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:

Continue reading

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.


Presentation to the Expert Committee To Consider Financial Advisory And Financial Planning Policy Alternatives on Behalf of SIPA

Please note the following small presentation I provided with respect to the above on behalf of the Small Investor Protection Association on 3 May in Toronto.


The Small Investor Protection Association fully supports recognising the importance of professionalism in financial planning. 

Financial planning is an important component of a wealth management universe focused on the processes and frameworks that underpin the efficient planning, construction and management of personal financial assets and their liabilities over time.  

Wealth management is a complex area and those firms and individuals providing advice within it have considerable discretion over the processes that plan, structure, manage, educate and communicate.  We believe that this discretion, the complexity of the processes and the asymmetry of knowledge and experience place the professional advisor and the firm in a position of great responsibility.  SIPA believes that this places fiduciary duties, accountabilities and responsibilities on advisors for the processes that plan, structure, manage and communicate outcomes irrespective of whether the service’s nomenclature is discretionary or advisory and irrespective of title.   

Existing regulation, at the advisory level, needs to widen its remit to those services’ processes that underpin wealth management outcomes and away from a predisposition with the transaction.

It fully supports raising the standards and the integrity of service processes involved in the planning the construction and management of financial needs service processes while deemphasising the role of the transaction in process, regulation and remuneration.

The problems we see in the delivery, quality and accountability of service outcomes lie with a system that rewards the transaction and that overly focuses on the transaction in its service processes.  The focus on the transaction de-emphasises the importance of construction, planning and management in advice based service processes and constrains the development of services that put the client’s best interests first and foremost in the process.  The current system does not operate wholly in the best interests of the investor, whether this is at the advisor, firm or regulatory level.  

As the CFA institute and the Canadian Advocacy Council for Canadian CFA Institute Societies both point out, “the current regulatory scheme is incomplete”. 

SIPA is concerned over the division amongst Canadian regulators as to the merits of introducing best interest standards and the removal of commissions.  It is also concerned that even the proposed statutory best interest standard may itself be diminished by industry interests and calls on Canada’s democratically elected legislatures to become directly involved in the modernisation of Canada’s regulatory system. It believes that advisors’ responsibilities and duties with respect to advice, processes and communications are indeed fiduciary ones. 

And from SIPA’s own submission on the subject:

“This illusion fed to the general public is unfair. It results in many personal tragedies when hard working people lose their lifetime savings quite often late in life when they do not have the time to recover. It creates desperate life-altering events that result in health issues, loss of hope and faith, disruption of families and sometimes victims taking their own life.”

We live in a trusting society. Canadians believe they can trust professionals that are regulated like doctors, lawyers and other professionals. Yes, they trust their “Financial Advisors” because they believe they are regulated professionals. They are not aware they are simply sales persons without responsibility to look after clients’ best interests; they do not feel a need to study medicine or a need to study finance and investments. They are busy with careers and family.

A small investor exclaims and asks “why are regulators not collecting fines for serious violations of securities regulations?”!

This is a brief post on a very important and highly complex issue that cannot be done justice in the space provided.  There are many issues today, in Canada’s financial services industry, where funding for independent research of issues impacting consumers would be of tremendous value to the continuing debate over standards and regulation

Canada’s Small Investor Protection Association (a small non profit organisation that serves as a voice and resource for Canadian investors who have been subjected to financial abuse and/or bad advice by the financial services industry) recently released a report by one of its members on unpaid fines levied by regulators on industry participants but which have not yet been collected.  The report has been discussed in numerous articles, the most detailed of which is found in a piece written by Yvonne Colbert of CBC news.

Continue reading

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.

Continue reading

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.

Continue reading


IMF Warns Debt Risk Growing From Big Firms in China, Other Emerging Markets, April, WSJ

In China, fully $1.3 trillion of corporate loans, or one-seventh of the total, are owed by companies whose profits don’t cover their interest payments, a problem that could trigger bank losses equal to 7% of gross domestic product if the issue isn’t addressed, the IMF said in a report on global financial stability.

