recession

RBA should expect a dead cat bounce from the rate cut

The RBA has cut rates to a record low 1.25%. The irony here is people and businesses invest because they see a cycle, not because interest rates are low. Lowering rates will do little to spur investment, especially as the global economy cools.

Post the Hayne Royal Commission, the banks will likely pass on the full amount which will only impact margins and weaken them given the high reliance on wholesale funding.

The other problem the RBA faces is that banks have become so reluctant to lend post the RC that the net impacts of the rate cut will be negated by the unwillingness to lend at levels we have seen in the past given the penalties associated with it.

CM still contends that the Aussie banks tread a perilous path given their leveraged balance sheets. CM thinks part nationalization or worse is a real prospect if the slowdown is severe enough. The equity buffers are tiny relative to the real estate portfolio. All contained in the above link.

The rate cut is unlikely to boost confidence other than loosen the noose around stretched borrowers’ necks.

Parker Hannifin order book sets worrying tone

Parker Hannifin is a fantastic barometer to measure the health of global industrials. It is a leader in pneumatics, pumps, hoses, hydraulics, drives, valves, filters, separators, refrigeration, seals etc. It’s products find their way into almost every conceivable part of the manufacturing chain. Think of it as a massive hardware store for corporations. From Caterpillar earthmovers to automation in food factories. When Parker announces orders, we get a good window on how the state of the economy is doing. The Q3 numbers released today showed:

• Orders decreased 4% for total Parker

• Orders decreased 6% in the Diversified Industrial North America businesses

• Orders decreased 4% in the Diversified Industrial International businesses

• Orders increased 2% in the Aerospace Systems Segment on a rolling 12-month average basis

Because aerospace is such a long lead time business, orders can buck trends. Having said that, orders for North America and International were soft.

Forget that Parker beat on EPS print. It’s guidance is the same. The orders are a worry. Q4 hurdles look tough.

Drinking the UnKool-Aid

Related image

It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

The gender unemployment gap

Changes in the Gender Unemployment Gap during Recessions

Another interesting piece was written by the St Louis Fed showing the gender unemployment gap of men relative to women. A negative spread shows that women have lower risk of unemployment relative to men in the 24 months after the start of a recession. Looking at the chart we see that in 1960 & 1969 female unemployment tended to rise relative to men after a recession began but in the following downturns of 1973, 1980, 1990, 2001 and 2007 the situation reversed. Participation rates for women in the workforce hovered at around 40% in 1970 vs 60% today. In 2007, the most aggressive spread emerged in favour of women by over 2%. The Fed report does not include what types of roles that women tend to do. Switching to the Bureau of Labor statistics (BLS) it makes sense that women over time have been retrenched at lower rates than males due to field of employment.

Women today tend to occupy more jobs in education, nursing, healthcare (defensive industries) whereas men tend to work in more construction, agriculture and manufacturing specialties (levered industries).

In 2017, employment breakdown between men and women was as follows.

employment of men by industry BLS的圖片搜尋結果

Another interesting table from the BLS was that of educational standards of 1970 compared to 2010. As we can see more women are pursuing higher levels of education. 67% in 2010 took some college or higher degree vs only 22% in 1970. One would imagine in 2018 those numbers are higher again.

Where men once went to college in proportions far higher than women—58% to 42% as recently as the 1970s—the ratio has now almost exactly reversed with women comprising more than 56% of students on campuses nationwide, according to the U.S. Department of Education (DoE). Some 2.2 million fewer men than women will be enrolled in college this year. By 2026, 57% of college students in the US will be women.

It will be interesting to see how the gender unemployment gap develops during future recessions with a far higher level of educated women in the workforce.

Wile E. Coyote market action ahead

img_0129

One of my former colleagues has a Bloomberg header that reads, “I no longer see the point in pointing out the pointless!” He is spot on. Global markets remind me of Wile E. Coyote holding a severed cliff edge, suspended in animation before inevitably falling to the ground with a thud. We are at that point.

Dow can’t break 20,000 and even taking into account the fact that Christmas and New Year’s took steam out of the market, it was already tired and breathless. VIX is at chronically risk taking levels and would seemingly only have a blow up around the corner. Gold is picking up and the yen is firming. Like it or not, as doomed as the Japanese economy is, everything is relative and the amount of yen kept offshore means that money is repatriated. Ask yourself why every time there is a natural disaster in Japan the yen rallies. The yen dropped from 82/$ to around Y78/$ 6 months later.

