fell 2.5% (-5.6% y/y). Construction sector hiring improved 1.6% (12.8% y/y) and government sector employment rose 1.2% (-5.9% y/y). (…)

The voluntary quit rate is steady at its pre-crisis level while quits keep rising about 7% YoY. Workers are not shy switching jobs.

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  • Actually, 45% of April’s job openings were in the Accommodation and Food Services industry where actual hirings have been declining fo several months. “Some have speculated that this is a shift away from undocumented labor – perhaps due to new pressures from the Department of Justice.” What’s going to happen when they apply similar pressures in San Diego’s and L.A.’s municipal employees?

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Anyway, I am focusing more on actual hires than openings and the hires are flattening.

Now, this is amazing an amazing chart (although I don’t know where and how they get the data):

Source: Deutsche Bank, h/t Tom (via The Daily Shot)

OECD Calls for ECB Taper, Cuts U.S. Growth Forecasts The European Central Bank should wind down its bond purchases in 2018 and raise one of its key interest rates by the end of that year, the Organization for Economic Cooperation and Development said.

(…) The Paris-based research body also cut its economic growth forecasts for the U.S. this year and next, saying stimulative measures it had expected from the Trump administration would now likely be implemented later than it had previously anticipated.

(…) it lowered its forecast for the U.S. economy, and now expects growth this year of 2.1%, down from 2.4% in March. It also lowered its projection for 2018 to 2.4% from 2.8%, reflecting a later start for investment programs and tax changes it had expected from the new administration. (…)

Don’t Count on Deregulation to Save the Trump Trade

(…) Now formerly bullish investors and business leaders are starting to curb their enthusiasm. Tax reform is already getting pushed back to 2018 and possibly later. And the Obamacare replacement plan—as well as the tax cuts that are part of it—is going nowhere fast. At least one GOP senator says a deal is unlikely this year.

If those are off the table, can we at least count on regulatory relief?

To some degree, yes… but we may have already seen most of it. If your investment strategy counts on deregulation to boost stock prices, you might want to reconsider. (…)

The actual order, which you can read right here, says agencies must identify two regulations for repeal for each new one they issue.

Identifying a regulation to repeal is not the same as actually repealing it. Many in the media and on Wall Street missed that part.

The reason Trump’s EO was so meekly worded is because even the president can’t wipe out most regulations by the stroke of a pen. There’s a legal process for both making and repealing them. Agencies have to gather information, study costs and benefits, allow public comment, etc.

This takes time—and with good reason. (…)

Private Funding Is Challenge of Trump Infrastructure Plan The president’s proposed infusion of funding for infrastructure turns on a critical question: how the administration will get private investors to put up most of the money.

(…) Under the new approach, Mr. Trump’s advisers said they can get private investors to flock to put up the capital for such projects by curtailing permitting requirements and regulations, and by offering incentives to states and cities to turn to the private sector for financing. (…)

It isn’t clear, however, that private investors will swarm to some of the country’s most seriously decrepit infrastructure projects because not all of them will provide commercial returns. (…)

Private-equity executives and bankers who specialize in infrastructure investing said that finding money for projects isn’t the problem. It is the dearth of attractive investments, they said. (…)

Benchmark U.S. Treasury Yield Falls to New 2017 Low The yield on the benchmark 10-year U.S. government note closed at the lowest level in 2017, extending its big slide since reaching this year’s peak in March.
PROFIT WARNINGS
Macy’s Remarks Spark Selloff Macy’s met with investors to lay out its strategy. Instead, the department-store chain set off a new panic over the beleaguered retail sector.

The department-store chain’s finance chief, Karen Hoguet, warned that Macy’s gross margins would fall about a percentage point in its current quarter compared with a year ago and decline slightly less than a point for the full financial year. (…)

SENTIMENT WATCH

Here they come! Hmmm…

Source: @bespokeinvest, @bespokeintel

Somebody recently coined the expression “return-free risk”. Some people will soon learn its meaning.

CETERIS NON PARIBUS:
Two SIM Cards and Better Selfies: How China’s Smartphones Are Taking On Apple Chinese manufacturers managed to snare more than 40% of the global smartphone market, double what they had five years ago, partly through offering handsets with features targeted to local markets.

 

Conference Call with James Grant, Grant’s Interest Rate Observer – 6/14/17

Mark sent me this link. Jim Grant is a great mind and a good speaker. Should be worth your time.

Ben Bernanke explains what Donald Trump gets wrong on the economy In an extended interview, the former Fed chair talks tax cuts, infrastructure needs, and why coal jobs won’t come back

THE DAILY EDGE (6 June 2017)

IHS Markit U.S. Services PMI sees new business growth acceleration in May

The seasonally adjusted Business Activity Index reached 53.6 in May, up from 53.1 in April, and signalled the largest rise in overall activity since February.

