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 (14 March 2018): Inflation Watch

Subdued Inflation Data Ease Market-Volatility Worries 
U.S. Government Bonds Advance After Inflation Fails to Surge

U.S. government-bond prices bounced Tuesday after closely watched data on consumer prices signaled inflation remains muted, easing concerns among investors that rising prices could spark a fresh wave of volatility in financial markets.

(…) Unrounded, the CPI showed an even smaller increase: by 0.150% in February from 0.539% in January. Excluding the volatile food and energy categories, so-called core inflation slowed to a rate of 0.182% in February from January’s 0.349%, the biggest increase since March 2005. (…)

Recent data now show the economy in a sweet spot with moderate inflation in February, together with bumper job creation, a 4.1% unemployment rate and strong consumer sentiment readings. (…)

Again, the facts:

  • Total CPI: Last 7 months annualized: +3.8%. Last 4 months a.r.: +3.6%. Last 3 months a.r.: +3.6%. Last 2 months a.r.: +4.3%.
  • Core CPI: Last 7 months annualized: +2.2%. Last 4 months a.r.: +2.4%. Last 3 months a.r.: +2.8%. Last 2 months a.r.: +3.0%.

Some more facts:

According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (1.9% annualized rate) in February. The 16% trimmed-mean Consumer Price Index rose 0.1% (1.2% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics’ (BLS) monthly CPI report.

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  • 16% trimmed-mean CPI: last 3 months annualized: +2.4% vs +2.0% during the previous 3 months.

  • Median CPI: +2.8% vs +2.8%.

The Federal Reserve Bank of Cleveland provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). “Nowcasts” are estimates or forecasts of the present. The Cleveland Fed produces nowcasts of the current period’s rate of inflation—inflation in a given month or quarter—before the official CPI or PCE inflation data are released. These forecasts can help to give a sense of where inflation is now and where it is likely to be in the future.

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The Atlanta Fed’s sticky price index sorts the components of the consumer price index into either flexible or sticky (slow to change) categories based on the frequency of their price adjustment.

The chart below plots the 3-m annualized change in the core sticky CPI (red) and the core flexible CPI:

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  • The prices charged by small businesses, as reported by the NFIB survey, point to higher inflation ahead. (The Daily Shot)

Source: Pantheon Macroeconomics

I am not making any forecasts here, simply laying the facts out. The danger with inflation is that we all get the boiling frog syndrome. What is obvious is that most media and pundits are now wearing rose colored glasses.

The average rent for apartments in multifamily buildings only increased $1 between January and February to $1,364, according a new report from real-estate data company Yardi. On a year-over-year basis, rental prices were only 2.7% higher, making it the weakest seasonal gain since the housing market recovery began.

Since last summer, rental prices have barely changed — hovering around the all-time high of $1,365 set in August, according to the Yardi analysis. But that could change in the months ahead as more people choose to continue renting thanks to the GOP-led tax reform that altered some deductions that benefited homeowners. (…)

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Facts: CPI shelter: last 3 months annualized: +3.0% vs +3.1% during the previous 3 months.

Gundlach Says 10-Year Treasury Above 3% Would Drive Down Stocks

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Measure of US borrowing costs flashes amber Widening spread between Libor and OIS may point to structural changes in the market
China’s Economy Grows Faster Than Expected on Strong Demand for Exports

Industrial production, a rough proxy for economic growth, expanded by 7.2% in January and February from a year earlier, the National Bureau of Statistics said on Wednesday, well above the 6.2% pace in December and forecasts for a 6.1% rise by economists polled by The Wall Street Journal.

China releases combined data for January and February to limit distortions caused by the timing of the Lunar New Year holiday, which fell in January last year and February this year. (…)

Fixed-asset investment, a closely watched indicator of construction activity, climbed 7.9% in the two-month period from a year earlier, quickening from a 7.2% increase in 2017 and beating forecasts for a 7% gain. Retail sales grew 9.7% from a year earlier, compared with a 9.4% rise in December and forecasts for 9.6% growth. (…)

Property investment, including in commercial and residential real estate, rose 9.9% in the first two months, compared with a 7% pace for the full 2017. Housing sales by value continued to grow at a double-digit pace, although the 15.7% rise was down from a 21.2% gain in December. (…)

Should Canada heed the BIS “warning”?

According to the Bank of International Settlements (BIS), risks are building in the Canadian credit market. According to the BIS, Canada, China stand out with their credit-to-GDP gap flashing red, i.e., an early warning indicator for stress in domestic banking systems. According to a recent paper by the Bank of Canada, the BIS warnings on Canada should be taken with a grain of salt.

For one, private credit in Canada includes Crown corporations, entities that are backed by the creditworthiness of federal or provincial governments. For another, the Bank of Canada argues for excluding lending between affiliated companies as this type of lending is not being extended directly by financial institutions. These adjustments alone reduce the Canadian credit-to-GDP ratio from 213% to a much less threatening 170%.

Finally, we would note that the BIS methodology does not control for demographics and the structure of labour markets that are so critical in assessing the longer-term sustainability of a domestic banking system. For example, employment surged 2.3% in 2017 in Canada, the largest increase in fifteen years. As today’s Hot Chart shows, the employment-to-population stands at 62% in our country, the second highest in the OECD. Meanwhile, the BIS report suggested that all was fine and dandy in Italy and Spain where less than 40% of the population is employed! (NBF)

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Elderly in U.S. Are Projected to Outnumber Children Americans over 65 years old will outnumber children in the U.S. by 2035, a first in the nation’s history, according to updated Census Bureau projections.

The Census Bureau projects the country would grow to 355 million by 2030, five million fewer than it had estimated three years ago. That is an annual average growth rate of just 0.7%, in line with recent rates but well below historical levels.

