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What The Moneyball Vice Index REALLY Says About Retail Forecast!

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Total Retail Spend Grows On Hurricane-Linked Demand

First, I want to point out that the two hurricanes that have devastated Texas, Florida, and Puerto Rico have been horrible.

Hundreds of thousands, if not millions of peoples’ lives were affected. And their circumstances have changed dramatically over these past couple months.

BUT… these hurricanes were a positive for economists looking for a boost in spending.

These hurricanes disrupted routine spending… but boosted spending on autos (car/truck replacement), building materials (home repair) and gas prices (prices surged).

Vice Index Now Points To Lower Spending

Recent downward revisions to retail data confirms that the Vice Index correctly predicted a pullback in spending growth.  

  • Trend: The latest data points to a near-term bottom in the 4Q.
  • September: August Retail (ex-Autos/Gas) spending came in at 3.3% y/y.  Further erosion means September will dip to 3.1%

Wage Growth Levels Off On Improved Comps

The collapse in 2H 2016 compensation growth will boost growth rates through 2017.

A similar pattern is visible in the Vice Index chart above.

Accompanying the slide in compensation growth is a similar slowdown in the savings rate.

It’s getting harder to squeeze more spending from the consumer. Their savings are down. They don’t have as much money to spend leisurely as they used to.

National Retail Federation Predicts Holiday Spending Growth

Per the NRF, a trick of the calendar will pull in spending and prevent the spending rate from falling below last year’s.  

Weekend days are always a bigger shopping day, regardless of the season. And this year the holiday period gets to include an extra one. Otherwise the spending rate would fall below last year’s.

That’s part of the softness is being echoed in the Vice Index data. The other part is that the NRF notes the weakness in the lower income segment. No doubt the strong stock market and continued job market strength will underpin middle and upper income spending.  But will it be enough to offset the broader weakness?

Vice Index says no.

Gambling Outlook – Still On A Losing Streak

Middle America is under financial stress.

Over the past year, US casinos (ex-Vegas) have enjoyed only 1 month of positive growth.

Las Vegas is doing a bit better thanks to the return of Chinese gamblers: YTD gaming revenues are up 3.5%.

This reflects the bifurcated US economy: middle America is pulling back on frivolous activities while upper income consumers continue to spend.

(NOTE: Will higher spending by the 1% be enough to offset a spending pullback by the bottom 99%? We’ll have to find out…)

Is Cannabis Replacing Beer?


Beer consumption fell in 2016 for the first time since 2011 (per IWSR).

Several reasons are possible:

  • Changes in drinking habits:  Millenials are socializing differently: it’s popular to hang out at home with friends and “Netflix and chill.”  And that’s driving a shift: drinking at bars (on-premise) has dropped while drinking at home (off-premise) has grown.
  • Shifts in taste: Beer is down, but distilled alcohol is up.  That’s largely from new styles of tequila and bourbons being released, and the big marketing campaigns pushing them.

But maybe cannabis legalization is also playing a role.

Go back to the Netflix-and-chill socialization.  That’s very pot friendly too.

A survey in March 2017 by Cannabiz found that 27% of beer drinkers would switch to cannabis when/if it was legal.  

In 2016 Cowen & Company noted that beer consumption dropped the most in precisely the States where pot was legalized: Oregon, Washington, and Colorado. Denver saw a 6% drop in beer consumption.

KEY TAKEAWAY: Major bellwether industries for the retail consumer are showing signs of distress. The upcoming holiday season will help… but most consumers are already maxed out. They can’t NOT buy their friends and family holiday presents. After that… who knows when they’ll make those big purchases again.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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The One Chart You Need To Look At As The Markets Hit New Highs

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The One Chart You Must Follow

Don’t read too much into current stock market moves…until you use one simple measurement to gauge stock market valuations.

But first, remember that we just finished the third quarter. This really isn’t much news to provide direction.

There is also a lot of chatter that the market is overbought – and it is.

But, the basic premise is that fundamentals matter.  

That is why I believe that Jobless Claims are the best means of measuring the underlying economic growth.

What I do is take the jobless claims y/y and then invert it.  Inverting is key: the stock market going up is a positive, Jobless Claims going up is a negative.  Inverting the Jobless Claims makes the moves correlate.

You’ll see the stock market and jobless claims (inverted) are positively correlated.

Jobless claims growth do a fine job of confirming the market’s growth. We don’t want them to match perfectly – because the reality is that the market gets overbought or oversold. So this signal will never be exact.

Instead, we want to spot when the market is overbought or oversold and move accordingly.  Because the market always reverts to the level indicated by the Jobless Claims signal.

In other words, after a quantitative easing (QE) boost or a panic (a la North Korea), the market wakes up and moves to the level that makes sense based on the underlying economic growth.

To put it simply – the market is hugely rational over time, but can be hysterical in the near-term. Jobless claims is a significant indicator in where the market is going.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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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)

Sincerely,

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.

 

Sincerely,

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.

Best,

Andrew Zatlin

Editor of Moneyball Economics

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