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Are We At An Inflection Point In The Economy? Yes!

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The End Of Effective Stimulus

(I’m looking at the macro fundamentals and I think an inflection is coming up in a few months…and that means opportunity.)

At the highest level, global growth is coming from a few places

  • China stimulus: backstopping materials prices and also juicing up Asia/E.U. activity.
  • E.U. stimulus: propping up activity via negative rates and public spending to integrate migrants (now running ~$80 billion annually).
  • Favorable Comps: The first half 2016 (H1) was terrible, so H1 2017 has been fantastic

The stimulus is losing effectiveness: nominal levels of goods consumption remains stuck at 2015 levels.  And capacity just keeps growing.

Meanwhile, the current growth waves are set to slow in the next 4 months.

China Is Already Slowing

Money supply is critical to keeping China’s domestic economy afloat.  It’s underpinning domestic demand:

Simply looking at M1 supply above, you can see the slowdown coming to China.

Everything is already slumping (OK – most countries would still kill for 6%+ Industrial production growth. But this is a slump compared to the 10%+ they had just a couple years ago).

And if China wants a “soft landing” (being able to transition their economy to consumer-oriented like the U.S.), then the current slow growth trajectory will continue.

E.U. Is Starting To Catch China’s Cold 

China’s slower growth is bad news for EU, which relies on China’s private sector demand.

E.U. consumer goods are very popular in China. As is machinery and materials.

For a sign of what’s to come, Germany’s most recent Factory Orders Exports didn’t grow at all (came in at 0% growth). Accelerating this trend will be the new German auto factories coming online in China.

Masking this decline is E.U. migrant integration stimulus.

Domestic consumption is surging, which it should given the ~$80 billion (B) earmarked in 2017 public spending. Germany alone has budgeted $55B.

That’s a lot of housing, food, and healthcare spending.  ut the pace of those capital injections begins to taper off in 2018.

Already, the signs of peak are evident.

The Moneyball E.U. Shipping Index shows that peak growth already came.  (As a reminder, this data measures a specific set of cargo shipments of high-value, intermediate goods).

To put this into context, the volume of cargo passing in and out of the Port of Hamburg is stuck at 2012 levels. The growth we see in the E.U. is better than 2015, but still weak.

The current trajectory in trade suggests continued growth through the rest of this year.

But expect problems to emerge in Q1 2018 because growth waves are tapering at the same time (China demand, migrant stimulus, and favorable comps).  And this is before any possible tightening from the European Central Bank.

The U.S. Is Also Set To Slow Down In The Coming Months

How mediocre is U.S. growth?

It’s been barely cranking out 2% GDP despite 0% interest rates for 9 years. And even today where we have <2% inflation. And this year – H1 2017  -enjoyed some now-fading drivers

  • Favorable comps:  Q4’15 and Q1’16 GDP were ~0.5%, so any year-over-year (yr/yr) comparison looks fabulous. But H2 2016 was a lot stronger.
  • Catch-up spending: a lot of H1′17 has been replenishing stockpiles and re-engaging necessary spending. (A substantial amount of ordinary CAPEX spend was tabled 2015-2016 and now fundamental maintenance requires some spending.)

But like the E.U., the growth has come from refilling the bucket and not really advancing the economy.

Capacity Utilization jumped after the election as stocks were “re-filled.” But now it’s fading again.

The end of the “Trump Stimulus” hope will add drag in Q4 and beyond.

Obvious Signs Of Stress

The hallmark of peak consumer spending is when sales teams push unnatural acts.

When normal growth becomes unsustainable, the sales team is pushed to look for ways to keep the momentum going.

That’s happening right now in the auto sector where loan quality has eroded (less qualified buyers, longer term loans, etc). Auto Sales didn’t peak in 2017, they peaked last year. They remained high because sales teams scrambled to sell cars any way they could because organic demand was slow.

It takes a while to see, but the current slow auto sales environment is coming despite the unnatural sales acts. That is, after trying every trick in the book – sales are still slowing.

Now comes the blowback: subprime delinquencies have surged, 84 month loans are at 6% of total auto sales – a sign of the desperation out there. It’s pulling in future sales today.

So now take the auto sector and extrapolate from there – what other sectors have boosted today’s sales at the expense of tomorrow’s?  And how much has depended on student loans?

Understand that ~80% of student loans are not used for tuition. It went to cars, vacations, home buying and so on.

That capital flow is still massive (+$100B yr/yr) but it is also slowing: the yr/yr growth rate has fallen <10%.
Basically, another force driving the U.S. economy is starting to taper.

