7/7/19: 2Q 2019 BRIC PMIs: The Bad, The Ugly, and The Uglier Still

BRIC PMIs for June are out and with them we have 2Q 2019 figures. And the story they tell is two-fold:

• Fold 1: There is an ongoing Global-scale slowdown in the economy that is broad, sharp and testing the waters of a mild recession approaching
• Fold 2: The BRICs are barely providing any upside support to the Global momentum.

Take Manufacturing:

This is simply the 'Uglier' side of the ugly. Global Manufacturing PMI hit 49.8 in 2Q 2019 - statistically, zero growth level, nominally - a manufacturing recession ward, albeit a very shallow one. More ominously, we now 6 consecutive quarters into declining growth reading. Now, per BRICS: Brazil at 50.9 (holding somewhat just above the water line, but down from 53.0 in 1Q 2019); Russia is at 50.1 - basically zero growth and down from 51.3 in 1Q 2019; India is at 52.2, down from 53.6 in 1Q 2019, and China is at 49.9, having delivered four quarters of statistically zero growth readings. So BRIC GDP shares-weighted Manufacturing PMI is at 50.6, which means the overall Manufacturing sector is barely staying afloat on the choppy growth seas. In 1Q 2019 the same was 51.0 and the 2q 2019 reading is at the lowest level since 3Q 2016.

Services sector posted Global PMI at 52.1. Which sounds like 'growth, but is hardly impressive. 2Q 2019 was the weakest since 4Q 2016, and marks the fourth quarter of shrinking PMI readings.

BRICs: Why, they are barely staying above the Global trend. Brazil is in a statistical Services recession at 48.6 in 2Q 2019, the worst reading in 3 consecutive quarters; Russia posted Services PMI of 51.4 in 2Q 2019 - seemingly respectable, but the lowest reading since 4Q 2015; China Services PMI is at 53.1, basically unchanged on 53.0 in 1Q 2019 (about the only 'british' spot); and India is at 50.3, the lowest for any quarter since 1Q 2018.

All of which means that the Composite activity index reading is a bit of debacle:

Overall, Global Composite PMI fell to 51.5 in 1Q 2019, the lowest reading since 2Q 2016. Dynamics are also bad: Global Composite PMI has now declined every quarter since its local peak of 54.2 in 1Q 2018. And the BRICs are in the same boat: Brazil Composite is at 49.3, the lowest reading in 3 quarters; Russia Composite at 51.2, the lowest in 13 quarters; India Composite at 51.4 is the slowest growth signal in seven quarters; and China is at 51.4 for the lowest reading in 8 quarters.

Not a pretty sight... 

7/7/19: Investment for growth is at record lows for S&P500

Interesting chart via @DavidSchawel showing changes over time in corporate (S&P500 companies) distribution of earnings:

In simple terms:

1. Much discussed shares buybacks are still the rage: running at 31% of all cash distributions, second highest level after 34% in 2007. On a cumulated basis, and taking into the account already reduced free float in S&P 500 over the years, this is a massive level of buybacks.
2. 'Investment for growth' - as defined - is at 51% - the lowest on record.
3. Meaningful investment for growth (often opportunistic M&As) is at 38%, tied for the lowest with 2007 figure.

S&P 500 firms are clearly not in investment mode. Despite 'Trump incentives' - under the TCJA 2017 tax cuts act - actual capex is running tied to the second lowest levels for 2018 and 2019, at 26% of all cash distributions.

6/7/19: American Pride: Another Divide

A great nation, divided and wanting for change as it may be... But just how divided are Americans? Bloomberg chart on a recent Gallup Poll data is quite telling:

The first thing to note is the demographic divide by age. Less than 50 percent of 18-29 year olds in the survey are 'extremely' or 'very' proud of being American. Less than 2/3rds of those of age 30-49 do as well. For older generations, the same number is 80 percent and higher.

The second is the partisan divide by party affiliation: only 50 percent of those identifying with the Democratic Party are 'extremely' or 'very' proud, against ca 95 percent of the Republicans. The Independents clock in under 65 percent.

Overall, Liberals, Democrats and the young are the flash points of relative disenchantment with the American identity, although the proportions of those who do not identify themselves as proud whatsoever and those identifying as proud 'only a little' is below 1/3rd for all three categories.

