The rise of the internet retail GIANTS, terra retail property value and future cash flows.

I have not blogged for a while.  Why?  A number of large projects for one that required immersion, but more simply that while there was a lot of noise, the fundamentals had not changed with respect to two key areas of interest.  The first that of investor protection concerns in Canada, the second, that of economic, market and financial imbalances in the global economy.

As far as investor advocacy is concerned, no change here: the CSA has stalled and more or less reversed course on two major initiatives, getting rid of mutual fund commissions and the move to best interest standards.  The move towards upgrading a transaction led retail financial services framework, with minimal change to industry accountability, continues unabated; there is still no recognition of the fundamental responsibilities surrounding the provision of personalised investment advice in Canada (within the advisory sphere), even within the new targeted reforms and so called proposed “best interests standards”, and vested interests and regulatory infighting are stymieing any possibilities of change. 

With respect to global financial, market and economic imbalances, again, no real fundamental change here: we remain in a deeply unsettling paradigm of low growth dynamics supported by debt and asset focused monetary excess; the marginal dynamic in the US is that of rewind vis a vis monetary excess, which will be destabilising.

There is however one dynamic that I would like to shine a light on: this is the hollowing out of the terra retail space by the likes of Amazon and the move by shareholder activists in a number of companies to ditch the business and sell the real estate.

The rise in income inequality and debt to help finance the growth deficit has led to lower interest rates, numerous financial crisis and a focus on asset price support by central banks.  The asset price focus has raised real estate prices which has increased the attractiveness of selling retail properties relative to present values of terra retail profits.   The rise in property prices has also increased the costs of terra retailing, increasing the attractiveness of remote online sales.   The pressure on salaries and ultimately on operating margins by this dynamic risks further exacerbating income inequalities etc.

To me the cycle is one of concern:

Rising inequality forces an increase in debt.

Rise in debt increases sensitivity of economy to interest rates.

A rise in interest rates leads to financial and economic crisis, imperilling financial system.

Financial system supported via low interest rates and asset focused money supply without addressing income inequality dynamics.

Asset prices rise, present values of economic flows decline, income growth dynamics remain weak force move to lower costs and lower prices.

High asset prices, cost competitive imperatives forces retail to move out of terra, selling assets attractive.

Retail property turned into residential real estate for investors/higher net worth individuals.

Loss of service jobs further weaken consumption dynamics, increase reliance on low interest rates and asset price support.

Go figure!

We have lost sight of the fact that system design is critical to what you do within it.  I see little or no evidence of any awareness of the overall system we are meant to be working towards.  

US retail sales…Is the Sun really shining again?

Retail sales takeaways:

  • In rebound mode, but nothing as yet to suggest trend of slowing growth cycles has been broken.
  • Motor Vehicle and Parts sales, a key driver of sales growth heretofore, looks to have slipped to a much lower gear: less consumer credit growth fuelling demand?
  • Retail sales adjusted for CPI ex shelter and adjusted for population growth only just bubbling up around pre crisis levels.
  • Seasonality: some questions over the extent to which seasonality is impacting the data.
  • Inventory to retail sales growth at historically high levels: economy exposed to heightened short term risks to spending.
  • CPI ex shelter, flatlining post 2012.
  • Boundaries to retail sales growth: consumer credit to disposable income ratios, long term income growth declines, peak personal consumption expenditures and continuation of weak profile post late 1990s: longer term dynamics at play.

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Debt and wealth in a monetary system, part 2: discounted valuation issues in a declining frame with inequalities.

We are presently building up conflicts within the asset price frame:

  • Conflicts between asset values and GDP flows and their growth rates;
  • Between asset prices and return expectations;
  • Between human capital values and the distribution of those values and their impact on the overall wealth equation with respect to future consumption risks as well as asset pricing via increased asset focus of flows due to distribution dynamics;
  • Within portfolio structure and relative to the liquidity and capital security dynamics of liability streams. 

All of this tied to the relationship between frame transitions, emergent properties and structural imbalances and unconventional monetary policy focused overly on asset price support.

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Are debt and wealth really two separate forces in a monetary system? Part 1

I write with reference to a discussion in a recent Bloomberg View article, We’re Still Not Sure What Causes Big Recessions.

Debt/broad money supply is a key foundation of asset and human capital values and their supporting GDP flows.  Because of this, wealth and debt effects (new loans create deposits) on GDP/income flows should not be considered as separate forces. 

