The Market Radar


We anticipate monitor and comment on market-moving global economic and geopolitical issues.  No dark side brooding, no wanting the world to end, no political rants.  Traders, investors, policymakers, or market observers can’t afford to ignore us.  In one word, perspicacity.

An educated citizenry is a vital requisite for our survival as a free people– Thomas Jefferson

By seeking and blundering, we learn. – Johann Wolfgang von Goethe

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free rider

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Now, Which POTUS Inherited A Mess?

Wow!

President Trump likes to repeat the fictitious notion he inherited an economic mess but his hair is on fire over Obama’s factually based tweet this morning.

Here Are The Facts

NFP

Just The Facts Ma’am

Economic_Sign_Digits

GDP growth in Trump’s first three years has averaged only 26 basis points more than Obama’s last three years albeit with a budget deficit-to-GDP running over 50 percent higher than Obama’s deficit in his last calendar year.  A very expensive slight marginal increase in growth.   Inflation has almost doubled.

Under Trump, jobs have increased by 6.6 million versus 8.1 million in Obama’s last three years.  The average nominal wage is higher but the average real wage is lower.

Also, note the 25 percent increase in the trade-weighted dollar in Obama’s last three years and not a peep about the Fed from his administration.   Though still at a relatively high level, the trade-weighted dollar declined by almost 2.1 percent from January 2017 to January 2020.

…a stronger/weaker currency has a tightening/easing effect on economic conditions.  – Economist

A strengthening dollar is also highly inversely correlated with manufacturing jobs.

Man_4

Yet,  this….

Finally, the Chicago Fed’s National Financial Conditions Index illustrates the Trump economy is experiencing some of the loosest financial conditions since the early 1990s.

Chicago_FED

Now, who is conning who, folks?

If you’re in the con game and you don’t know who the mark is … you’re the mark. — David Mamet

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Two Charts Keeping Us On The Beach

I’ve seen fire and I’ve seen rain.  I’ve seen manias the public thought would never end. Until they do.

This ain’t our first rodeo.  We have seen these types of asset bubbles many times during our career, especially when you include our emerging markets daze.  We have learned two certainties:

  1. Valuations are the gravity that ultimately brings markets back to reality, i.e., asset prices regress to mean valuations
  2.  Very few, and mostly liars top-tick and always get out at the top

The young Python Algo ‘bots driving stocks do not have this kind of context or history.

Supply Driven Bubbles

The current bubbles are slightly different in nature as we perceive them driven by the new supply-side economics, where both public and corporate policies have induced asset shortages of risk-free bonds, stocks, and affordable housing.   They are more steely, more difficult to pop, and last longing than most think they can.  Until they don’t.

Trading Versus Investing 

We do recognize trading is different from investing.   Good traders can flip cotton or cotton candy for a profit but even that is getting increasingly difficult with the rise of the ‘bots in this modern-day aglo driven market.    We traded “billions and billions” of Apple stock each year during the company’s high growth days back in the day.  And that was just Apple.  No more.

Buy Low, Sell High  

Though we have taken stabs at shorting this mania, we have learned some expensive lessons over the years about  “Milton” Keynes‘ (no, not the town in Buckinghamshire, England) dictum,

Keynes_Irrational

A lesson now being learned by the TSLA shorts, by the way.

Chart Numero Uno

Market Cap_GDP

We have posted this chart — one of Warren Buffet’s favorite macro valuation metrics —  many times but it still holds.  The black line can’t continue to climb from lower left to upper right forever as stocks eventually have to track the underlying fundamentals of the economy.  Whereas the natural trajectory for a stock index such as the Wilshire 5000 (blue line) is lower left to the upper right on the chart.  The higher the black line moves above past highs, the harder and more painful the fall, or a meaner regression to the mean.

Write that down, folks.

The question is have stock valuations “reached a permanently high plateau” as the famous economist, Irving Fisher, stated just a few weeks before Black Thursday 1929?