Going forward: macro data will slip.

As we get deeper into Q4, the comps get less favorable. Then we get more Chinese-driven deflation as their demand continues to slow and that hits material prices again. The E.U. will also start to flash slower growth. Same with U.S.

The Supply Chain Is Preparing For Slower Growth In 2018

An interesting bit of color is coming from the semiconductor space which has been on a phenomenal roll.

Like the rest of the industrial space, semiconductor companies hit the brakes on expansion in 2015. As demand caught up and supply was restrained, customers faced limited supplies and have been paying higher component prices.

But semiconductor producers are also aware that the cycle turns down and they expect it to slow again in 2018.  In fact, they are planning for it.

KEY TAKEAWAY: All of this slower growth narrative runs counter to consensus expectations. 2018 E.U. GDP is expected to be faster than this year’s.

So what should we expect? With Central Banks talking a tightening trajectory, fundamentals are going to come back in fashion.

  • Timing: Q1 seems to be the inflection point when macro starts to look consistently worse.
  • Degree: Lots of debt exposure in the private sector. It’s more manageable than in 2007, but it’s also nominally higher and just as central to the economy. Fire sales may not be as widespread or deep, but it will be ugly nevertheless
  • What to watch:
    • U.S.: inflation (trucking prices), wage growth (esp. Jobless claims y/y), corporate profits
    • EU: trade esp. Sweden (the canary in the German coalmine)
    • China: M1 supply, trade

Under these conditions, Stronger US dollar is likely for the usual reasons (currency manipulation, flight to safety, etc)


Andrew Zatlin

Editor of Moneyball Economics

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Vice Index – Consumer Spending & Confidence Rolling Over

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Vice Index Data: Downshifting

One of the important aspects of the U.S. economy is that recent business cycles have been longer. But also shallower.

I believe that the internet is playing a big role in this “lower-for-longer” phenomenon.

Increased communication that is the essence of the internet has also meant:

a) Pricing power reduction: Consider what is happening with retail store chain closings. They are casualties of the net: with a click of a button, mobile shoppers can find the lowest prices.  And shippers can deliver the goods virtually overnight (if not sooner).

b) Supplier expansion: More suppliers means more competition

c) Consumer base expansion: Connecting suppliers and buyers has expanded the overall marketplace. With more buyers, producers can achieve profits through greater volume.  It’s become a virtuous cycle – if you consider deflation virtuous

Simply put, it’s damn near impossible to create scarcity. And scarcity is at the heart of inflation and economic expansion.

But here’s the gotcha: this slow economy depends on low inflation.

Even a small uptick in inflation can cause severe economic shock. This is why the Fed interest rate hikes are so concerning.

When the economy is barely growing 2%, a 0.25% hike takes a big chunk out of the little growth that exists. Similarly, a small uptick in inflation has a larger impact than it might in the past.

Consumers Begin To Reset Expectations

Companies did not get ahead of themselves, but consumers did…

Throughout the first half of the year (H1 2017), companies were positive but restrained: they did not buy into Trump promises of extra growth. This meant that they invested accordingly and did not over hire nor over invest.

However, households did buy into Trump’s promises.

Consumer Sentiment surged post-election: from the lowest levels in 2 years to the highest in 2 years.

And then reality set in…

By May, it became clear that Trump’s Administration could not deliver any stimulus in 2017.

Consumer Sentiment has now stalled.

A bigger reality check was the resumption of slowing income growth. After rising in Q1, the Q2 pace of compensation growth has slowed each month, falling almost by half.

Accompanying that drop in incomes is a drop in retail spending, especially in Food Services.

That pullback in non-essential spending is a red flag warning of some belt-tightening.

Unlike other retail purchases (like gas and food), dining out or going to bars is very much a want and not a need.

Coming up Next: Vice Index points to more belt tightening The Vice Index picked up on the Retail deceleration back in February (the VI has a 4 month lead) – and predicted a downshift in the pace of consumer spending beginning June.

The latest Vice Index data says that Retail Spending for H2 2017 is poised to fall significantly, as low as 2% y/y versus the current 3.8%.

And that assumes no change in the current low-inflation, low interest rate environment.

Gambling Outlook & Data

(The following chart averages the rates of gambling growth for Detroit, Maryland, Connecticut, Atlantic City, & Pennsylvania.)

Peak Gambling?