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The rate of growth in new business meanwhile accelerated from April to a four-month high. Panellists noted that stronger demand from new and existing clients led to increased volumes of new orders. (…) For the first time since January, backlogs increased during May. The pace of accumulation, though moderate, was the strongest since last October. (…) The rate of payroll expansion accelerated to a three-month high.

On the price front, the rate of input price inflation softened fractionally from April’s 21-month high. The pace of increase was broadly in line with the series average. Anecdotal evidence generally associated increased cost burdens to higher prices for goods purchased, as well as wage rises.

Panellists noted that higher input costs were generally passed on to clients. Output prices consequently rose for the fifteenth consecutive month, with the pace of charge inflation accelerating from April. The rate of increase was the second-fastest in the current sequence. (…)

The final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index rose to 53.6 in May, up from the previous month’s reading of 53.2. Although the rate of growth in both sectors was relatively subdued, the trend for the first five months of 2017 is stronger than the same period in 2016. Similar rates of expansion were seen in the
manufacturing and service sectors, albeit with service providers experiencing a fractionally quicker acceleration than goods producers. However, growth rates remained relatively muted.

Historical comparisons with GDP indicate the PMI is signalling second quarter GDP growth of just over 2%, suggesting there may be some downside risks to IHS Markit’s current forecast of a GDP growth rebound to just over 3% in the second quarter.

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The NMI® registered 56.9 percent, which is 0.6 percentage point lower than the April reading of 57.5 percent. This represents continued growth in the non-manufacturing sector at a slightly slower rate. The Non-Manufacturing Business Activity Index decreased to 60.7 percent, 1.7 percentage points lower than the April reading of 62.4 percent, reflecting growth for the 94th consecutive month, at a slower rate in May. The New Orders Index registered 57.7 percent, 5.5 percentage points lower than the reading of 63.2 percent in April. The Employment Index increased 6.4 percentage points in May to 57.8 percent from the April reading of 51.4 percent. The Prices Index decreased 8.4 percentage points from the April reading of 57.6 percent to 49.2 percent, indicating prices decreased in May for the first time after 13 consecutive months of increasing. According to the NMI®, 17 non-manufacturing industries reported growth. Although the non-manufacturing sector’s growth rate dipped in May, the sector continues to reflect strength, buoyed by the strong rate of growth in the Employment Index. The majority of respondents’ comments continue to indicate optimism about business conditions and the overall economy.

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  • The most surprising development in the non-manufacturing report was the price trend, which dipped into contraction territory (below 50). Anthony Nieves, the chair of the ISM’s Non-Manufacturing Business Survey Committee, said that “there is no true pricing power out there right now.” Companies are simply unable to raise prices substantially without losing orders. Lowflation risks appear to be back (the term “lowflation” was first introduced in the context of the euro area here). (The Daily Shot)

Meanwhile, the Eurozone seems to be acting like one single entity…

…with very strong employment trends…

…and yet, interest rates unmoved.

Source: @Callum_Thomas (via The Daily Shot)

Conference Board’s Employment Trends Index Continues to Rise

The Conference Board said its employment trends index rose to 133.7 in May from 132.8 in April. The May figure represents a 6.4% increase from last year.

The board’s employment trends index combines eight market indicators, including industrial production figures from the Federal Reserve, job openings from the Bureau of Labor Statistics and jobless claims from the U.S. Department of Labor. The index filters data volatility to more clearly reveal underlying trends in employment conditions. (…)

Seven of the basket’s eight indicators rose in May, with the largest contribution coming from respondents in The Conference Board’s consumer confidence survey who said they find jobs “hard to get.”

U.S. Factory Orders Slip

Manufacturing sector orders eased 0.2% (+2.9% y/y) following a 1.0% gain, revised from 0.2%. Durable goods orders declined 0.8% (-0.1% y/y), revised from the advance report of a 0.7% fall. Transportation sector orders declined 1.4% (-6.8% y/y). Orders outside of the transportation sector ticked 0.1% higher (4.9% y/y).

Total factory sector shipments held steady (3.1% y/y). (…)

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U.S. Productivity Flat in First Quarter U.S. worker productivity was flat in the first quarter, an upward revision from the previous estimate, but still another sign of sluggishness during the eight-year old expansion.

Compared with a year earlier, productivity rose 1.2% in the first quarter, matching the average annual rate of growth over the past decade, but well below the 2.6% growth rate seen in the early 2000s.

Unit labor costs at nonfarm businesses rose at a 2.2% annual rate in the first quarter, revised down from an initial estimate of 3%. (…)

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SURPRISE, SURPRISE!
OH! CANADA

Canada’s housing market gets much attention these days as both the British Columbia and Ontario governments recently took measures to cool their respective bubbly market off.