The numbers suggest less of a disillusionment problem than the weakening of the sentiment. Which does offer a glimpse of hope: repairing American's perceptions of their identity is not an insurmountable task. The good news, American people do appear to be longing for change and hope. The tougher-to-deal-with news is that we seem to lack leadership candidates to take us there...

3/7/19: Record Recovery: Duration and Perceptions

While last month the ongoing 'recovery' has clocked the longest duration of all recoveries in the U.S. history (see chart 1 below), there is a continued and sustained perception of this recovery as being somehow weak.

And, in fairness, based on real GDP growth during the modern business cycles (next chart), current expansion is hardly impressive:

However, public perceptions should really be more closely following personal disposal income dynamics than the aggregate economic output growth. So here is a chart plotting evolution of the real disposable income per capita through business cycles:

By disposable income metrics, here is what matters:

1. The Great Recession was horrific in terms of duration and depth of declines in personal disposable income.
2. The recovery has been extremely volatile over the first 7 years.
3. It took 22 quarters for personal disposable income to recover to the levels seen in the third quarter of the recovery.

So what matters to the public perception of the recovery in the current cycle is the long-lasting memory of the collapse, laced with the negative perceptions lingering from the early years of the recovery.

To confirm this, look at the average rate of recovery in the real disposable income per quarter of the recovery cycle. The next two charts plot this metric, relative to the (a) full business cycle - from the start of the recession to the end of the recovery (next chart) and (b) recovery cycle alone - from the trough of the recession to the end of the recovery (second chart below):

So looking at the trough-to-peak part of the cycle (the expansion part of the cycle) alone implies we are experiencing the best recovery on modern record. But looking at the start-of-recession-to-end-of-recovery cycle, the current recovery period has been less than spectacular, ranking fourth in strength overall.

Which is, of course, to say that our negative perceptions of the recovery are anchored to our experience of the crisis. We are, after all, behavioral animals, rather than rational agents.

2/7/19: Inverted Yield Curve

Inverting U.S. yield curve is one of the best early indicators of recessions. Or at least it used to be... before all the monetary policy shenanigans of the last 11 years. Regardless, the latest U.S. Treasury yields dynamics are quite disquieting:

2/7/19: Factset: Negative EPS guidance hits the highest 2Q level since 2Q 2006

Bad news for the 'fundamentals are sound' crowd when it comes to justifying stock markets exuberance: based on data from Factset, to-date, the number of companies reporting negative earnings per share (EPS) guidance in 2Q 2019 has reached 87 - the highest number after 1Q 2016, and the highest number for any 2Q period since 2006. Total number of reporting companies to-date is 113, which means that so far in the reporting season, a whooping 77% of reporting companies are guiding negative EPS.

Technology sector leads negative EPS guidance issuance. Per Factset: "Information Technology sector, 26 companies have issued negative EPS guidance for the second quarter, which is above the five-year average for the sector of 20.4. If 26 is the final number for the quarter, it will tie the mark (with multiple quarters) for the second highest number of companies issuing negative EPS guidance in this sector since FactSet began tracking this data in 2006, trailing only Q4 2012 (27). At the industry level, the Semiconductor & Semiconductor Equipment (9) and Software (6) industries have the highest number of companies issuing negative EPS guidance in the sector." Which means the tech sector is singing the blues. Consumer discretionaries and Healthcare are the other two sectors showing underperformance relative to 5 year average.

Which is ugly. Uglier, yet, as we are not seeing any correction in the markets to reflect the deteriorating fundamentals. And uglier still when one considers the fact that the 'S' part of EPS has been gamed dramatically in recent years through rampant shares buybacks, while the 'E' bit has been gamed via opportunistic M&As.

2/7/19: Earnings and Market Valuations: Equity PEs

While P/E ratios are gamable and informationally highly restrictive, the metric is still a useful one when considering as to how expensive/cheap equity can be. Here is the latest chart via @topdowncharts showing P/E ratios based on 10 year average earnings (smoother series, but the long average is even less informationally rich than pure P/Es):

Which makes:

1. U.S. markets overvalued in excess of 2006-2007 peaks, but less than in the blowout bubble of the dot.com era;
2. Developed markets (ex-US) and Emerging markets relatively moderately priced.