Nominal gambling revenues are flat in most major US gambling centers. Vegas, for example, saw June gaming revenues up only 1% y/y and up 3% y/y for H1 2017.

International Game Technology (IGT) reported a (-6%) drop in slot machine revenues (IGT dominates the Reno and Las Vegas slot machine market).

To pump up their earnings, Las Vegas casinos have started to charge parking fees for self-parking. At $15 for 4+ hours, these fees will generate millions to casino bottom lines.

KEY TAKEAWAY: The root cause is slightly fewer visitors.

And it’s another sign of peak consumer spending.

Gambling reflects household cash flow and consumer sentiment.

Cash flow: The ordinary gambler must have extra money in their pocket in order to gamble

Consumer sentiment: The ability to lose money today implies that one feels positive about finances today and tomorrow.

A trip to Las Vegas requires effort and advance planning. And significant funs for airfare, hotels, taxis and dining. Conversely, local casinos cater to drive-up gambling: impulsive, spontaneous, and low effort. And much less costly in terms of time and money.

Even better, local casinos tend to be in blue collar areas: Detroit, Atlantic City, New Orleans, and so on. Vegas, on the other hand, is an international destination that includes both tourists and convention attendees.

Bottom line: Local casinos provide invaluable insight into Middle America’s near-term discretionary spending.



Andrew Zatlin

Editor of Moneyball Economics

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August 16, 2017: Financial Survival Network – Beware of the Coming Recessions

It’s Time To Go Long the U.S. Dollar

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Global Trade Momentum Slows in Second Half

The global growth story of 2017 has always been about the low base – first half  (H1) growth of 2016 slow while the second half (H2) was strong.  

However, actual trade remains stuck at 2015 levels.

Consider China, where trade volume is set to flatten again. Hong Kong export and import growth is at low single-digit levels. In nominal terms, H1 cargo shipments are ~10% above last year. But only 2% above 2015 and 10% below 2014 levels.

China’s latest trade data miss underscores the point. July import growth fell from 17% to 11% versus June. Exports dropped from 11% to 7%.

The global impact of slower China trade is already noticeable

  • Germany’s latest Factory Orders report indicated falling international (aka Chinese) orders.
  • South Korea exports to China fell in half.  One of the reasons I said last month that Korea would hold off on a rate hike for now was that they needed to know that current growth would hold and not roll-over.  They were right to wait.
  • Australia exposed.  Iron Ore imports track the M1 and they are already falling.  And 2H is the soft period for steel production, so the excess won’t be easily absorbed.

More Trade Pain To Come

Liquidity plays a big role, and it’s slowing.  

Current trade levels depend on China’s M1 supply which is slowing.  

The Chinese government will try to stimulate the economy further, but the impact will not be as strong as desired.  Certainly the first half 2018 is looking dicey at best.

The other big factor is market saturation: demand for goods is slowing.

China – the epicenter of world production – reflects that slowdown.

Consider smartphones, a big part of that story.

China’s incremental export growth to the US has always been dominated by phones. As phone exports to the U.S. have slowed… so too has China’s total export growth to the U.S.


In general, global trade growth is slowing – that base problem again. U.S. trade is already peaking while the Moneyball EU Trade Index points to an EU that is already set to slow (the Index leads the EU economy by 3+ months)

What to Expect: A Q3 Head-fake And Then Slowdown

  • A brief flurry of growth from Asia
  • Problems in 1H 2018

You’ll see a head-fake from Asia over the next few months.

Asian economies will be focused on delivering product for seasonal sales: back-to-school and Christmas.  A new Apple iPhone release will trigger a lot of Q3 activity out of South Korea and Taiwan.

U.S. inflation will perk up a bit thanks to the sudden burst of inflation in Trucking (it will likely fade in Q4).

Central Banks Are Scrambling

Everybody wants to extend this growth cycle.

The flurry of positive macro data and inflation will lead markets to be more hawkish on Fed rate hikes. But the slower growth that will be seen in Q4 will reverse those expectations.

The Case For The U.S. Dollar

If inflation picks up in the U.S., rate hike possibilities increase.

Then, if global trade slows further, the U.S. economy will look the strongest.

KEY TAKEAWAY: You’ll see a head-fake in inflation due to the holiday season coming up plus the iPhone 8 sales super-cycle.

Central banks will do their best to keep inflation up through monetary stimulation… but it’s all a smokescreen.

As foreign central banks stimulate, the U.S. dollar will be considered the best place to park money. It’s been beaten down over the past few months.

I see it as a buying opportunity.