Debt in its money supply origination (bank deposits) is a foundation of both GDP flows and asset values and it is when debt, and specifically in the form defined, increases relative to GDP/national income flows that we should pay attention.  And we need to pay attention to all flows, not just income flows on risky assets, for example corporate profits which can squeeze out returns on both fixed interest and human capital during periods of enforced low interest rate policy.

Money leverages many activities, and asset values are always to a certain extent in a form of a bubble, but excess leverage, especially during periods where we have structural imbalances and frame transitions creates instability and risks to the financial system. 

Frame transitions that we need to watch out for with respect to excess asset focused money supply growth are where drivers of GDP growth are in decline (labour and population demographics, productivity and global transitions impacting the same) requiring lower levels of capital or growth rates of capital accumulation resulting in increasing levels of capital depreciation.  In this context monetary frame dynamics should also be contracting or slowing.  Frame transitions can be accentuated by increasing income and wealth inequality, something that may also be an emergent property of economic systems during frame transitions.   This can also leverage asset prices to prospective GDP flows.

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Perspectives on US New Manufacturing Order data:

Key takeaways:

  • The frame should dominate analysis of new order fundamentals: long term weakness dominates.
  • The new order bounce back in March/April was led by the transportation sector (MVPs in particular), but the bounce back should be set against the depth of the declines.
  • Outside transportation the trend is very weak.
  • Consumer durable goods orders on a smoothed 6 monthly basis have weakened noticeably since the start of the year.

Commentators are increasingly concerned about the risk of a recession in the US Economy.  Recessions are typically short term step backs/retracements within expanding frames whereas we are in a rather complicated contracting one the one hand (developed economies) and transitioning frame (developing economies moving from investment dependence to consumption/service sector dependence) on the other characterised by excessive debt levels, unconventional monetary policy and increasing income inequality to name but a few fundamental issues. 

So let us look at US manufacturing new order data, at first in terms of the frame, which bounced back on a monthly basis in April:

The frame

We can see from the following chart that annualised real growth rates over rolling 10 year time frames (using new order data adjusted for PPI and smoothed) have been heading downwards since the start of the decade.  The real annualised rate of growth over rolling 10 year time frames shows that the current cycle is much weaker than the pre 2008 cycle.


We can see the step down in growth more easily if we just view the high water mark dynamics (which ignores the current index level if it remains below the HWM).


In reality given the declines in flows since 2014, new orders for manufacturing adjusted for the PPI stand below levels reached at the end of the 1990s, and yet, here we are all worried about the risk of recession when the risk of something far greater has already occurred.  Tied into the frame is the key dynamic of global rebalancing: cheap labour in emerging/developing economies had offshored a significant amount of manufacturing output from the late 1990s onwards (the weak order data partly reflects this) and the expected maturing of developing economies consumers and rising wage costs was anticipated by many to create a rebalancing of global economies.  This is presently at risk a) due to the time frame of transition being longer than many expect and b) given that technology is driving out labour in key industries.

And in the next chart we see nominal annualised rates for new orders over rolling 10 year time frames: clearly the structure and balance and dynamics of the US economy and the attendant global economic dynamics are unable to support the type of growth the economy had experienced in post WWII years.  The primary issue we are facing today is not one of a prospective recession but of a weakening frame:


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US incomes…peaked or just about to surge?

If we look at real disposable personal income growth from the latest BEA data update we see what might appear to be, on the surface, a robust recovery:


Quarterly data shows similar traction:


But real data has benefited from falling energy prices and nominal flows are not as strong, in fact if we focus on nominal flows we are in the midst of a clear downward movement:

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US ISM Manufacturing PMI…supplier deliveries, a true or false signal?

The US ISM Manufacturing PMI ticked up marginally today indicating slightly stronger manufacturing activity.  The change was small from 50.8 to 51.3.   While output and new order indicators fell, employment remained the same and inventories declined slightly, supplier deliveries slowed at the fastest pace for some time.  The month on month change in supplier deliveries was 10.2%, only bettered on 5 occasions over the last 35 years.  

But supplier deliveries tend to lag new orders and we also know that new manufacturing orders fell significantly in late 2015 and have since bounced back (data in the chart below is to March 2016). 


The bounce in supplier deliveries look to be related to the bounce back in PMI new order indicator starting in late 2015 and we can see this lag here:


The bounce in new order data was also the strongest since the recession ended and is usually associated with cyclical turning points. 


