Wednesday 23 August 2017

Bank credit shrinks so far in August

Bank credit went back to shrinking in early August. Since Trump was elected it pretty much stalled through to April, grew again for a few months, slowed in June/ July and has shrunk so far in August.

Clearly there is a spread of phases across the sectors with some like Autos probably in recession, others slowing, but many service sectors still going strong and driving some wage-inflation pressures and, in my view, oil is recovering.

If the overall economy continues to grow while a few sectors crash, like oil did 2014-2016, the Fed will be under pressure to hike rates. On the other hand a transmission mechanism like overall credit shrinkage or corporates starting an inventory liquidation cycle, could cause a few sectors contracting to morph into an overall recession.

I suspect either scenario (Fed hikes or recession) is USD positive.

Latest number was slightly positive, but so far this year its drastically slowed. 

Tuesday 22 August 2017

UK subprime - another US/ UK/ Canadian sectors is crashing

The crashes are now happening in multiple US/ UK/ Canadian sectors and are getting ever closer to the core of the post-08 monetary/ fiscal stimulus; namely US and Chinese FIRE economy assets.

Counting the dead canary's: 
  • US/ UK autos
  • Bricks and mortar retail
  • Global super prime residential
  • US CRE (is now falling)
  • Canadian mortgage lending
  • UK sub-prime lending. 
What's next, companies reliant on low wages and an import supply chain?

Sunday 20 August 2017

Employers paying up for workers while the Fed remains massively behind the curve

Last time companies paid up this much for the least productive workers, the Fed had already finished its hiking cycle. 

I suspect the headline number is being subdued by baby boomers retiring at their peak earnings/ productivity or taking on some part time lower pay work prior to fully retiring. 

Eitherway the $ wage bill grew faster in H1 than $s of GDP, so we have a sectoral rebalancing already underway.

As the Fed gets forced into catch up the USD should rally and bond yields rise, which pushes back my EURUSD at 1.30 forecast for a while. It will also squeeze corporate margins even more, which low market breadth is perhaps hinting at despite the gap between GAAP and non-GAAP earnings already being almost 10%. 


Wednesday 16 August 2017

Baby boomers selling their toys

Just because something is 1. an asset, 2. 'alternative', if it doesn't generate an income then the value is just supply and demand set against a negative cost of carry.

I would put collectable cars, art, wine, antiques, not commercially rented assets like real estate, boats and planes in that bucket.

Perhaps its also demographics, maybe if when you retire at 55/60/65 buying one of these cars or other collectable items seems cool, but at 65/70/75 you then want to sell and baby boomers are now in the process of selling.

Next up the suburban McMansions.

Chinas credit and trade dynamics as part of rebalancing

China's M2 growth slowed to 9.2% YoY. M2 is similar to total loans. Sounds good as part of a rebalancing. Unfortunately M2 is 163Tn CNY vs a 2016 economy of 74.4Tn, so credit growth is worth roughly 20% of GDP.

This level of credit creation is underwriting a 6-7% growth in industrial production and 10-11% growth in retail sales, so clearly unprofitable businesses/ local government debts, bad debts and asset speculation related finance are absorbing a lot of credit growth and its frankly deflationary. The government seems to be restricting access to credit for at least some asset speculation areas which is probably the easiest area to rein in.

With the BAT tax shelved, Trump is pursuing targetted trade wars to resolve the CA deficit and China has to rapidly look for another finished goods customer. Populous Sub Saharan Africa and ASEAN countries are the obvious destinations. The main goods they can sell China are commodity related hence the one belt one road strategy.

Friday 11 August 2017

Simple quant strategies being arbed away by weight of money

Lots of attention towards quant funds over the last year or two with a focus on the buzz words of AI, machine learning, pattern recognition etc etc.  There are two types of variable a computer can look at; raw data and transformative variables. If you point a computer towards raw data, it will find the inefficiencies, but they will be arbed away fast, by definition any computer with similar algorithms will find the same inefficiencies.  With transformative variables, often ones identified by the quant, you have much higher explanatory power and much less likelihood of direct competition. You also have the potential to be predictive rather than just reactive and most basic quant strategies are reactive, i.e. post event strategies.  A simple transformative variable could be a moving average, or a ratio. Or for example it could be some data on robotics take up and labour productivity in certain industries. Or it could be a price pattern combined with other variables to identify a persistent inefficiency.  With transformative variables most of the value add is from the quant, but most of the work is done by the computer.

Wednesday 9 August 2017

Less than half NYSE stocks above their 200 day MA

The action so far this year has been buy and hold a limited number of retail focus names like Tesla or Amazon. 

I think the low VIX is probably explained by the lack of institutional activity and many stocks drifting sideways. Market breadth is shown below. Less than half of NYSE stocks (about 2500) are above their 200 day moving average:

In May 80% of NASDAQ100 were above it, but that has now dropped to 60%

Europe was very strong earlier this year but breadth has also collapsed there recently

Monday 7 August 2017

UK car sales down 9%

Got a text from a  main dealer I bought a car from six years ago. Thought it was a bit weird and they must be under-pressure. But looking at the below it seems UK sales down 9% in July YoY, but are still doing better than US sales, -14% YoY for GM.  Some of the electric/ hybrid segments are up 40-50% YoY but off a tiny base.

Another $2bn of US muni debt on the brink

Following Puerto Rico's default, another US territory is on the brink with $2bn of muni debt. There is plenty more municipal bankruptcies/ stress in the pipeline in both the US and Europe.  In Europe some of the questionable debt even has a negative or near zero yield.

Thursday 3 August 2017

UK and US savings rates and credit cycles, Albert Edwards

UK and US credit cycles have run about as far as they can. In both countries debt is growing about 3-3.5x as fast as GDP. Just need a trigger to reverse, whether its UK house prices falling, Fed rate hikes or some other catalyst like trade 'wars' and slowdowns in capital flows from places like China. If credit creation ground to a halt it would be worth up to 8-10% of final demand disappearing.

I feel a bit sorry for Albert, structurally he is right, but he is up against such powerful and entrenched interests who are fully committed to keeping the show on the road that the entire cycle since 2008 has played out slowly. 

The two things that are keeping the pressure off the Fed are slow wages and weakness in a few areas holding headline Core PCE down. 

Meanwhile in June and July credit growth has collapsed back to almost zero again.