Given the fact that U.S. equities earnings are probably the most susceptible to strategic manipulation, e,.g. shares buybacks, M&As and earnings/cash management, the U.S. markets are in heading for trouble.

29/6/19: Why Moody’s is wrong to keep Cyprus on junk status

Euromoney on Cypriot economy: "Why Moody’s is wrong to keep Cyprus on junk status" https://www.euromoney.com/article/b1g125jl1wvf0v/why-moodys-is-wrong-to-keep-cyprus-on-junk-status with a comment from myself.

24/6/19: Markets Expect the Next QE Soon...

Adding to the previous post on the negative yielding debt, here is a recent post from @TracyAlloway showing Goldman Sachs' chart on implied probability of the U.S. Fed rate cuts over the next 12 months:

Source of chart: https://twitter.com/tracyalloway/status/1141895516801732608/photo/1.

The rate of increases in the probability of at least 1 rate cut is staggering (as annotated by me in the chart). These dynamics directly relate to falling sovereign debt yields (and associated declines in corporate debt yields) covered here: https://trueeconomics.blogspot.com/2019/06/24619-negative-yielding-debt-monetary.html.

Notably, as the markets are now 90% convinced a new QE is coming, their conviction about the scale of the new QE (expectations as to > 3 cuts) is off the chart and rising faster in 2Q 2019 than in the previous quarters.

24/6/19: Negative Yielding Debt: Monetary Contagion Spreads

Negative yielding Government debt (the case where investors pay the sovereign lenders for the privilege of lending them funds) has hit all-time record (based on Bloomberg database) last week, at 13 trillion.

Source of charts: https://www.bloomberg.com/amp/news/articles/2019-06-21/the-world-now-has-13-trillion-of-debt-with-below-zero-yields.

Quarter of all investment grade corporate debt is now also yielding negative payouts (note: bond returns include capital gains, so as yields fall, capital gains rise for those investors who do not hold bonds out to maturity).

In effect, negative yields are a form of a financialized tax: investors are paying a premium for risk management that the bonds provide, including the risk of future decreases in interest rates and the risk of declining value of cash due to expected future money supply increases. In other words, a eleven years after the Global Financial Crisis, the macro-experiment of monetary policies 'innovations' under the QE has been a failure: negative yields resurgence simply prices in the fact that inflationary expectations, growth expectations and financial stability expectations have all tanked, despite a gargantuan injection of funds into the financial markets and financial economies since 2008.

In 2007, total assets held by Bank of Japan, ECB and the U.S. Fed amounted to roughly $3.2 trillion. These peaked at just around $14.5 trillion in early 2018 and are currently running at $14.3 trillion as of May 2019. Counting in China's PBOC, 2008 stock of assets held by the Big 4 Central Banks amounted to $6.1 trillion. As of May 2019, this number was $19.5 trillion. Global GDP is forecast to reach $87.265 trillion by the end of this year in the latest IMF WEO update, which means that the Big-4 Central Banks currently hold assets amounting to 22.35% of the global nominal GDP.

Negative yields, and ultra-low yields on Government debt in general imply lack of incentives for Governments to efficiently allocate public spending and investment funds. This, in turn, implies lack of incentives to properly plan the use of scarce resources, such as factors of production. Given that one year investment commitments by the public sector usually involve creation of permanent or long-term subsequent and related commitments, unwinding today's excesses will be extremely painful economically, and virtually impossible politically. So while negative yields on Government debt make such projects financing feasible in the current economic environment, any exogenous or endogenous shocks to the economy in the future will be associated with these today's commitments becoming economic, social and political destabilization factors in the future.

20/6/19: Say Goodbye to the Trump Bump in Corporate Investment

Trump's investment boom... is vapour now.

And that is despite the fact that tariffs on China, threats of tariffs against Mexico, mini trade war with Canada and threats of a trade war with Europe - all supporting domestic investment all along... 

20/6/19: The 'Mental' Bits of Economic Fundamentals

My article on the statistical mishaps in the U.S. and Irish economic data for the Manning Financial: https://cfc.ie/2019/06/11/economic-outlook-by-dr-constantin-gurdgiev/.