But, with the continued slowdown in global manufacturing PMIs and weakness in the ISM’s other PMI components as well as weakness in readings from Markit’s own indicator I would not be too upbeat about any possible signal.  We appear to be stuck in a slowing growth trend market by downs and gradually weakening ups!

And from Markit’s own PMI release:

“The survey data indicate that factory output fell in May at its fastest rate since 2009, suggesting that manufacturing is acting as a severe drag on the Page 2 of 3 © Markit economy in the second quarter. Payroll numbers are under pressure as factories worry about slower order book growth, in part linked to falling export demand but also as a result of growing uncertainty surrounding the presidential election

CPB World Trade Monitor and Flash PMIs

We are clearly in a period of weak global growth as shown by the 6 monthly rates of change in export volumes.  What makes the current weakness of note is that it is the second such decline in the last year and the most pronounced outside of 2001 and 2008/2009:



And a closer look:


If we look at smoothed data which adjusts for monthly extremes we find further confirmation of weakness both at the annual and the six monthly:


And a closer look at the annual rate:


We can also look at the data from a high water mark perspective:


Again at both the monthly and six monthly data we see significant weakness from early 2015 followed by a late year recovery, followed by further weakness.

But the CPB World Trade Monitor is always a couple of months behind which is why current flash PMI data from the various Markit Surveys suggests that weakness has continued across global markets:

Markit Flash US Manufacturing PMI :crept closer to stagnation in May….overall business conditions…weakest since the current upturn started in October 2009….renewed fall in production…softer new order growth…further cuts to stocks of inputs….U.S. manufacturers signalled the first reduction in output since September 2009 in May….uncertainty…caused clients to delay spending decisions…reduced foreign client demand had underpinned slower growth in overall new orders…outstanding work at U.S. manufacturers falling for the fourth successive month in May….

Markit Flash Eurozone PMI – rate manufacturing output growth…second-weakest since February 2015. Growth of new orders received by factories also eased. Producers reported that domestic market conditions remained tough and softer international trade flows led to the smallest rise in new export business for 16 months.

Nikkei Flash Japan Manufacturing PMI™ – “Manufacturing conditions deteriorated at a faster rate mid-way through the second quarter of 2016…Both production and new orders declined sharply and at the quickest rates in 25 and 41 months respectively….a marked contraction in foreign demand, which saw the sharpest fall in over three years….

Thoughts on revisions to US manufacturing new order data

US durable goods order data out yesterday suggested a strong rebound in new orders in April led principally by transportation orders.  But I am not going to talk about the new data (at least until I get the full manufacturing new order data set due shortly), I want to talk about the difference between the new and the old order data:


Data to March 2016 had been revised down by some 2% for manufacturing orders and the rate of revision was similar for both durable and non durable goods.

However the wider picture shows that transportation, in particular motor vehicles and parts orders showed significant upward revisions:


On the other side of the variance we see non defence capital goods excluding aircraft, computers and electronic goods and primary metals heavily negatively revised:


The picture confirms the relative strength we have seen in auto led consumer credit growth on the one hand and weakness in exports and capital expenditure on the other.

A few thoughts on “Rise of the Robots”, risks to global rebalancing and much more

Foxconn replaces ’60,000 factory workers with robots’” was a recent headline in a BBC news report, and of course many other stories.

The global rebalancing story goes as follows: developed economies offshore production of goods in cheap labour emerging markets with strong growth prospects, benefiting from cheaper labour and also entrance into consumer markets with vast potential.  Developed economies experience declines in wage growth as manufacturing declines and service sector expands in relative terms, interest rates are lowered and consumer credit growth stimulated.   Lower cost goods and low interest rates cushion the impact of lower wage growth but the economy moves out of balance, towards consumption and debt (increasingly asset focussed) and away from production and investment.  

Ultimately this story depended on developing markets maturing their own consumer stories and wage growth/currencies rising to erase or at least obfuscate wage price differentials.  This rebalancing of developing economies to consumption and away from manufacturing/investment would have created demand for goods, services and expertise of developed economies, rebalancing GDP away from consumption and towards production and investment, raising wages and reducing dependence on credit for consumption with interest rates slowly re-ascending.

