THE DAILY EDGE (11 April 2017): Hard vs Soft, yet again.

Conference Board Employment Trends Index Rose in March U.S. employment trends remained strong in March, according to a report, suggesting solid job growth will continue this spring.

The Conference Board Employment Trends Index came in at 131.43, up from 131.09 in February. The March reading also reflects a 4.3% gain compared with the year-prior report. (…)

The index aggregates eight labor-market indicators, which the Conference Board says helps filter out the volatility from monthly reports, to show underlying trends more clearly. Gains in the index in March were fueled by positive contributions from six of the eight components. In order from the largest contributor to the smallest last month, they were: real manufacturing and trade sales, the ratio of involuntarily part-time to all part-time workers, industrial production, the percentage of respondents who say they find “jobs hard to get,” the number of employees hired by the temporary-help industry, and job openings.

The Fed’s own Market Conditions Index is not so cheerful:

HARD VS SOFT

Everybody has entered the ring now and it’s getting more confusing.

This is from uber-bear Zerohedge:

• “Hard” Economic Data Slides To One Year Lows

 

• This is from Bloomberg whose hard data is not as soft:

It is hard to know what’s really hard!

And even the soft side is hard to understand. The ISM’s latest data leads them to estimate Q1 GDP up 4.3% (!). Markit’s PMI data says +1.7%.

John Hussman wrote a good piece yesterday (Echo Chamber)

(…) Soft survey-based measures tend to be most informative when they uniformly surge coming out of recessions. In contrast, during late-stage economic expansions, positive disparities in soft measures tend to be false signals that are resolved in favor of harder measures. (…)

What’s striking about survey-based economic measures is that their 5-year rolling correlation with actual subsequent economic outcomes has plunged to zero in recent years (and periodically less than zero), meaning that these measures have been nearly useless or even contrary indicators of subsequent economic outcomes. (…)

Yellen Sees Monetary Policy Shifting Federal Reserve Chairwoman Janet Yellen indicated Monday that the era of extremely stimulative monetary policy was coming to an end.

(…) “Where before we had our foot pressed down on the gas pedal trying to give the economy all the oomph we possibly could, now [we’re] allowing the economy to kind of coast and remain on an even keel,” she said. “To give it some gas, but not so much that we’re pressing down hard on the accelerator.” (…)

“Evidence suggests that the population roughly expects inflation in the vicinity of 2%,” she said. “We’re focused on making sure that inflation expectations and actual inflation stay very well anchored.”

If Everyone Is So Confident, Why Aren’t They Borrowing? Economists are struggling to explain a sudden slowdown in bank lending.

Total loans and leases extended by commercial banks in the U.S. this year were up just 3.8% from a year earlier as of March 29, according to the latest Federal Reserve data. That compares with 6.4% growth in all of last year, and a 7.6% pace as of late October. (…)

Loans to businesses have slowed most sharply, with the latest data showing commercial and industrial loans up just 2.8% from a year earlier, compared with 8.9% growth in late October. (…)

Political uncertainty seems partly to blame. Consumers and businesses may express greater confidence since the election, but many might still hesitate to take out big-ticket loans to fund new projects until they have greater clarity on the outlook for tax, trade and health-care policy.

Such caution would only be rational. It also suggests the growth surge many investors are expecting may not materialize until the policy picture out of Washington becomes clearer.

Source: BMI Research (via The Daily Shot)

The slowdown in credit growth we saw in the US is also visible on a global basis.

Source: Capital Economics

Lending for Commercial Property Falls as Investors Pull Back Commercial real estate lending by banks, insurance companies and other financial institutions is declining as sales activity slows and regulators voice concern about the sector.

Lenders closed roughly $491 billion of mortgage loans in 2016, down 3% from 2015, according to new statistics from the Mortgage Bankers Association. Most of the decline occurred in the fourth quarter, when volume was 7% lower than the same quarter in 2015, according to Jamie Woodwell, the trade group’s head of commercial property research. (…)

The slowdown is accelerating this year. Investors have purchased just $50.3 billion worth of U.S. commercial property in the first two months of 2017, compared with $80.1 billion during the same period in 2016, according to data firm Real Capital Analytics. (…)

Yet banks and insurers are getting more aggressive over deals as investment in the sector declines. A flock of new lenders also are emerging on the scene, including investment funds formed by private-equity firms that are focused on real estate debt.

“It’s tougher right now,” said Craig Bender, who heads up ING Groep NV’s U.S. real estate lending business. “The banks are hungry. The life insurance companies are hungry.” (…)

Lenders and developers have gotten especially aggressive in building rental apartments. More units are under way today than in any period since the mid-1970s, experts said. (…)

Lenders also have been emboldened because loan performance is doing well. Just 0.59% of commercial mortgages held on balance sheets of banks and thrifts today are more than 90 days delinquent, the lowest rate in more than a decade, according to the Mortgage Bankers Association. By comparison the delinquency rate was 4.21% at the end of 2010.

The improving loan quality reflects steadily rising prices. A property value index compiled by Green Street Advisors more than doubled between 2009 when it hit its post-crash low point. But lately that index plateaued. In March, it declined by 0.5%.

