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: 20 SEPTEMBER 2019

U.S. Leading Economic Indicators Hold Steady

The Conference Board’s Composite Index of Leading Economic Indicators was unchanged during August (1.1% y/y) following a 0.4% July increase, revised from 0.5%. The index has been trending sideways since late-last year.(…)

Performance amongst the components of the Leading Indicator index was decidedly mixed in August. Contributing positively to the were the readings for building permits, the average workweek, factory orders for consumer goods, consumer expectations for business/ economic conditions and the leading credit index. Offsetting these increases were initial claims for jobless insurance, the ISM new orders index, stock prices and the yield spread between 10-year Treasuries & Fed Funds. Factory orders for nondefense capital goods held steady.

Three-month growth in the leading index of 1.4% (AR) remained below the high of 9.1% in December 2017.

The Index of Coincident Economic Indicators increased 0.3% (1.6% y/y) during August following no change in July, revised from 0.2%. The rise reflected increases in each of the component series: personal income less transfer payments, nonagricultural payroll employment, industrial production and manufacturing & trade sales.

Three-month growth in the coincident index improved to 2.3% (AR) from a low of 0.4% in April and May.

The Index of Lagging Economic Indicators fell 0.3% (+3.0% y/y) in August following an unrevised 0.6% July increase. It was the first decline in three months. The average duration of unemployment retraced its July rise. The prime rate, the business I/S ratio and growth in factory sector unit labor costs also fell. Offsetting these declines were gains in the services CPI, the ratio of consumer credit outstanding-to-personal income and growth in C&I loans outstanding.

Three-month growth in the lagging index eased to 3.4%, but remained up from growth of 1.1% in May.

The ratio of coincident-to-lagging economic indicators is sometimes considered a leading indicator of economic activity. It rose slightly from July which was nearly the lowest level since early-1975.

Advisor Perspectives offers the best perspective on the LEI:

Smoothed LEI

The 12-m m.a. of the 12-m rate of change has no false signals since 1960. It looks reasonably comfy at +3.2% but the LEI is only up 0.8% YoY in August. A flat LEI for the next 4 months would take the 12-m m.a. to +1.5%…

Home Sales Inch Up, Raising Hopes That Slump Is Easing August data suggest recovery could be under way in the housing market

Sales of previously owned U.S. homes rose 1.3% in August from July to a seasonally adjusted annual rate of 5.49 million, the National Association of Realtors said Thursday. (…) Annually, sales in August were up 2.6%, the second month of growth following 16 straight months of declines. (…)

Average fixed mortgage rates for 30-year loans were 3.73% in the latest week, down from close to 5% in November, according to Freddie Mac . Mortgage applications for home purchases have risen for three straight weeks, according to the Mortgage Bankers Association, and housing starts were up more than 12% in August. That marked the biggest monthly gain for new-home construction since 2007.

Significant headwinds remain. For one, the price of homes available for sale continues to rise. The median sales price in August was $278,200, up 4.7% from a year ago, marking the 90th consecutive month of price increases on an annual basis. The number of homes available for sale, meanwhile, fell in August. The shortage also has been propping up prices, Mr. Yun said. (…)

Good thing the South exists:

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U.S.-China Talks Resume, With Chinese Officials Set to Visit U.S. Farm Belt

Talks between a Chinese delegation led by Liao Min, a vice minister for finance, and Deputy U.S. Trade Representative Jeffrey Gerrish began Thursday and are scheduled to continue Friday. The negotiations are expected to lay the ground-work for top-level negotiations between U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and Vice Premier Liu He in October in Washington. An exact date for that meeting hasn’t been released. (…)

U.S. Agriculture Department Secretary Sonny Perdue said Thursday that Chinese officials will visit American farms next week as part of efforts to “build goodwill.” (…)

Saudi Arabia Set to Return to Normal Oil Production Levels by End of Month
Chip on the Shoulder: How China Aims to Compete in Semiconductors

(…) China’s bet on AI chips makes both technological and market sense, as it is viewed as a clean slate where Chinese companies have a shot at “overtaking competitors around the bend” (弯道超车). Traditional chips have powered everything from smartphones and laptops to televisions, but are starting to see their growth plateau as the consumer electronics market becomes saturated. AI chips, while making up just 1% of global semiconductor sales, are poised to experience robust growth over the next decade.CHINADebate

(…) AI chips come in different forms, including graphics processing unit (GPU), field-programmable gate array (FPGA), and application-specific integrated circuit (ASIC), among others. But it is the ASIC that offers China a shot to end its woeful record on manufacturing semiconductors. (…)

ASICs offer a relative “white space” in which China hopes to compete, for several reasons:

  1. Efficiency gains

ASIC chips are custom designed and optimized to handle a specific set of functions, so they tend to be significantly superior to general purpose chips in terms of efficiency. Some estimate that ASIC chips could be as much as 10 times more efficient than GPUs. Therefore, ASIC is viewed as the future and is projected to account for 70% of market demand, according to McKinsey.