The story about Foxxconn factory workers being replaced with robots takes away important marginal flows from the rebalancing equation and reemphasises emergent income distribution inequalities: less income to labour, more to capital; reduced consumer expenditure growth to rebalance growth in developing/developed areas; greater stress on high debt levels accumulated in both areas, debt levels used to finance consumption in one and infrastructure and manufacturing in the other.  And of course, all the attendant asset price issues that have arisen as a result of low interest, financial shocks, asset price support and other unconventional monetary policy actions.

Technology is a good thing and we should always be striving to produce more efficiently and effectively and part of the move to robots in these developing markets is the reallocation of labour capital across the broader economy and the need to produce ever more goods for growing demand in many of these vast economies. 

But the separation of income flows, or at least higher growth higher value income flows to labour, is a disconcerting one and especially so given the ongoing deceleration of global economic growth and asset price divergence.  This not only accentuates the trend towards increasing income inequality and therefore damages the eco system’s ability to regenerate demand (and support asset prices), increasing reliance on loan growth (and hence debt support), but it also risks prevent a more rigorous and necessary rebalancing of growth between developing and developed that would have re-established the balance of power between labour capital and financial capital that would be necessary to keep the eco system’s flows at regenerative levels. 

Within the capitalist system there are numerous subtleties.   Human beings need a reason for being and the economic dreams of home ownership, durable goods consumption and various other lifestyle goals are gradually being hammered away and left to an increasingly small percentage of the population.   The objective of a capitalist system should be productive efficiency on the one hand and the regeneration of the model’s ability to support its asset, human and of course natural frame.   Technology has not historically been a blight on humanity, but that has been because of various forces that have coincidentally expanded the frontier of consumption and production capabilities.   

Productive efficiency is only one side of the equation and it requires balancing forces on the other to maintain a healthy “equilibrium” of sorts between all factors of production.   Talk of helicopter money, the drive for increasingly perverse unconventional monetary policy all strongly suggest that the equation that drives the eco system is out of balance.

Some obscure perspectives on Canadian Household expenditure

An economy is an asset that produces flows of consumption and investment expenditure.  In a growing economy you would expect these flows to grow.  Household consumption expenditure, while growing larger every year, has ceased to increase at a faster rate year on year for some time:


If we exclude imputed rent paid by households (money not actually spent) and money spent on games of chance (excluded here for the benefit of the analysis to follow), annual year on year (Q on Q basis) shows data as of Q4 2015 below growth in flows reached in the late 1980s:


Why have I deducted games of chance from expenditure?  Well the main reason is I believe that increased expenditure on games of chance is more a sign of consumer stress than consumer health:


Imputed rent, also a proxy for housing affordability, as a % of household expenditure has increased to close to 16% while expenditure on recreation and culture ex games of chance has fallen steadily since its peak in 1999.

The divergence can be better seen in the following chart showing annual Q on Q increases in these expenditures:


Canada: some niggles in savings rate data..

As of Q4 2015 the household savings rate was some 4%, down from 15% as of the early 1990s:


But the data hides a starker reality: disposable income less household expenditure in Q4 2015 left a savings rate of 0.5%.  The 4% savings rate is actually made up for the most part of a pension adjustment, a factor which has held relatively stable.  Not much room here for increasing expenditure.


Indeed we see a big drop in savings ex pension adjustment from 1993 onwards, matched by a large increase in consumer credit and a further deeper plunge from 2002 to 2008, matched again by consumer credit.   I cannot find stat data from Stats Canada or the Bank of Canada on HELOCs which would provide further information on influences on household expenditure (secured home equity lines of credit being far cheaper than unsecured consumer credit) but the consumer credit data seems to coincide quite well with the drop in savings rates:


Household and NPO debt relative to GDP continues to rise:


Canadian Retail Sales: slowing and heavily dependent on Autos

Retail sales fell 1% in cash terms in March on February and by 1.3% in volume terms.  Over the year volume (real) retail sales grew 1.77% and by cash (nominal) 3.17%.

In real terms real volume based retail sales look to be in a declining growth trend (note the smoothed data line) of lower highs and lower lows:


Across Canada we see weakness in Alberta and relative strength in Ontario over the year in nominal terms:


But monthly rates of change are slowing considerably from a peak in mid 2015:


If we just focus on annual data for Canada we see a very strong out of trend upward move


But this is primarily from motor vehicles and parts sales:


If we take away motor vehicles and parts and we see a flat retail sales picture (index January 2014 100):


The disparity between retail sales and retail sales ex motor vehicle and parts sales has not been this big for years:


But the trend is bigger if we just compare MVP sales to retail sales ex MVP:image

We can see this disparity below: the largest since the early 1990s, itself a rebound from the recently ended recession, so the current strength is significant.image

We can see that motor vehicle and parts sales has contributed close to 60% of retail sales over the last three ears:


So how does motor vehicle and part sales compare with wage growth?  If we look at cumulative data, in this case annualised rates of change over rolling 5 year periods, we see that motor vehicle and parts sales have well exceeded increases in hourly wage growth:


US Employment data, key points and filler!