Believe it, if you wish.  After all, we now live in a culture and political environment where,

It’s not a lie if you believe it

To that, we say hogwash.

We don’t know the exact point where the market tops but we will see you on the beach until it does.

Chart Numéro Deux

Russell 2000_S&P500

We have also put together the above chart illustrating the relative performance of the small caps, the Russell 2000 index versus the S&P500 (red line).   Notice before every bear market and recession the small caps begin to significantly underperform the S&P500.  Kinda like the current environment.

Does the chart then reflect an imminent recession and bear market?    We don’t know but it is another warning sign flashing caution.

Best Economy Ever?

Is it possible the above charts reflect a market in the midst of the best economy ever?

We don’t think so.

In fact, the economic performance of the past three years looks very similar to the prior three years, if not a bit less robust.   The table below illustrates the 27 bps of higher annual real GDP growth over the past three years comes at a very steep cost — a 1.7 percent of GDP increase in the federal budget deficit.   Not exactly a productive expansion of the public debt, in our opinion.

The 2014-2016 economy was also facing a massive headwind of a strengthening dollar with the trade-weighted broad index increasing by almost 25 percent in the three years.

Economic_Sign_Digits

We have analyzed the significant impact and correlation of dollar strength on manufacturing payrolls, especially in machinery.

Man_4

 

Broad_Dollar

There you have it, folks.  Not if, but when.

Until then,  see you on the beach.

P.S.   Just one more thing.   The Gallup chart on Economic Confidence has traditionally been a contrarian indicator.

Gallup_Economic Confidence

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The Clash Of Generations

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COTD: Coronavirus Risk To Manufacturing

Corona_Feb15

The holiday is over, but few people are back in offices and factories…the effects of covid-19 will be like those of SARS in 2003: a sharp shock to Chinese growth, followed by a strong rebound. But SARS may not be a reliable guide. China’s economy accounts for 16% of GDP today, up from just 4% then. It has become enmeshed in supply chains of mind-boggling complexity, and just-in-time production leaves little room for delays.  – Economist

That Was Then, This Is Now

China Impact on Global Economy 2019 v 2003

Hat Tip:  Mike Bird  @Birdyword

Run to our post, The Global Supply & Demand Shock Of The Coronavirus, which we wrote waaaaaaaay before the MSM jumped on this story.

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Why The Millennials Feel The Bern

The Global Macro Monitor has been writing about the Clash of Generations for years, and way before the headlines and data that are now starting to show up in the MSM.   See here.

The fight taking place between the moderates and the progressives in the 2020 Democratic primary is just another manifestation.

DFA_Generational Wealth_5

The nation’s finances are almost as skewed toward the elderly as its politics are. Americans 55 and up account for less than one-third of the population, but they own two-thirds of the nation’s wealth, according to the Federal Reserve. That’s the highest level of elderly wealth concentration on record. The reason is simple: To an unprecedented degree, older Americans own the most valuable real estate and investment portfolios. They’ve captured more than 80 percent of stock-market growth since the end of the Great Recession.  – Atlantic

DFA_Generational Wealth_8

Representative Alexandria Ocasio-Cortez is often described as a radical, but the data show that her views are close to the median for her generation. The Millennials and Generation Z—that is, Americans aged 18 to 38—are generations to whom little has been given, and of whom much is expected. Young Americans are burdened by student loans and credit-card debt. They face stagnant real wages and few opportunities to build a nest egg. Millennials’ early working lives were blighted by the financial crisis and the sluggish growth that followed. In later life, absent major changes in fiscal policy, they seem unlikely to enjoy the same kind of entitlements enjoyed by current retirees. – The Atlantic

We have put together a few charts to help explain the economics between this struggle.  We are grateful to the economists and statisticians at the Federal Reserve Board for constructing their Distribution of Financial Accounts (DFA), which provides a treasure trove of data.