Andrew Zatlin

Editor of Moneyball Economics

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Vice Index Nails Retail Forecast AGAIN

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Heads Up: Retail Spending Momentum Turns Negative


(Note: The Vice Index is lagged: recent vice spending pullbacks are reflected in the chart above starting June.)

Consumer Spending Slowing Down

Regular readers know the Vice Index is the real way to measure the breadth of the U.S. consumer. It factors in many disposable spending habits like alcohol, marijuana, prostitution and gambling.

Everyone knows consumer spending (including disposable spending) is the lifeblood of the US economy. There are different but related measurements:

  • Disposable Income is personal income minus taxes.
  • Personal Consumption Expenditures (PCE) is disposable income minus savings, interest payments, and transfer payments.  (It runs ~91.5% of Disposable Income)
  • Discretionary Income is PCE minus basic essentials

In other words, discretionary spending is the spending on wants after the needs get covered:  taxes, interest, savings, and basic needs. It includes luxuries like apparel, cars, TVs, vacations and so on.

Discretionary Incomes are directly impacted by changes in incomes and inflation. But the spending of that income is most influenced by the state of the economy and expectations about the future, which affects consumer confidence and the willingness to spend or not.

Retail spending is an incomplete measure of consumer spending because it only follows spending at stores and virtual stores. By definition it excludes major luxury spending like recreation (vacations, sporting events, gambling, air fares, and so on). That’s a significant gap: US gambling is a $240 billion (B) industry.

An Even Higher View Of The Vice Index

Vice spending is broadly representative of the US consumer:

  • Broad-based: Every socioeconomic and demographic group participates
  • High-volume transactions: Over 100 million discrete events per year

And vice spending is highly sensitive to near-term economic conditions:

  • Cash based: depends on free cash flow
  • Luxury spending: wants not needs
  • Significant dollar amount: not pricey but not cheap

That’s why analysts spend so much time crunching the data and spitting out projections and expectations.

Guess what? Moneyball’s Vice Index nailed it again.

Where Consensus expected a solid month in retail expectations, the Vice Index was flashing warning signs.

Retail Retail ex Autos & Gas
Consensus Expectations 0.1% 0.4%
Andrew Zatlin -0.1% 0.1%
Actual -0.2% -0.1%

More concerning is that the Vice Index is flashing rapid deceleration in spending momentum. It’s worth showing the Vice Index chart again.

Spending has clearly downshifted.

Last month I predicted an inflection point – a downshift in retail spending trend. Specifically, I forecasted a drop from the 4%~5% range to a more moderate 3%~4% range. That’s now happened.

Spending growth slowing down is no longer a one-off problem. It is now a trend.


Discretionary Spending: Leading Indicator

For Bond & Equity Markets

The impact on the bond and equity markets is both immediate and direct. 

Increased demand for consumer discretionary goods and services is inflationary and boosts the likelihood of interest rate hikes.  

It also leads to higher corporate revenues which in turn boosts the stock market. The opposite is true as well: reduced demand will lead to lower production and services, which means weaker performance by companies in the affected sectors and lower inflation and falling interest rates.

Tracking Consumer Spending: Personal Consumption Expenditures & Retail Spending

The main conventional data points that track consumer spending are Personal Consumption Expenditures (PCE) and Retail Spending.  PCE tracks the ability to spend and Retail tracks the actual spending.

If PCE measures the ability to spend (after-tax money leftover after covering essentials). And Retail measures a portion of the spending… Luxury spending measures the willingness to spend.

As the quintessential non-essential, luxury spending is highly elastic with incomes and that makes it the canary-in-the-coalmine for consumer spending.

Track luxury spending and you gain leading visibility to consumer spending.

Luxury Spending: The Missing Piece of the Puzzle

Traditional definitions of luxury are quite narrow: costly goods purchased by the wealthy to demonstrate affluence.  

As such, measurements are limited in scope and scale: diamond purchases, Tiffany’s and Sotheby’s revenues, and yacht sales, to name the most widely used.  

We want to know whether consumers feel that they have more or less money in their pockets and, therefore, will spend accordingly.  

For that reason, price is irrelevant.  A normal good purchased by a rich person may be a luxury good to a lower income person.

A more useful definition of luxury spending is anything that is (1) truly non-essential, (2) not an ordinary day-to-day purchase, and (3) enjoyed on relatively rare occasions.  In addition, there is a psychological element of satisfaction: the consequence of buying luxury goods and services is that the consumer feels

Vice Spending To The Rescue

Remember, Vice spending tracks U.S. consumer spending on alcohol, marijuana, prostitution and gambling.   