The markets have been running on fumes. Even taking out the Trump effect, central bank policy is impotent, the global debt pile continues to rack up and the world is by and large run by wimps not willing to take drastic action. The lack of accountability is staggering. Independent central banks are not a virtue but a vice. For all of the supposed benefits of a free and unleashed central bank maybe it becomes the perfect fall guy for governments to operate in the vacuous, indifferent and soft policy settings they do. Central banks in the reverse can apportion blame on governments for not providing policies that benefit from low interest rate settings. The Fed should be disbanded.

I remain bearish to be sure. Trump can’t right almost two decades of irresponsible corporate, individual and public sector behavior. Perhaps my biggest concern is the risk that governments and central banks become the ones using moral hazard as an exit clause. In that world all bets are off. Don’t think it isn’t been considered. Even Japan’s policy advisors are considering converting the $10 trillion (240%od GDP) debt into zero coupon perpetual debt. It is a polite way of saying that we’ll print the debt away.

As poor old Wile E. Coyote knows too well, it ends in a massive plume of smoke. You can control (manipulate) markets up to a point but eventually relative asset values come to the fore and the premium/discount gap widens to extreme levels. Market confidence is shot to pieces despite what the indices tell us. Don’t be fooled. Meep Meep.

King Kong needs to rescue this NY damsel in distress

image

Recently I’ve had the privilege of being inundated by Democrat supporters feeling confident that the White House reports things are already “Great in America”. They assure me first, poverty rates have fallen off a cliff and real wealth has soared. Now I’m only guessing they conducted the census survey in the Hamptons. Uncanny how such news is released before the election.

Speaking of pie in the sky forecastiing the NY Fed Empire State Survey showed a miraculous rise from -4.21 to -1.99 (still lower than expectations of -1.00) despite all that the components fell off a cliff in most cases.

New orders fell to -7.45 vs 1.04
Shipments tumbled to -9.38 from 9.01
Unfilled Orders fell to -11.61 from -9.28
Delivery time fell to -4.12 from -6.25
Inventory fell to -12.5 vs -4.12
Number of employees fell to -14.29 vs -1.03
Work hours fell to -11.61 vs 2.06
Prices received fell to 1.79 from 2.06

Prices paid rose to 16.96 from 15.45 Which converts to lower profits so it isn’t a positive move.

While the Fed admits business conditions remain poor it only goes to prove the devil is in the detail. I’d love to see how the White House got to its conclusions.

Dire Straits – why you need to worry about the global economy & it is nothing to do with Brexit

central banks gun

Better to sit down. We will be covering some pretty bleak conclusions in this report. The world’s central banks have hit stall speed. They have lost control and do not have enough altitude to recover. How bad can things get? There are two things at play here. One is economic (explicitly monetary) policy. The other is social reality (explicitly hardship). Both have become dysfunctional. Reckless central bank monetary expansion sold behind the banner of ‘nothing to see here’ has backfired. Money velocity (or the power of money) across the globe is plummeting to record lows. While the GFC was easily avoidable the post disaster mop up operation consists of printing our way out of the disastrous debt pile by inflating it away. Even negative interest rates leave inflation well below targets. Deflation still prevails. Poverty and post-GFC destitution has reached boiling point. When people feel robbed of their identity and increasingly their democracy we should not be surprised to see the rise of nationalism and non mainstream candidates and sadly violence, especially in Europe. This social disruption should not be ignored because the experimental financial engineering that was supposed to wiggle us from the bondage of moral hazard has had the complete opposite effect.

Here are 7 things to ponder;

  • A recent US Federal Reserve survey found that 47% of Americans couldn’t raise $400 in emergency cash were the need to arise. 5% unemployment rate belies financial difficulties.
  • A bank survey in Australia showed 50% of people wouldn’t be able to meet their financial obligations if unemployed for more than 3 months. Housing price to income ratio almost twice the level pre-GFC. Private debt: GDP ratio at 160%.Credit rating downgrade imminent.
  • 60% of ETF purchases in Japan and c. 100% of sovereign bond purchases are bought by the Bank of Japan which now owns 38% of outstanding government debt. 15 year Japanese government bonds now yield -0.004%. Japan’s move to negative rates has caused a run on sales of mini-vaults as people look to store their own cash.
  • M2/M3 money velocity has hit all time lows in the US, ECB, Australia, China & Japan.
  • Italian banks non performing loans (NPLs) are approaching 20% and as high as 50% in the south of the country. The ECB is breaching their own covenants to hide the mess. Belgian Optima Bank has just been shut down for not being able to meet obligations. Many more?
  • Over 25% of those in the EU live below the poverty line and youth unemployment is c.25% with long term unemployment now 50%. In Greece those numbers are 36%, 58% and 72%.
  • China’s industrial sector among others shows clear signs of recording sales without much hope of being paid with receivables ballooning in some cases leaping to over 5 years of reported revenue pointing to a sharp uptick in corporate debt insolvency & NPLs to follow.