  1. Low production cost

Custom designs require significant upfront costs, and those designs often require tweaking. But since the chip is designed for narrow functions rather diverse use cases, once the design is complete, its manufacturing cost can be a few cents per chip, much lower than that of FPGA or GPU.

Since all ASIC chips are custom-made, one company making ASIC chips does not preclude another from making their own. This also means there will likely be more push for vertical integration so that software and hardware makers can have their own chips made for their specific devices and functions.

In fact, Google, as well as more than a dozen Chinese startups, have started designing their own ASIC chips to improve the performance of their data centers and products, respectively. As production volume goes up, ASICs can achieve leverage the China market’s advantage in economies of scale.

  1. Market potential

AI-enabled chips will likely be found in a host of edge devices, such as smartphones, laptops, barcode scanners, cameras, sensors. This means the total addressable market for ASIC chips is significant. Although GPUs still make up the bulk of the AI chips market today, by 2025 more than half of these are projected to be ASIC.

AI technologies are poised to deliver additional global economic output of around $13 trillion by 2030. To ride the wave of the fourth industrial revolution, China seems to believe that the ASIC chip affords a unique opportunity to rid the chip on its shoulder.

FYI:

Call me iOS 13, Apple’s Latest iPhone Update, Is Out—Just Be Cautious One suggestion: Wait until next week, when bug fixes are expected

(…) Throughout the past week, using iOS 13 on the new phones and an older XR, I’ve encountered minor but frequent bugs. The Messages app will sometimes flicker and the cursor can often get stuck; the Camera app periodically opens to a black screen and gets sluggish; apps—including those developed by Apple—have crashed unexpectedly.

Apple has acknowledged the bugs and says that it will release iOS 13.1 next Tuesday. This will include some additional features, such as the previously announced AirPod audio sharing, ETA-sharing in Maps, and improvements to AirDrop, and will also include bug fixes. It’s always good not to rush into an OS update. In this case, unless you don’t mind some bumps in the road, I suggest waiting until next week to do the download.

If you have automatic software updates turned on, you can turn it off by going to Settings > General > Software update and turning off Automatic Updates.

THE DAILY EDGE: 19 SEPTEMBER 2019

Global Growth to Hit Decade Low Amid U.S.-China Trade War The global economy is set to grow at the slowest pace since the financial crisis, with business investment and trade hampered by an escalating dispute between the U.S. and China, the OECD said.

The Paris-based research body said it now expects world output of goods and services to increase by 2.9% this year, the smallest annual rise since 2009 when the global economy was pushed into a recession by the near-collapse of the financial system.

It expects growth to remain low in 2020 and possibly beyond if the trade conflict between the U.S. and China spills over into other aspects of their economic relationship. The OECD noted that the affiliates of U.S. companies operating in China have sales that exceed total U.S. exports to China. (…)

Another worry for Ms. Boone is that trade disputes could proliferate, with Japan and South Korea already in conflict and U.S. President Donald Trump due to decide in November whether to press ahead with tariffs on automobile imports that would hit the European Union.

The OECD cut its growth forecasts for the U.S. and a number of developing economies. It now expects U.S. gross domestic product to increase by 2.4% this year and 2% the next year, having forecast growth of 2.8% and 2.3% in May. It made an even larger cut to its 2019 growth projections for Mexico, Argentina, Brazil, India, Russia, Saudi Arabia and South Africa. (…)

The research body also warned that should the U.K. leave the European Union without a new trade deal, economic output could be 2% lower than would otherwise be the case in the U.K., and 0.5% lower in the EU. That would leave the U.K. in recession, and the EU on the brink. (…)

Fed Trims Rates as Officials Differ Over More Cuts Central bankers divided over Wednesday’s decision and the outlook for further reductions.