Casey Research last week took this a huge step further:

Investors beware: the U.S. economy is in for a huge shock. This shock won’t start with auto loans…student loans…or even U.S. corporate debt. It will begin north of the 49th parallel. That’s right. Canada will soon put the U.S. economy to the test. (…)

In short, Canada has a gigantic housing bubble on its hands. And it looks like that bubble is finally about to burst.

When it does, Canada will have serious problems. It could even have a recession or a full-fledged banking crisis. (…)

Ghost Canada’s housing crisis could trigger the next global economic meltdown. (…)

Canada is America’s most important trading partner. Every year, we send them $267 billion worth of goods and services. That’s more than we export to China, Japan, and the United Kingdom combined.

In other words, the fate of the U.S. and Canada are highly intertwined. (…)

In short, the U.S. economy is sitting on a tinderbox of debt. And a Canadian housing crisis could very well be the spark that sets the U.S. economy on fire. (…)

Before you take action expecting the tail will shortly wag the dog, consider these facts:

  • Vancouver and Toronto are currently the only bubbly housing markets in Canada. Together, they account for 30% of the total Canadian housing market. As David Rosenberg points out, “70% of the country is nowhere near a bubble, with most cities still seeing a situation where it takes 3-4 years of income to buy an average home, which is normal”.

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  • Nationally, an estimated 68% of Canadians have fixed-rate mortgages, primarily for 5-year terms, as opposed to variable-rate mortgages that would expose
    borrowers immediately to higher interest rate charges in a rising rate environment.
  • More than 96% of mortgage borrowers have at least 10% equity and 80% have at least 25% home equity. Furthermore, 92% of borrowers since 2014 have home equity of at least 10% and 73% have at least 25% home equity.
  • 55% of residential mortgage debt in Canada is insured.
  • At 0.28%, the Canadian mortgage delinquency rate has been stable over the past few years and is below the 0.39% average since 1990, below the 0.45% peak
    experienced in the recent housing pullback and well below the 0.65% peak experienced during the 1990s housing downturn.
  • In Canada, mortgages contain personal covenants giving recourse to the lender. This limits the desire of borrowers to take on potentially unaffordable mortgages and reduces the probability of borrower foreclosing on the property.

One of the most important drivers of downturns in Canada’s housing market is a significant decline in employment. Since 1967, Canadian employment growth has only been negative when U.S. employment growth was also negative.

Stop watching the tail, it’s the dog, stupid.

Pointing up THE “120 YIELD” SPREAD WARNS

The spread between 10Y and 3M Treasuries is now 1.17.

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What does that mean? By itself nothing more than a trend closer to an inverted yield curve. But maybe you should take the time to read this post:

SENTIMENT WATCH
When Low Jobless Rates End Badly

There have been only three fleeting periods in the past half-century when the U.S. unemployment rate was as low as it is today.

This would be cause for celebration but for one disturbing fact: in hindsight, each period was associated with boiling excesses that led to serious economic trouble.

Low unemployment of the late 1960s preceded an inflation spiral in the 1970s. The late 1990s bred the Dot-com bubble and bust. The mid-2000s saw the buildup and collapse of U.S. housing. (…)

Each of those episodes was different, making it hard to map out a systematic connection with low unemployment. (…)

“Hitting a low point on the unemployment rate, compared to history, isn’t a sufficient condition to say we’re near a recession,” said Gregory Daco, the head of U.S. Macroeconomics at Oxford Economics. “The wage-inflation dynamic has not picked up, and that’s clearly something different from the past.” (…)

In the 1990s and from 2005 to 2007, U.S. industries operated at over 80% of their capacity, according to Federal Reserve data. In the 1960s, they were churning out cars, appliances, steel and other goods at nearly 90% of factory capacity. By contrast, U.S. industrial capacity utilization maxed at just 79% in 2014 before an oil bust and industrial slowdown idled many factories and refineries. (…)

Well, there have been many periods since WW2 when unemployment was pretty close to where it is now and they all ended badly. This is end-of-cycle stuff. Click on the Kessler Investment chart to enlarge.image

Ray Dalio Has Growing Concerns About Donald Trump

Billionaire hedge fund manager Ray Dalio, who was initially bullish on Donald Trump’s ability to stimulate the economy, is growing increasingly concerned about the potential consequences of his presidency.

“When faced with the choices between what’s good for the whole and what’s good for the part, and between harmony and conflict, he has a strong tendency to choose the part and conflict,” Dalio said in a LinkedIn post Monday. “The more I see Donald Trumpmoving toward conflict rather than cooperation, the more I worry about him harming his presidency and its effects on most of us.” (…)

The founder of the $160 billion Bridgewater Associates said Trump’s decision last week to exit the Paris climate accord, a landmark pact reached by almost 200 countries to curb fossil-fuel production, is the latest example of the president’s approach to conflict.

“Every week is telling in that regard,” he said Monday. “This next week will be no different.” (…)

  • Dalio’s piece is here.