Subscribe FREE to the Moneyball
Economics Newsletter

economy

Is the U.S. Economy Slowing Down?

By | charts, data, economics, economy, statistics | No Comments

There always seems to be a lot of noise and chatter surrounding the current president Donald Trump. But despite the controversies, here on Moneyball Economics we think the president deserves plenty of credit for the U.S. economy, which is stronger than it has been for a while. The employment rate in the country has held steady at over 60%, and business confidence has been restored as the government made it easier for people to put up their businesses. And although the stock market has remained largely flat, investors remain hopeful on how robust the U.S. economy is. Yet, despite this there are signs that it is slowing down in 2019.

This notion was put forward by Federal Reserve Chairman Jerome Powell in the Fed’s semi-annual monetary report to Congress. Powell noted that the overall world economy was slowing due to a number of international issues: “Growth has slowed in some major foreign economies, particularly China and Europe. And uncertainty is elevated around several unresolved government policy issues, including Brexit and ongoing trade negotiations.”

His speech on the U.S. economy caused a ripple effect across the globe, with the economic calendar on FXCM showing that his testimony caused a lot of market volatility. This shows how despite growth in the U.S., the global economy is still wary of the economic policies of the Trump administration. However, there was good news as the job market in the U.S. was shown to still be strong, and in 2018 the economy had grown by 3% compared to 2.7% in 2017.

Powell also had a two-hour testimony before the Senate Banking Committee and touched on the conflicting signals that the Fed has been trying to decipher. Reuters reports that this includes disappointing data on retail sales and other aspects that were in contrast with the steady hiring, wage growth, and ongoing low employment rate in the country. Again Powell pointed to international economies as the reason for slowing the U.S. economy down.

Powell remains hopeful though, as the flow of new workers into the labor force has increased, showing “there is more room to grow.” His appearances on Capitol Hill are part of his semi-annual testimony to congress. Questions ranged from the sources of rural poverty to the impact of climate change on banks, and to all of the questions, Powell has promised to give an open and transparent review.

While the slowing economy will worry a lot of businesses, Goldman Sachs believes it will benefit companies with low operating leverage. These companies tend to have higher costs associated with more sales, but lower fixed costs to cover each month. This means low operating leverage companies will be least affected by a drag of sale amidst a slowing economy. David Kostin, Goldman’s chief U.S. equity strategist said, “In the current macro environment, we recommend investors own stocks with low operating leverage and sell companies with high operating leverage.”

At the moment it looks like other business will have to ride out 2019, and see how the global economy and Trump’s economic policies play out.

Are We Just In A Dead Cat Bounce? Or Are We Headed For New Highs?

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

The market has been so volatile, we’re now in a “bad news is good news” phase.

The global economy was heading for a recession well before Trump stepped in with his trade wars (mainly with China).

China is at the heart of where the economy and markets go from here.

Or, rather, Chinese credit (aka debt).  The growth of which has been slowing.

As we all know, China has used a mountain of debt to build its economy. It quadrupled its debt to $28 trillion from 2007-2014 alone – according to McKinsey. Who knows how much more they’ve borrowed since.

All this debt has been used to pay for railways, highways and cities. Debt to pay for factories. Debt to pay for homes.

It was a rush to build, build build. Export, export, export. And create millions of jobs.

But the steam ran out a while ago. The big projects are done. To shove money into the system requires more effort.

Turned around, the demand to build factories leads to a demand for money. As growth slows and money (credit) demand slows, money creation slows.

The biggest source of money is Central Banks and their lending – aka M1 money supply.

China’s M1 supply growth peaked in early 2016 (the chart has lagged the M1 supply growth by 13 months).

The above chart shows the correlation between Chinese money (credit) growth and their economic activity as measured by trade.  At current levels of M1 supply growth, trade will continue to contract throughout 2019. That’s recessionary.

Is that a problem?  Well it is for their trading partners.

Germany’s #1 export destination is China (no longer the U.S.).  Notice the relationship between German factory orders and China’s industrial production measurement (the Caixin PMI).

When the PMI falls below 50, that’s recessionary.  And notice that Germany’s factory orders have been contracting.

China has been trying to navigate a soft landing. But Trump pushed them into a hard landing.

The only way out for China is to reverse course and inject stimulus.  Which they will. Especially as the tariffs increase in March. (The U.S. and China don’t seem anywhere close to a trade deal.)

I think the U.S. Federal Reserve (Fed) will also blink and slow rate hikes and (probably) slow the quantitative easing (QE) normalization.

In other words – a global recession is almost underway unless the People’s Bank of China (PBoC) and the Fed inject liquidity. Which they will.  Which will then push the stock market up.

So get ready for a bull run.