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  Lenders Tighten The Spigots on Mall Landlords

• Dodge Momentum Index Springs Forward in March

The Dodge Momentum Index increased by 0.9% in March to 144.4 (2000=100) from its revised February reading of 143.2. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which have been shown to lead construction spending for nonresidential buildings by a full year. The Momentum Index has now risen for six consecutive months, with much of the gain being driven by institutional projects entering planning while commercial projects so far in 2017 have receded slightly.

The institutional portion of the Momentum Index rose 3.7% in March, and is 23.0% higher than the end of 2016. Commercial planning meanwhile fell 1.2% in March and is down 2.9% from December 2016. However, the overall Momentum Index, as well as the commercial and institutional components, are well above their year-ago levels. This continues to signal the potential for increased construction activity in 2017 despite the short-term setbacks that are inherent in the volatile month-to-month planning data. (Chart from CalculatedRisk)

China Regulator Warns Banks Away From Speculative Activity China is taking another step to curb risk in its financial system, instructing lenders to steer clear of certain practices that has created unhealthy asset bubbles and prevented money from flowing into a weak real economy.

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  China Is Playing a $9 Trillion Game of Chicken With Savers

Oh Canada!

Pace of housing starts hits highest level since September 2007

The overall increase came as the annual pace of urban starts increased by 20.2 per cent to 235,674 units, boosted by an increase in multi-unit starts.

Multi-unit urban starts increased by 30.2 per cent to 160,989, while single-detached urban starts increased by 3.1 per cent to 74,685 units. Rural starts were estimated at a seasonally adjusted annual rate of 18,046.

CMHC’s trend measure, a six-month moving average of the monthly seasonally adjusted annual rate, increased to 211,342 units in March compared with 205,521 in February.

• Irrational exuberance?

Home price inflation has become THE hot topic of discussion in Canada. Surging prices are no longer confined to greater Toronto and Vancouver. As today’s Hot Chart shows, we estimate that close to 55% of regional markets in Canada are reporting price inflation of at least 10%. This record proportion is very similar to that observed in the United States in 2005 at the peak of the market. Even if Canada continues to enjoy some of the best demographics in the OECD, home price inflation appears to be running ahead of fundamentals. When 55% of the market is on fire, the use of interest rates to cool things down is justifiable. The Bank of Canada must change its narrative and abandon its easing bias as soon as this week. (NBF)

Stock Market Valuations and Hamburgers

The link is to John Mauldin’s latest Thoughts from the Frontline. Good stuff in there although still omitting the Rule of 20…Some comments of mine:

• Long-term market stats and relationships that do not take into account periods of high and low inflation risk mix very different investment environments which necessarily impact the LT average and median stats.

• The inverse relationship between P/E ratios and inflation is evident from this chart:

• And the stability of the Rule of 20 is obvious from this 60-year chart covering high and low inflation eras:

• Hence this valuation risk map:

Amid the debate and confusion between hard and soft data, the political and geopolitical situations and the Fed’s shifting, there remain 3 essential data sets to focus on:

1. Equity valuations based on hard historical data have entered the “high risk” area meaning that the risk/reward ratio has completely shifted from very favorable/favorable to investors during most of the last 8 years to highly unfavorable.
2. Trailing S&P 500 operating earnings troughed last July at $114 and have increased 3.6% since. Recent trends in estimates and corporate guidance suggest that Q1’17 earnings will rise some more. The earnings tailwind is soft but pretty steady so far.
3. Inflation has been slowly accelerating since early 2015 offsetting all the earnings gain in the Rule of 20 “fair value” (yellow line in chart above). As a result, the S&P 500 Index is currently 11% above that “fair value” calculation (20 minus inflation x trailing EPS = 2090). This is the largest gap (overvaluation) since 2008 (black line).

There are only 3 ways this gap can softly close back to “fair value”:

• earnings rise strongly to $135 in fairly short order;
• inflation declines to 1.5% in fairly short order;
• or a combination of the above…

…unless the market hardly corrects the gap itself for reasons which only get obvious after the fact…

SENTIMENT WATCH

Here’s another valuation risk chart: as good as it gets:

(via The Daily Shot)

A change in trend?

Source: Credit Suisse (via The Daily Shot)

A different kind of sentiment measure:

Source: John Burns Real Estate Consulting

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  Today in bad incentives: “One hundred days is the marker, and we’ve got essentially 2 1/2 weeks to turn everything around,” said one White House official. “This is going to be a monumental task.”

This show will eventually come near all of us and it will be hard to swallow:

California Taxpayers Expected To Nearly Double Public Pension Contributions Over Next 5 Years

Despite the strong economy and a buoyant stock market, pension cost burdens faced by California local governments have continued to grow – with many now devoting more than 10% of revenue to retirement contributions. With the Great Recession now eight years behind us, the risk of a new downturn is increasing. The result would be a further spike in pension burdens on local governments. Unless the state enables more aggressive pension reforms than those allowed under the 2013 PEPRA legislation, several California cities and counties will find themselves forced to slash other spending. The less fortunate will simply be unable to pay the bills they receive from CalPERS or their local retirement system.