Unlike retail sales, industrial production, new orders or a number of other economic data, the employment report comes with a lot of extra filler.  You need to dig down into the ingredients to figure what is and what is not good.  On the surface we have seen a recent deceleration, but nothing which looks out of the ordinary post 2009.


But what do we see when we dig? 

  • Productivity growth at post war lows!  Employment data is producing less and less and becoming in GDP, asset price support and income growth terms, increasingly diluted.
  • Health care and social assistance has been key to recent employment growth but the growth rate is falling off.  Looking after an aging society may not produce the growth needed to sustain the liabilities attached to the economic frame.  Indeed, many of these liabilities may not be adequately accounted for within asset valuations.
  • If we exclude health care and social assistance from employment date, employment levels only returned to growth on an annual basis in October 2014, making the current employment growth cycle a short one to date.
  • Add food service and drinking places employment (to health care and social assistance) and we have the sum total of jobs created since the recession started.  But even food services and drinking places employment growth has shown a recent declining trend.   Again, the income/productivity dynamics of this type of employment is unsupportive of the current asset/liability frame.
  • Retail trade employment growth was especially strong during the latter part of 2015 (dominated by motor vehicles and parts dealers), although we have seen weakening of late.  Watch out for MVP employment (which means an eye on consumer credit) and buildings and materials (which means an eye on construction).  There has been weakness on the retail side that is obscured by recent April data
  • The weakness in the goods producing industries, construction excepted, and trade and transport is noteworthy in the light of weakness in output, new orders and exports.  These are all key industries in terms of the economy’s ability to provide generate long term GDP, income and productivity growth.   Manufacturing and trade are important cogs in the economic machine.
  • The one relatively strong point in the data remains the professional and technical sub sector of professional services.  Relative to service sector (and hence all employment) it has continued to rise in importance, but the growth rate of this dynamic has slowed in the current cycle.  This may not be a positive for income flows if it represents a movement towards rationalisation of processes (reduced employment at the front end and a small increase at the operational core), reflective of cost reduction and other operational rationalisation.
  • Long term dynamics  – employment growth rates/part time versus full time/self employment versus employed – are all weakening or stuck in a post recession rut.  A lot of recent employment gains look like they are due to a rise in part time employment (which may be a positive if it signals increasing willingness to hire) so growth fundamentals are still very weak and possibly weakening. 

What makes employment growth and the make up of employment growth so important is that it impacts productivity and earnings growth, two key factors that require vigour if we are to accommodate high debt levels and high asset prices.  Other relevant relationships include capital investment (historically weak), income inequality and a slowdown in population growth as well as a shift in its demographics.   Finally, with weak global trade dynamics we have considerable pressure on areas of the economy that have traditionally been important to productivity and earnings growth.  

There is nothing wrong in a declining population and declining growth rates of employment as long as the relationship between asset values (debt/equity) and consumption/investment dynamics are in keeping.   I very much doubt whether it is and this is why employment growth today is a much more important indicator of financial health than it is fundamental economic health.  There are so many straws in the wind!

And the graphics:

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US retail sales….not so pretty a picture

Some concerns with the April data:

  • April is seasonally a weak month and any transfer of consumption capacity to it would skew the monthly data in favour of a higher seasonally adjusted change.
  • It is not the rebound in the data that is important but the strength of the trend.  The pattern over the last 3 years is for a weakening in the strength of the rebound and retail sales growth.
  • Inventories are high relative to sales but they have likely never been higher once we factor in the growth rate of inventories relative to sales.

And the supporting graphics:


Seasonally adjusted retail sales grew at the fastest rate for some time.  Eye popping almost! But April is typically a weak month and we have had relative weakness during Q1 2016.  

The following chart shows the actual, unadjusted, expenditure on a monthly basis for the above seasonally adjusted chart.  If consumption capacity had been transferred to April from prior months its adjusted impact would have been skewed.