As a result of this sensitivity, Vice Spending carries a distinct advantage: it leads by 4 months.

Over time, the vice spending correlation to retail spending and Personal Consumption Expenditures has improved significantly.  I think that comes from changes that expanded the reach of vice spending and its consequent representation of overall spending.

  1. Gambling became more accessible:  In the early 1990s, only 2 states had legalized gambling.  Today 48 states have legalized gambling.
  2. Prostitution became more accessible: the internet reduced barriers to participation and created marketplaces that connected clients and providers
  3. Marijuana consumption expanded: Boomers and Millenials smoke pot.  For example, (per the CDC) in 2002, 1% of adults aged 45-54 surveyed said that they smoked marijuana in the previous month.  In 2014, 6% said they did.  For those aged 26-34, the figure went from 8% to 13%

In other words, the end of the 90s saw an accelerating ease of access (and accompanying reduction in social stigma) that led to significantly higher participation by the general population.

 A Reason for Spending Slowdown

Simply put, spending is slowing because income growth is slowing

Compensation received has slipped from 4.5% last year to barely 3% this year.  And the trend is down.  That limits growth in spending: PCE has rolled over again.

KEY TAKEAWAY: There’s nothing signaling a recession. But slower spending is not going to help the stock market.

And if the Vice Index is correct about a major spending slowdown in 4Q, that’s a problem as we head into 2018.



Andrew Zatlin

Editor of Moneyball Economics

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Watch Out Below For Coca-Cola (KO)

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Watch Out Below For Coca-Cola

Coca-Cola (KO) has been under pressure for a few years.  

KO is up roughly 33% since 2012. The S&P 500 is up roughly 88% over the same time frame.

They have sought to streamline their business and have divested a lot of assets. But the clouds are still dark for Coke.

KO has three major problems:

  1. Aggressive competitor: Pepsi (PEP) is very aggressive.  And very diversified: in addition to drinks they offer snack foods (Frito-Lays), granola bars & cereals.  KO does just beverages
  2. Soft drink tax: Cities have begun to tax soft drinks, with the inevitable result that sales are falling. By a lot.  Two months after enacting the tax, Philadelphia saw soda sales drop 30%+. Canada Dry is laying off 20% of its workers.  It’s a few million in losses, but it’s spreading to other cities.
  3. End of Food Stamps Benefits: At the height of the recession, US States waived the requirement that food stamp (SNAP) recipients had to (1) have a job, (2) be in training, or (3) provide some community work.  Food stamp recipients shot up from 27M to 47M.  8 years into the recovery, there are still 41M individuals getting food subsidies.

Most don’t realize, but food stamps are big business: about $71 billion (B) in annual support.  

Food stamp subsidies have more than doubled since 2007 (at $30B.)   

If you really want to get pissed off at program wastage… administrative costs have also doubled – from $2.4B annually to $4.8B.)  

In past economic cycles, Food Stamp participation drops back to pre-recession levels within 2-3 years of the recession. 

That stopped with the 2001 recession. Why? Because big business stepped in.  

A cool $50B per year of government money is being funneled to a handful of companies. These companies spend millions themselves in lobbying to keep the largess going.

Almost half of food stamp money is spent on candy and – wait for it – soft drinks.  

Walmart is the biggest beneficiary. They get 18% of the total.

Amazon sees this big piece of the pie and wants in. Now, Prime members who use their SNAP card get a 45% discount on food and soft drinks.

But changes are coming.  

States like Alabama and Georgia (among others) have reinstated the basic requirements to qualify for food stamps.  

Remember, this isn’t hitting hardship cases. The rules are very gentle. If you are able-bodied, then you don’t get a free ride.

Work, show proof that you are trying to work, or provide the community with 20 hours of monthly public service (one afternoon per week).  Participation has collapsed.  Alabama alone saw 85% drop in participation. Georgia 62%

As a major recipient of the spending, KO is about to face billions in falling sales.

KEY TAKEAWAY: Coca-Cola is in for a rude awakening with the food stamp regulatory changes. Taxes on soft drinks. And competition from Pepsi. All are big negatives for the stock.

Meanwhile, it’s trailing price-to-earnings ratio is 31. Its price-to-sales is just under 5.

Want to pay that much for a company with falling revenue and earnings? Didn’t think so.

Avoid the stock ahead of earnings July 26th.



Andrew Zatlin

Editor of Moneyball Economics

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