Go To The Charts

We will let the charts speak for themselves, and, yes, we get it.  Younger generations are always less wealthy than the older ones, who have had a lifetime to accumulate assets, but wealth accumulation has become increasingly prohibitive for those just starting out in our age of serial bubbles.

We are hoping the Ms will not be sucked into this massive asset bubble.

DFA_Generational Wealth_2

DFA_Generational Wealth

Controlling For Population Ratios

DFA_Generational Wealth_4

The Washington Post’s Christopher Ingraham adjusts for this, pointing out that in 1990 “boomers owned 21% of the nation’s wealth and represented 31% of the population, for a wealth-to-population ratio of 0.68 — each percentage point of the total U.S. population represented by boomers, in other words, owned 0.68 percent of the wealth.”

And yet in 2008, “Gen X–ers owned 9% of the wealth and made up 22% of the population, for a wealth-to-population ratio of 0.41.”

Millennials by comparison, are on track to have an even lower wealth-to-population ratio than that.  – MarketWatch

Upshot

When you have little or no “skin in the game”, why support the system?   Burn it the F&@K down!

Don’t chase and let the markets come to you Ms.  The fever will break and the bubbles will burst.  Not a great way to reduce the wealth gap but it will provide an opportunity to accumulate assets at a decent price.

Patience, young grasshopper.

DFA_Generational Wealth_6

Source:  Axios

What Generation Are You

DFA_Generational Wealth_7

Source:  Career Builder

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Low-Cost Universal Health Care With A Record Budget Surplus?

How can it be?

Germany_1

     See the full DW article here

The following video on the German health care system is a must view, folks.

Take the 10 minutes and watch.

If not, study the charts.

The German system is completely private consisting of two plans: 1) SHI — Statutory Health Insurance — for those making under $60k per year, is made up of a highly regulated sector of competing not-for-profit private companies, and 2)  PHI – Private Health Insurance.

Upshot

Better healthcare at a lower cost.  Ich bin ein Berliner, baby!

You listening Amy, Mike, and Pete?

Hat Tip:  Roro @rorotrader

Germans Much More Satisfied Than Americans 

Germany_3

Less Than U.S. Health Care

Germany_2

Two-Tier System – Public and Private Options

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Less Wait Times

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Much Lower Prohibitive Costs

Germany_6

Source:   All Charts Are From The CNBC Video

 

 

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Coronavirus: It’s The Second Derivative, Stupid!

Double yikes.   Arrest this beast!  Please!

On a business trip meeting with many firms with huge exposure to China.  Concern in their community definitely growing but still a bit clueless about the seriousness of the growing crisis.  I give them about two weeks before full blown panic sets in.

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The Global Supply & Demand Shock Of The Coronavirus

Our analysis of the impact of the Coronavirus is a work in progress and nobody knows the endgame.  It is still the early days of the epidemic, and its dynamics will take time to understand. The scale of the impact will depend on how contagious and lethal it reveals itself.  That is the second derivative of the infection rate – the rate of change of the rate of change.

There is a supply shock to global manufacturing as many factories in the world’s supply chain will be shuttered for longer, which shifts the global supply curve left, increasing-price and production pressures.  Ergo component shortages, higher prices, and lower production.

The 2 percent decline in the U.S. stock market and collapse in bond yields are signaling a potential global aggregate demand shock that offsets inflationary pressures of the supply shock.

Manufacturing_China_6

As of Friday, 10,000 cases have been confirmed by China, surpassing the total from the 2002-2003 SARS epidemic. The new virus has killed 171 people in China.

The epicenter of the outbreak is Wuhan, one of China’s largest manufacturing centers. Foxconn and Pegatron have operations there, as do memory manufacturers such as XMC (non flash) and Yangtze Memory Technologies Co. (non-volatile memory).

Auto producers, such as General Motors, Honda, Volkswagen, BMW and Daimler also populate the region.