More importantly is whether the rebound in adjusted consumption represents a continuation of a weakening trend or not?  This is the real question!


Also, retail inventories relative to sales remain at relatively high levels:


The highest level since 2004/2005.  However, once we realise that 2004/2005 inventory levels accompanied higher retail sales growth relative to inventory growth we can see that the inventory/sales dynamic is weaker still.


US Q1 GDP..big picture concerns conflate with shorter term weakness!

The big picture is the risk that growth may well have peaked in the current cycle:


And personal consumption expenditure flows (population adjusted) have arced in a worrying sign of secular decline for some time:


GDP growth less private employment growth has been negative since Q4 2010, one of the very few such periods in the post war period and the weakest to date and symptomatic of weak productivity and wage growth:



Preliminary US GDP grew by a real $22bn in the first quarter.  Given that we are unlikely to see the weather related bounce back in growth that we saw last year, we are left wondering where growth is going to come from in the second and third quarters, especially if global trade fundamentals remain weak.

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The slowdown continues

Manufacturing is a central cog in the growth frame and declining growth rates should be a cause for concern.  Today’s Markit flash PMI’s for the US, Japan and Europe showed continued deterioration in manufacturing fundamentals:

US Manufacturing– ““US factories reported their worst month for just over six-and-a-half years in April, dashing hopes that first quarter weakness will prove temporary. “Survey measures of output and order book backlogs are down to their lowest since the height of the global financial crisis, prompting employers to cut back on their hiring. “The survey data are broadly consistent with manufacturing output falling at an annualized rate of over 2% at the start of the second quarter, and factory employment dropping at a rate of 10,000 jobs per month.”

Japan Manufacturing – Manufacturing conditions in Japan worsened at a sharper rate in April. Both production and new orders declined markedly, with total new work contracting at the fastest rate in over three years. The sharp drop in total new work was underpinned by the fastest fall in international demand since December 2012, and following the two earthquakes on the island of Kyushu (one of Japan’s key manufacturing regions), the outlook of the goods-producing sector now looks especially uncertain.

Euro Zone Composite – ““The eurozone economy remains stuck in a slow growth rut in April, with the PMI once again signalling GDP growth of just 0.3% at the start of the second quarter, broadly in line with the meagre pace of expansion seen now for a full year. “A failure of business expectations to revive following the ECB’s announcement of more aggressive stimulus in March is a major disappointment and suggests that the modest pace of growth is unlikely to accelerate in coming months. “France continues to act as a major drag on the region, with goods exports slumping to the greatest extent for over three years. Germany and the rest of the region are enjoying more robust expansions by comparison, though growth rates slowed in April. “

The US data followed on the heels of weak industrial/manufacturing production for March and a weakening Chicago Fed National Activity index.



US manufacturing remains in a long term funk: the last time we had such weakness in the US was during the depression and the post war adjustment.


Monthly rates of change in manufacturing show weakness on both a monthly and smoothed trend basis:


Motor vehicle assemblies look to have peaked and supports recent weakening in retail sales;




CPB World Trade Monitor Update

The recent CPB World Trade Monitor Update (to February): growth in world trade volumes despite a February rebound from a January decline, based on high water mark analysis, are showing significant weakness:


World export growth based on smoothed 6 monthly data has shown significant weakening:


Add in weak readings in the recent flash Markit Manufacturing PMIs for Japan, the US and Europe, the weak St Louis Fed GDP Now readings and slowdown in Q1 China growth, and we see little in the tea levels that would suggest any meaningful reversion in the above trend is underway.

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US retail sales…update

It is a trend I have been following for some time….global growth is slowing down at a time in the cycle when you would usually expect to see inflation and supply bottlenecks.  If it were not for the very high levels of asset focussed money supply growth over the last few decades and the build up of debt and asset values (dependent on this growth), I would not be ringing any bells.  But the divergence between what asset values need growth to be and what growth is turning out to be is the problem.

US retail sales (I am still waiting for the CPI update which will allow for a better assessment of retail volumes) took a further hit in March:




The biggest contributor to the recent slide has been motor vehicles and parts sales.  This component has also been the biggest contributor to retail sales growth post the 2008/2009 recession and a large contributor to significant increases in consumer credit debt loads:





The inventory picture has also darkened with the longer term inventory to sales relationship showing an unusual divergence:


Last month’s analysis

“Investing in social infrastructure as an anti-recession tool”

…is the title of a Washington Centre For Equitable Growth article.  I think that there is some logic to investing in social infrastructure in a slowing growth frame. 


