Basically … the absence of real income growth is limiting household durable good purchases. This cannot be good for those companies if / when the economy slows down. The recovery has yet to impact disposable income (that’s one potential inference). The second inference is that households are spending their money elsewhere (experiences, digital connectivity, etc … ?)
This is an interesting thread to pull out across different data sets and analysis
Friday, the spread between 2 year and 3 month Treasury yield turned negative. (this is my personal chart that i track daily to keep focused on rate changes – source)
This prompted the question – as longer term investors will often state that between the two markets – bonds and stocks – the bond markets are the ‘smart money’. If you agree with the premise that there is a direct correlation between economic growth and interest rates (the higher the growth, the higher the rates), then economic growth looking forward in declining according to the smart money.
MarketWatch published a post this weekend where the author claimed to use the valuation methods employed by some of our ‘smart investors’ – Buffet, Shiller, Tobin, and Jones – for an annual return rate of the S&P 500 over the next decade. While anyone can question if those guys really represent ‘smart investors’, but look at their annual growth projections – 2.6%, 2.0%, 0.5%, 4.1%. Those numbers are in high contrast to the stock returns of the last 10 years.
Two sources of perceived smart money are pointing to a much slower economic growth and the resulting stock returns. Surprises could pop any time, any where … but something to certainly consider as portfolio managers refine their risk management and allocation targets … my Q1 portfolio review will modify risk scenarios accordingly.
While we in US participate in what seems like a really bad soap opera, others are working to change the landscape of international finance. Currency used in international trade is very important and reducing the US $ role as the defacto international currency is something to watch. I do not have a judgement one way or the other, but such a change will alter how we do business, and how we invest.
A provoking post on Seeking
Alpha this morning that prompted deep thinking on the money flows from the
large changes in oil prices over the last 5 years. The basic gist which
totally makes sense is that the oil profits are not as important as the consumers’
total cost for oil. The lower their costs, the more they spend elsewhere
in the economy. The inference then is that higher oil prices are totally
deflationary – they reduce broader consumer purchasing … it doesn’t really
matter if the oil profits end up in US, Canada, Russia or Arabian Peninsula.
I have been talking about
this for several months, maybe even a year or so, but not to the technical
depth that these two people are this past week. I think this is worth
considering and baking into your long-term risk management variables.
My pontifications have been more cultural evolution derived but these
guys are helping me understand the investment implications.
GDP ‘3rd’ estimate was released this morning. One paragraph i found most interesting: “The acceleration in real GDP growth in the second quarter reflected accelerations in PCE, exports, federal government spending, and state and local government spending, as well as a smaller decrease in residential fixed investment. These movements were partly offset by a downturn in private inventory investment and a deceleration in nonresidential fixed investment. Imports decreased after increasing in the first quarter.”
I bolded the points i focused on. Government spending was a key catalyst in the figures – debt spending in great degree (?)
Point – risks continue to grow globally across mutliple asset types. there are short term plays but they contain complex variables and winning hands are beyond average investors (myself included). i am comfortable with my recent moves taking more and more capital out of equities and placing in short-term treasuries (<6 months). Might i miss out another 5% of S&P upward melt? sure … but as somebody posted last week (can’t remember who): i want a return OF my capital, not just a return ON my capital.
Reminder: i’m semi-retired with short runway to acquire additional capital
“Meanwhile, the threat that tariffs will eventually push up consumer prices in the U.S. only adds to the case for preemptive rate hikes. Goldman’s Jan Hatizius released a note this week that carried the title: “More growth, more tariffs, more hikes”. Whether or not the Fed will reach the end of the road in terms of their capacity to raise rates sometime in 2019 is the subject of vociferous debate and I won’t broach that subject here. For our purposes, the point is simply that piling stimulus atop a late-cycle dynamic forces the Fed into hawkishness.
That’s dangerous because it has the potential to create a false sense of confidence among, for instance, small-business owners, who may not appreciate the finer points of what’s going on. On Tuesday, the NFIB said small-business confidence (as measured by their optimism index) hit the highest level in its 45-year history in August.”
A recent post really hit the nail on the head in describing a future scenario where the overwhelming quantity of data and information will require well-educated people to analyze, interpret and make plans (knowledge). It is easy, I think, to infer that those markets (geographies, countries, cities, etc) that are heavily investing into education, training and innovation around mathematics, science and computer science will be the economic, innovation and thought leaders of the future.
Sadly, most of us in the USA watch as our education programs wither from underfunding and especially the under appreciation of teaching as a serious, high-paying profession.
This is a fascinating take on how Trump’s talk boxed in Fed … a bit dramatic for sure but expected from this author (i read almost every thing he posts on SA). When things are going to get way more complicated, i would hate to be the Fed with options being limited – intended or unintended.
This guy has a great way of pushing aside the noise and superficial headlines that do not help. This set of questions is incredibly important to really dig thru the noise to find your view on job-based inflationary pressures. Other than prices, this is the other big element; after reading these questions, one has to ask how much employment pressure there really is.