The electronics industry is poised for a cascading disruption that could change industry growth forecasts for the year. Bill McLean, president of semiconductor research firm IC Insights, said the virus has exacerbated the economic unease that has stalled semiconductor capital investment.

“Brexit, trade issues and now the coronavirus are causing global uncertainty,” he said  at a Boston-based forum. “Uncertainty causes [businesses and consumers] to freeze.” Worldwide, semiconductor capital spending is forecast to decrease by roughly 6 percent this year, from $103.5 billion in 2019 to roughly $97.6 billion.

Zhang Ming, an economist at government-backed think-tank the Chinese Academy of Social Sciences, warned that the virus could push China’s economic growth below 5 per cent a year in the first quarter, reported the Financial Times. Economic consensus currently puts China’s GDP growth at 5.7 percent. That average has steadily declined since 2018, according to McLean.  — EE Times

More than 300 of the Global Top 500 companies have a presence in Wuhan, including Microsoft and Siemens. Wuhan is located in the Hubei Province.

Wuhan has 10 car factories, including those Honda, Renault, PSA and General Motors. The car industry represents around 20 percent of the city’s economy and employs 200,000 people directly and more than a million indirectly.

Most factories lose about two weeks of production in total during the Lunar Holiday but more production will be lost as the holiday has been extended.

Here is a look at the main manufacturing regions in China.

China Manufacturing Distribution Breakdown

Electronic Industry: Mainly in Guangdong (33%), the rest in Yangtze River delta, Sichuan, Shaanxi Provinces.

Textile Industry: Mainly in Zhejiang (18%) and Jiangsu (20%), the rest in Fujian, Guangdong, Shandong Provinces.

Leather & Feather: South-East Coastal areas, Hebei, Henan, Chongqing and Ningxia provinces.

Metal Product: Zhejiang, Guangdong, Jiangsu, Shandong, Hebei, Henan provinces.

Glass: More in Hebei, Jiangsu, some in Shandong and Guangdong provinces.

Ceramics: Jingdezhen in Jiangxi provinces

Furniture: Mainly in Guangdong and Hebei province, the rest in Jiangsu, Zhejiang, Shanghai, Chengdu and Beijing.

Construction: More in Shandong province, the rest in Hubei, Henan, Guangdong, Jiangsu, Beijing, Zhejiang.

Household Appliance: Guangdong, Zhejiang, Shandong provinces.

Artware & Stationary & Sporting: Zhejiang, Fujian, Guangdong, Hubei

Papermaking & Printing: Guangdong, Zhejiang, Jiangsu, Shandong, Fujian

Machinery Manufacturing: Dongbei Area, Hunan and Hubei provinces.

Petrochemical Industry: Shandong (32%), Liaoning (21%), Guangdong (15%)

Pharmaceutical Industry: Tianjin city, Xian city in Shanxi province

Food & Beverage: Liaoning, Shandong, Jiangsu, Guangdong, Fujian, Hebei, Henan, Hunan, Hubei, Inner Mongolia

Transportation Equipment:

  • Motor & Bicycle: Taizhou city in Zhejiang province (40%)
  • Shipping/Vessel: Yangtze River delta, Pearl River Delta, Bohai Bay Areas
  • Automobile: Mainly in Jilin, Hubei, Shanghai and Yangtze River delta, the rest in Pearl River Delta, Beijing

 

Manufacturing_China_3

 

Source: Berkeley Sourcing Group

Manufacturing_China_7

 

Source:  CNN

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Our Kafkaesque World Encapsulated In One Tweet/Video

See here for a good primer on the term Kafkaesque.

“So disorienting and illogical”

Screening for guns but no screen if you’re packing at the state Capitol.   WTF?

See no evil

That’s less than a chip shot away from the logic of the three monkeys now taking place in the Nation’s Capitol.

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The Rise Of The China Market In All Things

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