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

The returns speak for themselves. And they’re CRUSHING the market returns. Check it out here.

Market Update – December 13 2018

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

There’s a positive inflection point that seems to be coming up in January.

First, the market is oversold. The short sellers’ selling pressure is done. Which means most have closed out their positions for gains. And makes room for more buying.

Second, the Federal Reserve looks likely to pause on rate hikes. The markets reacted favorably when they hinted that rates were just below “neutral” – where rates should be to match inflation… where consumer prices don’t heat up too quickly.

Both of these factors combine to remove additional selling from here.

Meanwhile, fundamentals are about to turn positive.

The China-U.S. trade tiff will abate.

Political pressure will force compromises… On both sides.

China is bleeding and Trump is keeping up the pressure (the latest hit – arresting Huawei’s CFO).

However, this could quickly reverse.

The next wave of tariffs are set to hit in Q1 2019. This new set of tariffs are different from the first wave – which hit goods that were price elastic (the first round of goods had easy substitutes that were not made in China).

This next round hits goods that Chinese manufacturers dominate – which will be inflationary. (Chinese manufacturers need to raise prices in order to maintain their profit margins. U.S. consumers will pay that increase in price on the respective final good.)

Indeed, today’s NFIB Small Business Survey reflected these concerns and slumped to a low level.

Bottomline: pressure to cut a deal is building. The results will make the markets happy. And rally.

Lastly, fundamentals of the U.S. economy remain strong. Any slowdown will be a lot more mild than currently priced in.

One way to approach this would be to buy stocks that are more domestic. Restaurants, for example. Side note: avoid anything oil related.

 

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

The returns speak for themselves. And they’re CRUSHING the market returns. Check it out here.

The U.S. Economy in 2018

By | economics, economy | No Comments

Fact is, there is much noise and chatter surrounding the current Trump presidency. A lot of it, arguably, is self-inflicted: Russia, Jim Acosta, the controversial Tweets, even Rain Gate and Rake Gate. Lost in all of this, though, is the job President Trump has done in steering the U.S. economy, which is booming at the moment.

With that in mind, here is a look at how the U.S. economy has so far fared in 2018, under the stewardship of President Trump. This review will delve into some important sectors, all of which impact the economy to varying degrees. But before tackling these sectors, it is worth emphasizing yet again how the president has led this remarkable economic resurgence. In the words of finance expert Jeff Cox, President Trump “has set economic growth on fire,” and this boom is “uniquely his” and his alone.

Jobs

One of the hallmarks of the Trump Administration has been job creation, and that has continued this year. Data from Trading Economics show that from February of this year up to October, the employment rate in the U.S. has held steady at over 60.3% — a full percentage point higher than the 68-year average of 59.33%. Nonfarm payrolls have also increased this year, even breaching 250,000 in October. But just as important, wages have increased as well. In fact, wages this year are at their highest levels since April 2009. This means that more Americans now have jobs, and are actually earning more.

Notably, President Trump’s economic policies reversed an Obama-era trend where the overall employment rate grew much faster vis-à-vis employment in the manufacturing industry. In other words, more and more manufacturing-related jobs are being created under this administration as compared to its predecessor. A Forbes comparison of the last 21 months of the Obama presidency and the first 21 months of the Trump administration shows that the latter has been able to create far more jobs — up to 10 times more, in fact — in the manufacturing industry as opposed to the former. Much of this renaissance, obviously, can be traced to President Trump, who has restored business confidence pretty much across the board.

Business

As stated earlier, business confidence in the U.S., has been restored under this administration, and is in fact soaring. The reason for this, mainly, is President Trump’s decision to soften regulatory requirements and push for more across-the-board deregulation, thereby making it easier to put up a business. With the president relaxing federal rules, business leaders began investing more capital as worries about red tape and capricious changes in rules dissipated. The manufacturing industry has been one of the biggest beneficiaries of President Trump’s business-centric policies, along with the mining and leasing sectors.

Stock Market

The U.S. stock market is a beacon of strength as pointed out here previously on Moneyball Economics. It has remained largely flat throughout 2018 even as President Trump started trade wars against China and Germany. The former’s Shanghai Composite actually dropped by 25% since February of this year, while the latter’s DAX fell 10% in the same period. The U.S. stock market, in contrast, did not falter, although it has shown signs of cracking these past two months, largely due to fears of economic deceleration and the fading impact of tax cuts. The recent drops in Nasdaq, the Dow, and the S&P 500 has somewhat undone their gains for the year, but the fact that they have held steady for much of 2018 is undeniable proof of how robust the U.S. economy is.