Chinese Buyers Hungry for Canadian Homes With Inquiries Up 134%, April Bloomberg

China and India Have Different Answers for Their Debt Messes, April Bloomberg

Mounting debts could derail China plans to cut steel, coal glut, March, Reuters

China’s debt bubble threatens global economy March, Nikkei Asian Review

China’s debt explosion threatens financial stability Fitch warns, April, Telegraph

“Living standards fell in 2015, ONS figures show”, April, Guardian

National Accounts articles: Alternative measures of real households disposable Income and the saving ratio: March 2016

Shows a decline in household disposable income if we remove imputed rents, pension entitlement adjustments and other non cash adjustments used to define PDI and savings rates.   With respect to savings rates we see a different picture too:


The U.S. Housing Affordability Crisis: How a Rent and Low-Income Problem is Becoming Everyone’s Problem, April, Zillow

Active Share: Key Insight or Flawed Measure? February, CFA Institute

Night Fasting: Not Eating For 13 Hours Or More Every Night May Reduce Risk Of Breast Cancer Recurrence, March, Medical Daily

Intermittent Fasting, March, Australian Spinal Research Foundation

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

Bubbles….what are they and why can the Fed not see them?

In a previous post:

I commented on Janet Yellen’s putdown of suggestions of excess usually associated with the term “bubble” and graphically demonstrated that there existed a significant divergence between US economic/income growth and asset values (debt/equity) that would suggest a bubble of sizeable proportions existed. 

I also provided a link to a prior post on bubbles that mentioned per se that the very fact that asset values tended to discount the future, in a monetary system, meant that bubbles were in fact a de facto natural component of a monetary driven economic paradigm.  The key issue was the balance and the relationship between the two, itself a function of the nature and balance of fundamental economic relationships and their emergent properties.   A great many of my previous posts assert the existence of a perilous divergence and describes the many imbalances that have accentuated this imbalance and which have added to its instability.  

When we talk of bubbles in the same frame as bursting and collapse what we are talking about are unsustainable relationships that are being pushed to their extremes and beyond.   We are talking about divergence in the order of things, about structures whose natural relationships are being pushed so far out of alignment that minor shocks produce extreme outcomes..  This is where the statistician’s fat tail comes in and once we realise that we have an imbalance it is no longer a fat tail but a much higher probability outcome.

A bubble may burst in the sense that the growth of the energy in the system exceeds its structural ability to continue to expand at a rate consistent with the change in energy.   This could be seen as inflation in the economy or as inflation in an asset price as demand for that asset outstripped its value and the ability to supply that demand.  Bubbles in this context can lead to misallocation of resources as noted in a recent BIS report on this issue.  

A bubble can also deflate in the sense that the energy driving the fundamental drivers of growth in the system either no longer require the frame to expand at the same rate or, indeed, that the financial frame needs to scale backwards to accommodate the decline in system energy (this would be the case where demographics are slowing and are in decline and where productivity growth has slowed and also where distribution of income is impaired). 

If monetary and fiscal decision makers view the gear change in growth as a temporary aberration and attempt to force expansion of either/or both the fundamentals and the financial frame, when in fact the frame is naturally contracting (depreciating) or its growth rate slowing, then we risk divergence between the fundamental drivers of the system and the frame.  In other words the energy added to the system complicates the much needed adjustment of the  frame as stimulus temporarily expands both, and in the current case, expands the financial frame at a growth rate well in excess of the fundamentals whose own trajectory has been temporarily amended.

In other words where we have had slowing demographics, transitory economics and monetary stimulus as well as increasingly skewed distributions of national income.  We have had a de facto bubble developing and this has manifested itself in ever higher levels of debt and asset focussed money supply growth at the same time as productivity/demographic/CAPEX/economic/income growth have decelerated.  But either the Fed cannot see or, perhaps like many regulators, it does not feel that righting bubbles is its mandate.  All the same the extremely narrow focus on system dynamics is a disturbing one that has more than likely been a major vitiating factor in the development of current imbalances.

“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:

Continue reading

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:


Continue reading

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.“

Continue reading

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!

Continue reading

Helicopter Money…increasingly likely if growth continues to slow….

Helicopter money is essentially central bank financed government expenditure: Central Bank issues money to buy government debt, government uses money to fund, inter alia, tax breaks and/or infrastructure spending.

China is transitioning to slower growth, Japan remains mired in slow growth/demographic decline, European growth rates remain constrained as does US growth and there are problems in other key economies, notably Brazil and Russia.  As this pattern remains in situ, the risks to the financial system rise higher and so do the chances of “helicopter money”.