In a slowing growth frame less of a corporation’s revenue flows are likely to be reinvested and productive capital is likely to be increasingly depreciated over time, depending on the rate of decline of the frame.  At the moment this cash flow, distributed as either dividends or buybacks, is likely to go disproportionately to those with higher wealth and hence more likely to be reinvested in existing assets, driving up their prices.

In a competitive economic model cash flows would be used to finance the transition to lower growth, with flows consumed and/or used to reduce debt.  As people age the costs associated with complex medical and personal  care needs rise, but these are liabilities that are presently not that well funded.  It makes sense to optimise the allocation of flows to a) fund the economic costs of older adult communities and b) make sure that those at the younger end of the scale continue to receive the necessary education and employment skills training.   This would ensure that the expenditure flows in the economic habitat would be healthier in terms of optimising expenditure and investment.  Imbalances due to inefficient distribution of flows are likely to lead to higher asset price and financial system risks.

In a growth frame where higher levels of productive capital investment is needed it makes sense to have lower corporate tax rates, but in a slower growth frame where higher percentages are distributed it would make sense to tax these distributions at higher levels for more efficient distribution.   In a competitive efficient market place without asymmetric properties we would be less likely to have the present skewed distribution of income and wealth and associated funding pressures on key aspects of social infrastructure.

US debt/asset dynamics……the bubble the Fed appears not to see

In last week’s “Decision Making at the Federal Reserve” at the International House of New York Janet Yellen said that the US economy had made tremendous progress in recovering from the damage caused by the financial crisis, that labour markets were healing and that the economy was on a solid course.  She also said the economy was not a bubble economy, and that if you were to look for evidence of financial instability brewing you would not find it in key areas: over valued asset prices, high leverage and rapid credit growth.  She and the FRB did not see those imbalances and despite weak growth would not describe what we currently see in the US as a bubble economy.

Perhaps the question was the wrong one.   The bubble, indeed most bubbles, are financial in nature and relate to both the flow of financing and the current stock of financing.   We are always in a bubble to some extent given that one of the key facets of the monetary system is the discounting of the present value of future flows through the allocation of assets, principally of money relative to all other assets.  Today’s differential between what the economy can produce over time and the value and supply of assets that represent the future expenditure flows from our economy, are I believe, in excess of the present value of those flows.  Part of this is due to monetary stimulus designed to drive growth forward in the face of demographic change, increasing income inequality (which weakens the expenditure base of the economy) and important transitions in key emerging economies that have numerous structural relationships.

We are in a bubble and while the economic issue today is one of a deflating frame (i.e. not one with inflationary characteristic usually associated with economic overheating), the differential between the financial frame and the economic has arguably never been so wide.  Perhaps the Federal Reserve should have defined what they believed to be a bubble or rather the moderator should have been a bit cleverer! 

Some may say that excess financial leverage of households has moved back to more sensible levels:  the following chart shows that consumer debt levels have moved back to early 2004 levels but that these levels were associated with much higher longer term real GDp growth rates.  In this context debt has not really fully adjusted.


And, looking at shorter term real growth trends we see that real GDP growth has peaked at much lower levels relative not just to total debt to the rate of increase in consumer debt.  One would be forgiven for thinking that the last 5 years included a recession in the data, but it has not:

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Helicopter Money…Japan..25 charts

Japan has been at the forefront of weakening GDP/wages/growth, deteriorating demographics, elevated sovereign debt and extreme monetary policy.   Of all the major economies, given its existing debt burden and aging population, Japan is arguably the closest to Helicopter money.

Post 2012, policy (Abenomics) aimed at stimulating demand, generating wage growth and inflation has failed with respect to the specific objectives set.  But then again, what is an optimal level of consumption in a declining demographic paradigm?  Perhaps in the modern world it is one which drives growth to the point that current debt levels become manageable, or where risky assets provide returns commensurate with the consumption liabilities expected to be provided by them.   In this context, global Central Banks have been consciously attempting to manufacture growth for at least a decade.  Helicopter Money would however break this intercession, acknowledging that only more money supply and more debt relative to growth can support the expenditure/infrastructure side of the balance sheet: it is difficult to comprehend just how the asset side of the balance sheet would evolve in such circumstances.  I suspect that there would need to be an adjustment, a reset, but even that would be only half the story.  That said, on to Japan:

Japanese real GDP growth has been sliding heavily since the bursting of its own asset  bubble starting in 1990:


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Helicopter watch..PMIs

We do not need a global recession or a financial shock to precipitate a “Helicopter Money” operation, all we need is slow to anaemic growth given a heavily indebted economic and financial system challenged by demographics, productivity growth constraints, structural imbalances and increasing inequalities.  Anaemic to weak growth will itself precipitate a crisis. 