Real Estate

Real estate has not exactly boomed per se in 2018, but it hasn’t died a painful death either. There is a slowdown, yes. But curiously, it can actually be attributed to the vibrant, growing U.S. economy. The housing market is “a victim of the economy’s success,” with the Federal Reserve raising interest rates to keep inflation in check. This has resulted in more expensive mortgages, which have caused hesitation among buyers, even with their increased purchasing power. There are, of course, other factors at play that have contributed to this real estate slowdown. Two such factors are the tariffs on imported lumber and the crackdown on immigrants, both of which have made homebuilding more expensive in the first place. Exacerbating the situation are real estate-related taxes that make buying property needlessly costlier. The mortgage recording tax — imposed on the states of Alabama, Florida, Kansas, Minnesota, New York, Oklahoma, Tennessee, Virginia, and Washington, D.C. — is a prime example in this regard. This levy is charged when inputting a transaction as a matter of public record. New York’s archaic mansion tax is another example. Yoreevo explains how the mansion tax hasn’t changed since it was introduced in 1989. This means that a million dollar apartment in 1989 would have bought you a much larger property than today, where buyers now have to pay double the amount for the same type of apartment. Despite all this, real estate experts foresee things balancing out, perhaps as early as next year, on the strength of the healthy economy and the equally robust labor market. In other words, property buyers will eventually start buying homes and other property because the strong economy have given them the capability to do so.

The U.S. economy is a good as it has ever been, and the president, despite all the noise and chatter, deserves plenty of credit. He has helped steered the economic juggernaut that is the United States of America into a historic 2018, and an even better 2019 looks infinitely possible.

It’s Time To Get Bullish

By | charts, data, economics, economy, statistics, Uncategorized | No Comments

There are many reasons to get a little bullish today.

Let’s talk first about where we are and then talk about where we are heading.

So, why did the market drop?  The recent market blow-off has been quite breathtaking: the S&P was down -10% in 2 months.  Facebook down -35%!  Amazon down -22%.

I still don’t know what triggered the drop. It seemed more technical based instead of fundamental based.

That is to say, yes, the market was overbought and ripe for a pullback… but a drop of 9%?

You may cite the trade war, tax loss selling come early, some disappointing forecasts… but most of that was already priced in.

One thing I do know: this was a massive margin call.  And it appears to be over.

In a previous report, I walked through the use of margin (aka debt).  Basically investors borrow from investment banks using their current assets as collateral.

This is a good thing in a bullish market: the underlying collateral assets rise in value – enabling more borrowing – and the newly purchased assets also rise in value.

Investors can borrow at 1% per month and watch their portfolios grow 3% or more. (This is simplified, but it’s basically 2% on the underlying asset and 2% on the assets bought on margin, minus the 1% borrowed). This is market beating that makes for big bonuses yearend by Wall Street and hedge funds.

But being over-leveraged is bad when the market turns bearish. It forces fire sales at prices the holder didn’t want to sell at. But their brokers are forcing them to sell to meet the margin calls.

Which then pushes the market down. Causing more margin calls. Rinse and repeat.  Banks are calling in IOUs and the borrowers must cover them immediately.

Evidence of extreme margin calls

When you have to sell, sell your most profitable assets to lock in gains.

Amazon was up 80% for the year before this October-November drop.  Apple was up over 30%.

In other words, the companies that seem to have been most decimated are also the companies that had some of the biggest runs.

Bitcoin (BTC) was another target for slaughter.

Demand for BTC has been steadily falling – if demand is defined as volume purchases.  Worse, anyone who bought and held BTC in the last 16 months is now losing money.  Not a lot of people are buying into it.  And that makes a sell-off more powerful.

But the biggest evidence of margin calls is in the margin debt data itself.

Margin debt is tracked by FINRA and it peaked in July. It pulled back a bit before outright collapsing (-6%) in October.  November was probably more of the same (waiting for the data).

It’s very simple: buyers had turned into net sellers.

Bullishness Ahead

I don’t know if we have bottomed. But I know we’re at or close to a short-term bottom. The markets are up 4% since November 23rd.

There are finally more buyers than sellers.

With the margin calls over, the worst of the selloff is here.  (There could be more as year-end approaches, but that’s more individual than institutional.)

I think you’ll see  pension funds and other big institutional buyers jumping in at this time of year.

Remember, a bull market is simple. There are more buyers than sellers.

Another reason to be thinking bullishness: future prospects look brighter.

China still hasn’t capitulated, which has added risk to the markets. But they will. And when they do, it’s back to business and a serious market surge.

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

P.S. Struggling to make sense of the market? Is the volatility keeping you up at night?

Well, Moneyball Traders have had opportunities to make massive gains... even through the whipsaw of October.

The returns speak for themselves. And they’re CRUSHING the market returns. Check it out here.