In Case You hadn't Already Heard
Obamacare continues to collapse under its own weight. It is growing more likely that it will become a complete failure sometime late in 2017. I could go on and on but I will spare you.
10/24/2016 02:37:41 PM
When Magic Fairies Really Aren't
The sheer lunacy that dominates the United States right now is mind-boggling! We have been invaded by self-proclaimed magic fairies who call themselves politicians, regulators and Janet Yellen. Unfortunately, their fairy dust is not so magical. Alright! Alright! I am o.k. now; I just took another blood pressure pill. You want proof…alright, read on.
I pointed out to you in my July 29
post that regardless of how much fairy dust they have sprinkled, this is still the worst economic expansion in recent modern times. You would think the self-proclaimed elites that prescribe to watch over our country and economy would be frantically trying to reverse this. HUH! In fact, it seems that Janet Yellen and politicians are about to make things worse. The Fed has been spouting the message that the US economy is running so well that we may need another rate hike and it would seem the markets are buying that message. After all, oil prices have doubled, commodity prices have stabilized, the unemployment rate is low, jobless claims are at record lows, wage and inflation pressures are rising, and corporate earnings are less negative (remember, two negatives make a positive ha ha). I mean, heck, I almost just talked myself into drinking the Kool-Aid! Well, here is a little dose of reality. The chart below shows the real-time GDP estimate for Q3 and you can see it has been plunging recently. This is supposed to be the best quarter of growth this year and it is barely hanging on to 2% growth.
Even with that, according to the chart below, the market appears to still be full of that Kool-Aid because it shows that markets are pricing in roughly a 64% probability of a Fed rate hike in December. This is all fine-and-dandy but let’s look under the hood for the economy’s real message.
My Corporate Health Index is anything but healthy. This index says that corporations are in some decent trouble when we look at things like cash flows and earnings. The reason this is important is because once they get into too much trouble, they start to reduce expenses (i.e. lay off people). The chart below clearly shows this relationship.
Because of the lack of profitability in corporate America, federal tax receipts are down, in fact, they are below the level they were at this time last year. As you can see in the chart below, this is usually a recessionary trait.
Not only are tax receipts lower, but because of the stress on corporations, real gross private domestic investment are in dire straits through the first half of 2016. This usually points to future labor problems. As you can see, the correlation between these two data sets is undeniable.
If we run a probit model against this relationship, it puts the odds of employment growth turning negative within the next two quarters at better than 70%. Not quite panic time, but man, I am starting to sweat a little!
Because of the very fragile nature of the US economy, I still believe that any tightening by the Fed will be a mistake. I realize they have backed themselves into a corner. It appears that their reputation may be at stake if they don’t hike in December. But they have to see the data I am presenting to you. After all, I didn’t go to Harvard, Yale or Fairy School (wink wink) and even little ol’ me can still see this underlying economic weakness. This leads me to believe that any future hike will only serve two purposes, and neither of them is economic. First, it will prove the Fed is not all talk and would help to restore a bit of their credibility, and second, it will give them more room to lower rates when the
economy eventually hits the skids. Remember, we just learned from Japan that NIRP (negative interest rate policy) isn’t very effective. This leads me to believe that with rates still near zero, Fed members aren’t sleeping very well these days.
I am happy to finish this off by saying that the banking sector is doing relatively well right now and the banking cycle runs about four quarters behind the business cycle.
10/19/2016 01:00:02 PM
Can we Finally Admit THIS IS DEEPER THAN CENTRAL BANK POCKETS!?
Today’s GDP number was unpleasant to say the least, especially relative to market expectations. The print came in at 1.2% vs expectations of 2.6%. To make matters worse, Q1 GDP was revised down to .80%. But let me show you, this is hardly anything new. This has been going on for 38 quarters in a row. That’s right! A record setting 38 quarters in a row! Historically speaking, when Nominal GDP has dropped below 5%, it was typically done during US recessions. But as you can see in the graph below, US Nominal GDP has been below that 5% threshold for 38 quarters in a row:
It is not the headline GDP number that is the real issue. The real issue is this problem of anemic growth in the US has been wide-spread and pervasive, no industry has been spared. The Federal Reserve Bank of Chicago puts out an index they refer to as the CFNAI, or the Chicago Fed National Activity Index. This index is updated monthly with 85 separate economic indicators that cover production, income, employment, hours worked, wages, personal consumption, housing, sales, orders and inventories. This is the broadest measure of economic activity available on a monthly basis. I have broken down the average level of this index during NBER defined business cycle expansions since 1967. The graph below is self-explanatory:
I think it is time to state the obvious here. This problem is deeper than Central Bank pockets! Even with the extraordinary monetary policies put in place starting in 2008, we have had the worst 9 year period of economic performance in modern times. Washington and regulatory authorities need to WAKE UP and see that Central Banks alone can’t fix this. Horrible fiscal, health care and trade management in Washington, combined with the choking effects of over-regulation across all business lines is slowly drowning this country. This is not my opinion, these are just the facts.
The recent spurt in positive economic data has everyone chattering again about another rate hike this year (this is getting old), but I have presented many forward looking models in this blog that all say this spurt in recent above-trend economic activity is short-lived. The Fed needs to start using its "transparency" to let
know that they have done about all they can with monetary policy. No matter how bad the Fed wants to normalize rates, doing so would just make things worse.
Falling asset yields will continue to present repricing risk for bank margins, and given the pockets of under performance across business lines, credit risk will be elevated also. That being said, at the local level, there are still many pockets of strength and thus lending opportunities that should persist through the end of the year. We see loan-to-deposit ratios are up industry wide as well as earnings; things remain fairly optimistic for most community banks regardless of the sub-par macro environment.
07/29/2016 08:13:26 AM