Unlike many European nations, the U.S. would continue to grow, reaching 404 million by 2060. (…)

This year’s prime-age workforce—ages 25 to 54—is about 630,000 smaller than the Census Bureau projected it would be just three years ago. The bureau projects the prime-age workforce will grow 0.5% a year through 2030, down from a 2014 projected annual rate of 0.58% for the same period. (…)

The projections assume no major changes in immigration policies.

As the nation ages and birthrates remain historically low, immigration looms larger in shaping the future. The bureau projects that by 2030, net immigration would rival natural increase—the surplus of births over deaths—as a share of population growth. By 2040, immigration would be more than twice as large as the natural increase.

As a result, the share of Americans who are foreign-born, now about 13%, is expected to reach a record 14.9% by 2028, topping a mark set in 1890. That share would rise to 17.2% by 2060. (…)

Whites who aren’t Hispanic will begin shrinking as a group by 2024. They would drop below half of the population by 2045, two years later than the bureau estimated just a few years ago.

By 2020, less than half of those under 18 years old would be non-Hispanic white. (…)

Red rose Stephen Hawking, Physicist Who Reshaped Cosmology, Dies at 76

THE DAILY EDGE (13 March 2018): Inflation Accelerating

CONSUMER PRICE INDEX – FEBRUARY 2018

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.2 percent in February on a seasonally adjusted basis after rising 0.5 percent in January, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index rose 2.2 percent before seasonal adjustment.

The index for all items less food and energy increased 0.2 percent in February following a 0.3-percent increase in January. Along with shelter, apparel, and motor vehicle insurance, the indexes for household furnishings and operations, education, personal care, and airline fares also increased in February. In contrast, the indexes for communication, new vehicles, medical care, and used cars and trucks declined over the month.

The index for all items less food and energy rose 1.8 percent over the past year, while the energy index increased 7.7 percent and the food index advanced 1.4 percent.

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This morning’s  headlines on the CPI:

Here are the facts:

  • Total CPI: Last 7 months annualized: +3.8%. Last 4 months a.r.: +3.6%. Last 3 months a.r.: +3.6%. Last 2 months a.r.: +4.3%.
  • Core CPI: Last 7 months annualized: +2.2%. Last 4 months a.r.: +2.4%. Last 3 months a.r.: +2.8%. Last 2 months a.r.: +3.0%.
U.S. Small Businesses Are More Optimistic Than They’ve Been in Decades

(…) Almost all of the 10 index components, including inventory plans and sales expectations, increased or held steady in February, propelling the gauge to its second-highest level since the survey began in 1973. Amid tax cuts and deregulation enacted by the Trump administration, businesses cited improved profit trends at the best level since 1987. (…)

  • The best of times:

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  • Sales expectations are rising faster than actual sales:

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  • Job openings have stalled at the past peak level. Hiring plans are moderating:

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  • More. higher paid workers not offset by higher prices:

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  • Yet, strong profits:
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  • But inventories have spiked lately. Have sales expectations been too high?

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Full NFIB pdf.

Trade Conflicts Threaten Global Growth, Says OECD

(…) “Escalation would not be the road we would want to go down because we know from history what will happen,” said Mr. Pereira, a former minister of economy in Portugal. “Escalation usually goes down fairly badly for everybody. It’s important to rely on global solutions to excess capacity in the steel industry.”

The OECD didn’t give figures for the losses in output that would likely follow an escalation, but the Dutch ING Bank Tuesday published a separate analysis which estimated the scale of the damage from a broad, 10% charge on European Union exports to the U.S., and U.S. exports to the EU. It calculated that the EU economy would be 0.3% smaller after two years, and the U.S. economy 0.4% smaller. (…)

(…) Bill Walsh, who owns seven dealerships in Illinois, said the average customer is more concerned about the monthly payment than the sticker price. Mr. Walsh said dealers and the auto makers’ finance arms have become adept at arranging payments that customers can afford.

If stiffer steel costs eventually tacked on a few hundred dollars to the price, manufacturers would “do everything” to try to absorb the cost, such as using incentive programs, he said. (…)

Havens Just Aren’t Safe Anymore, Goldman Says
BUY HIGH, SELL LOW!

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We don’t know when, but we know this will not end well.

  • Corporate debt as a % of sales is at an all-time high. Nobody cares as long as margins remain elevated and interest rates low. Imagine a scenario with rising wages, rising interest rates and slowing sales.

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  • Debt as a % of cashflow is already at levels it normally reaches during recessions…
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    sources: Moody’s Analytics, Federal Reserve

  • The share of US corporate bonds owned by mutual funds and exchange-traded products continues to climb. (The Daily Shot). When money eventually flees…

Source: @boes_

  • “Father, forgive them, for they do not know what they are doing.”

Source: Moody’s Investors Service

Trump’s Message in Blocking Broadcom Deal: U.S. Tech Not for Sale

With his swift rejection of Broadcom Ltd.’s hostile takeover of Qualcomm Inc., President Donald Trump sent a clear signal to overseas investors: Any deal that could give China an edge in critical technology will be swatted down in the name of national security.

Although Broadcom is based in Singapore, China loomed large over the U.S. government’s fears about a foreign takeover of chipmaker Qualcomm. That’s because Qualcomm is locked in a head-to-head race with China’s Huawei Technologies Co. over which company will dominate the development of next-generation wireless technology. (…)

Only five takeovers of American firms have been blocked by U.S. presidents on national security grounds since 1990. Of those, Barack Obama blocked two deals during his two terms. Trump has blocked two in six months. (…)

Confused smile Larry Kudlow Emerges as Trump Favorite to Replace Cohn