Today’s global PMI reports suggest that manufacturing growth globally remains constrained by weak/weakening export demand and that such demand growth that there is remains dependent on domestic demand conditions.  All cycles are punctuated by dips and rebounds but the relationship between the dip and the rebound and the strength of the latter provides clues as to the ultimate strength and direction of the cycle.  Today’s rebounds are lacklustre and this is cause for concern: 

PMI reports are littered with:

US Markit: “expansion remained subdued”, “weakest quarterly upturn since Q3 2012”, “stabilization in new export orders”, “generally improving global economic conditions”, “output growth remained below its post crisis trend”, “subdued client spending”, “cautious inventory policies”, “competitive pricing”;

Euro Zone: “weakest”, “ticked”, “stagnation”, “disappointing export trends”, “marginal”, “weak domestic demand”, “reduction in selling prices in response to competition”, jobs growth issues, “intensification of deflationary pressures”, “discounting”;

UK: “weakest performances”, “doldrums”, “challenging global economic conditions”, “poor levels of new orders from home and abroad”

(Russia): “worsening downturn”;

Indonesia: “output emerged from its prolonged slump”

TAIWAN: “moderate expansion of purchasing activity”, “client demand was relatively subdued”,”cautious inventory policies”, “raised staff numbers only slightly”, “renewed pressure on operating margins”, “new export work declined for the third month in a row”, “ companies continued to discount”, “Unless global economic conditions start to improve…”

Japan: “lowest for over three years”,”New orders…contraction was the sharpest in nearly two years”, “sharp drop in international demand”, “instability in the wider Asian economy”, “client negotiations and competition driving down selling prices”;

China: “fractional deterioration”, “continued to cut their staff numbers”, “relatively cautious stock policies”, “Weak foreign demand”

South Korea: “contracted for the third consecutive month in February”,”rate of decline was only marginal overall”, “slump in demand and challenging economic conditions”, “new orders stabilised….followed two months of contraction”, “increased competition and an unstable global economy”, “international demand declined for the second successive month”, “goods producers cut back on their staffing levels”, “increased competition encouraged companies to reduce their selling prices.“

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Helicopter Money…European growth

Long term Euro Area growth has been slowing and this is best illustrated by looking at annualised growth over 5 and 10 year horizons.  Could growth in the current cycle have already peaked?

image_thumb11Loan growth remains lacklustre and broad monetary aggregates ex M1 are declining.  The most recent decline in loan growth looks to be mirroring the deceleration in economic growth experienced since Q1 2015. The ECB increased its monetary stimulus push in March in response.


Employment and wage growth continue to rise but are hardly inspiring amidst considerable unemployment across the Euro Area.

The slowdown in global trade appears to be impacting key manufacturing new orders, in particular in Germany where the IFO Business Cycle Clock for the manufacturing sector shows a downturn.


German foreign capital goods orders relative to trend:

This graph shows latest results on new orders in manufacturing

Export growth is sliding…has it peaked?


Economic sentiment is in decline as is consumer confidence in the Euro Area: yet further indication that growth may have peaked.


Shorter term data, in particular the Flash Markit Composite PMI for the Euro Zone, shows a tepid March bounce back from weakness in the first two months of the year. 

“despite the rise in March, the average PMI reading for the first quarter of 53.4 was the lowest quarterly trend for a year, signalling a slight slowing in the pace of economic growth”

Slowing growth in China, what looks to be a weak plateau in the US and a still slow recovery in Europe is raising global financial/economic stability risks.  There remains considerable slack in Europe and lower energy prices appear to have helped boost consumption, but the concern remains that at low growth rates the global economy is skirting the edges of another financial crisis.  Negative rates and quantitative easing are failing, not unexpectedly, to have the desired effect.  We may be nearing the moment where interest in heavier infrastructure spending possibly financed by “Helicopter money”, given the global sovereign debt positions, could be rearing its head.  

Watch out for any further easing in growth!

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