(…) “There will come a time, I suspect, when we think we’ve done enough. But there may also come a time when the economy worsens and we would then have to cut more aggressively,” said Mr. Powell at a news conference Wednesday. “We don’t know.” (…)

Seven of 10 Fed officials voted in favor of lowering the benchmark federal-funds rate to a range between 1.75% and 2%, with two reserve bank presidents preferring to hold rates steady and one favoring a larger, half-point cut. (…)

“It’s an unusual situation,” Mr. Powell said. “Our eyes are open. We’re watching the situation. We’ve cut rates twice.” (…)

Seven of 17 officials penciled in one more rate cut this year. The other 10 were split evenly between those who thought the new level of rates, after Wednesday’s cut, would be appropriate through the rest of 2019 and those who thought rates shouldn’t have been cut. (…)

The FOMC now includes exports on its list of uncertainties but keeps faith on the consumer whose spending “has been rising at a strong pace”. Not a word on inflation! Negative rates?

I do not think we’d be looking at using negative rates; I just don’t think those will be at the top of our list.” Instead, he suggested: “If we were to find ourselves at some future date again at the effective lower bound—again, not something we are expecting—then I think we would look at using large scale asset purchases and forward guidance.

Trump on Powell on July 30: ““No ‘guts,’ no sense, no vision! A terrible communicator!” But Powell has the guts to admit that they don’t know, simply because they have no vision on what’s going to happen on trade. They are not alone:

American CFOs did not have a good summer.

Economic uncertainty is a top CFO concern, pushing difficulty hiring and retaining qualified employees to the second biggest concern. Hiring concerns had topped the list for several years. More than half (53%) of US CFOs believe that the US will be in recession by the 3rd quarter of 2020 and 67% believe that a recession will have begun by the end of 2020.

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Whether they are right or wrong matters less than the fact the 53% of CFOs expecting a recession must be preparing for one: cut costs, trim employment, capex, R&D, reduce debt and raise cash.

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Notice how the gap between growth in revenue and wages and salaries has narrowed. The squeeze on margins is even more dramatic when considering the median revenue growth forecast from +7.5% a year ago to +4.0% in June t0 3.0% in September.

  • And their bosses are getting worried as well:

Source: Business Roundtable via The Daily Shot

Blackstone CEO Steve Schwarzman Says Recession Is ‘Unlikely Now’

(…) Despite signs of a slowing U.S. economy and a tug of war with China on trade issues, Schwarzman says a strong labor market, low interest rates and healthy consumer spending are propping things up. 

“Consumer buying is going up,” Schwarzman explains. “If they continue spending that money, we’ll have a longer run. But there’s no doubt that 4 percent type growth, 3 percent growth would be very challenged now.” (…)

What worries Schwarzman the most right now is the China trade conflict. He says if the U.S. and China cannot resolve their differences, he fears they will drag down growth for the world economy. From years of doing business in China, Schwarzman is plugged in to what government officials and business leaders there are thinking. He gives a glimpse into what to expect from the negotiations between President Trump and Chinese leaders in October. 

“Their perspective is ‘we want to open but we’d like to do it on our schedule, not yours,’” he says. (…)

Oil Spikes, Auto Strikes Join List of Supply Shocks
  • The current dispute has all the hallmarks of a drawn-out battle. GM has more interest in keeping its fixed expenses under control than in containing one time strike costs. It will want to avoid losing market share to its competitors, but a recent buildup of inventories gives it some protection: It currently has 77 days’ worth of supply, compared with an industry average of 61. (WSJ)
Brazil Central Bank Cuts Benchmark Rate to Record Low

Bank of Japan Hints at Possible Action in October The Bank of Japan left policy unchanged but hinted at possible action at its next meeting, saying it believes momentum toward achieving its inflation target may be falling short.
U.S. Housing Starts Rose Significantly in August Home building in the U.S. increased in August to the highest level since June 2007, a positive note for the housing industry in a year marked by lagging home sales and sluggish single-family construction.

Housing starts, a measure of new-home construction, climbed 12.3% in August from the prior month to a seasonally adjusted annual rate of 1.364 million. (…)

In fact, it was strength in the multifamily sector that helped drive the steep August climb in building. Construction of buildings with two or more units rose 32.8% in August from a month earlier. Single-family home construction, meanwhile, rose just 4.4%

Residential building permits, which can signal how much construction is in the pipeline, rose 7.7% from July to an annual pace of 1.419 million. (…)

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(Haver Analytics)

  • Mortgage applications for house purchase have been very strong for this time of the year. (The Daily Shot)
Microsoft to Buy Back Up to $40 Billion in Stock The software giant also said it plans to raise its dividend 11%, as the company maintains its record of sharing its flood of cash with shareholders.