US real per capital GDP growth based on high water mark analysis


US Nominal GDP profile: rolling average quarterly change in GDP less inventories and Consumer Credit


Annualised real GDP growth Japan over rolling 10 year periods:


The same for Japanese household consumption:


Euro Zone real growth rates: annualised over rolling 5 and 10 year time frames: image

And the same for household consumption:


In the past, asset markets have typically reacted to late cycle interest rate rises as monetary policy looked to restrain growth in the face of increasing production/supply bottlenecks.  Asset markets would increase their preference for money relative to other assets, asset market leverage and consumption/production focussed loan growth would scale back; the economy would move into a “step back” or so called recession.  But, this retracement of markets and the stutter in monetary and economic growth was usually a short term phenomena: populations, technology, productive capital, and loans were in an expansionary phase.  Growth rates of populations, productivity and capital expenditure have fallen, to lesser/greater extent, across the world. 

At a point in the economic cycle when monetary policy would usually be rising, to hold off over heating economies, growth is not only slowing but reinforcing a long established slowing trend.  The recent US interest rates rise should not be considered as a counter cyclical rise but a “normalisation” of monetary policy.

A slowdown/well paced decline in growth should not in and of itself be a problem.  Capital depreciation is a natural way in which economies transition to lower growth/declining frame regimes.  There are two ways in which the current slowdown in growth is a much bigger risk to economic/financial system health:

1 – The first is that asset markets and asset focussed money supply growth have been juiced and expanded to stimulate growth on the assumption that weak growth was transitory/shock induced; these actions have raised the supply and value of assets (debt and equity) relative to economic growth; as growth slows, and the slower trend is established, expectations over future flows which give assets their value also decline.  In the absence of monetary policy aimed at asset values, asset values correct (equity) and/or default (bonds/loans).  This correction impacts present and future consumption as well as the financial system: bank deposits (broad money supply) are backed by assets; as assets devalue/default deposits/money supply are impaired further impacting economic stability. 

2- The distribution of national income has been increasingly skewed towards corporate profits and very small sections of the population.  Unequal distribution of income and capital impacts present and future consumption and capital expenditures associated with that profile.  These capital expenditures risk extending to core infrastructure/health/education spending.   Quality of life at so many levels risks being impacted.

US Capital expenditures


Helicopter money may be needed to support the eco system in the event of an asset price and financial system shock, as growth slows further or experiences a decline, amidst dysfunctional distribution of flows (income inequality). The time for Helicopter money may be drawing near, but it should not be considered a saviour of asset markets, rather the last gate along this particular road.  How it impacts the economic/financial system is likely to be complex and especially so given that the asset price unwind and accompanying demand shock of excess financial system debt could be fast acting.

US Manufacturing orders and inventories to January 2016

A little late in reviewing this data, but here are the takeaways:

We know new order growth had slowed considerably and had been sharply negative for some time at the nominal and moderately so at the real.

The rate of decline has since halted, but real growth is pedestrian and looks to have plateaued at a time when headline employment rates suggest the economy is close to “full” employment. 

Inventories have been scaled back but remain high, and particularly so in the key motor vehicle and parts sector which has shown weakening in momentum and the notable transportation sector.

Wage growth/consumer credit relationships are strained and it is difficult to see where domestic demand growth is going to come from, especially with the global weakness we have seen elsewhere.

Manufacturing is a small but central cog in the machine: its components are used everywhere and a slowdown in one connected cog inevitably implies a changing dynamic elsewhere.

And the pictures:

Continue reading

US retail sales

With the recent CPI data I have updated my retail sales graphics.  Takeaways?

  1. Sales growth is slowing but no recessionary conditions;
  2. Weak historical growth profile held up by motor vehicles and parts sales;
  3. Motor vehicle and parts sales held up by consumer credit growth;
  4. Points 2 and 3 slowing;
  5. While personal disposable income has exceeded retail sales growth of late, cumulative historic relationship remains weak;
  6. Consumer credit growth to income relationships strained;
  7. Population growth weak in historical context;
  8. Current cycle lacking in typical wage growth spike

And the graphs:

Continue reading

Helicopter drops: feeding the animals in order to keep the zoo in business..

I was reading “Helicopter drops might not be far away” by Martin Wolf in the FT.  By now those interested in macro economics/monetary policy/asset markets should be well aware of the long gradual easing in interest rates, especially since the 1990s.  Lower interest rates did not just encourage people to borrow for consumption, but they also boosted the amount of borrowing for asset purchases with rising asset values also looping back into consumption for a while.   During this period, global money supply growth also became ever more asset focussed. 

For a while this helped stimulate consumption in key economies, also aiding in developing economy growth.   Developed economy consumers became ever more indebted at a time when income growth was also slowing, but given that asset markets kept rising and interest costs kept falling, everything was able “to keep on going for a while”…many felt that this period of low interest rates and rising asset markets was a “great moderation” and few seemed to notice the enveloping divergence. 

While the financial crisis was the bursting of this particular reality, it also marked the onset of a period of unprecedented financial engineering in response, itself a denial of that reality. 

Continue reading

US Retail Sales, Industrial Production, Manufacturing New Orders

Nominal retail sales data is typical of a recessionary environment, but much of this is due to declining gas prices.  Manufacturing output and new order data is also typical of recessionary conditions.   Motor vehicles and parts sales/new orders/output are still strong data points albeit showing signs of weakening, especially in the auto components.  Cycle to cycle we see retail sales, orders and output all failing to establish a clear positive post crisis fundamental growth trajectory.   That said there does not appear to any abrupt collapse in the data which is not necessarily a positive.

Continue reading

Correlations, volatilities and expected returns as the monetary tide reverses flow..

I note comments by El-Erian over Central Bank’s inability to suppress volatility as a bigger risk than China and I would agree although I would qualify this in terms of the immediate asset price risk.   Asset focussed money supply growth and asset price relatives (relative to GDP growth and income growth as well as its distribution) are all deeply negative for asset markets when liquidity dynamics, amongst others, change.

Recent commentary by Zero Hedge on the winding up of Nevsky Capital is also worth reading: the Nevsky Capital report suggested that a disciplined structure can no longer be counted on to realistically manage risk and return given the uncertainty of an increasingly skewed distribution of possible outcomes in an environment worryingly distanced from fundamentals/exposed to unconventional monetary policy; liquidity dynamics in the market place also impacted.  

Another interesting piece of data shows the 10 year rolling returns on commodities that I found in a tweet from @zatapatique.

I have written on the issues of excess asset focused money supply and liquidity for some time (relevant posts of mine).

Many portfolio management structures depend on expected return/correlation/standard deviation assumptions that would be very much exposed to a break in the direction of money flows towards assets.  All statistical measures of risk and co variance are drawn from the impact of monetary demand flows for assets.  In an environment where monetary policy is accentuating flows to asset classes as well as expanding the quantity of money and reducing the supply of certain asset classes the natural flow response to risk and return in the environment are muted.  As unconventional monetary policy recedes, additions to the quantity of asset focussed money and interest rate support reverses, the natural flows not only start to reassert but the prior excess flows adjust to the new environment.  We get a break out of trading ranges and covariances.

This is all incredibly risk and uncertain for those dependent on traditional statistical measures of asset price sensitivities and covariances.

“Solving the UK Housing Crisis , the Bow Group”, so what about Canada?

“Denmark prohibits non-EU nationals from buying a home unless they have lived in the country for five years”

This is a worthwhile read.  A report on the UK housing market’s affordability crisis by a UK Right Wing think tank that recommends limiting foreign ownership of the property market.  I can definitely see some relevance to Canadian property markets here and the issues raised are very much in line with those expected by the considerable excess asset focussed money supply growth we see globally.   Unconventional monetary policy and increasing income inequality running alongside slowing economic growth have increased the asset focus of global money supply, especially towards hard real assets such as property that will not disappear in an economic/financial crisis.  

You can see this in the Canadian asset market:

The real return on the S&P/TSX composite since the market peak in September 2007 has been –23% to mid December 2015:


Yet the value of the Canadian residential property and land has moved the other way:


Interestingly the MLS Canadian Composite Home Price Index shows an increase of 33% since since September 2007 and the Greater Toronto component an increase of 59.2%.  

And there has been an increasing dialogue on the issue in the Canadian press:

Affordable housing crisis affects one in five renters in Canada: study” “One in five Canadian renters face an affordable housing crisis, spending more than half their income on shelter costs, a problem that appears to be even more acute in suburbs and small cities than in major urban centres.”

Moody’s, The Economist warn of high Canadian debt, housing prices” “”The risks are less around the rapid house price appreciation per se, than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,”

Before we step any further we need to reassess the economic engine, its habitat and condition and the conflict between the two.

Capitalism and its economics have been the subject of much debate since at least 2007.  At its heart it represents the engine of economic growth, of technological progress, of the efficient allocation of resources, the determination and distribution of return/prices (wages, interest, dividends) key to attracting risk takers and capital and of the accumulation of capital required to produce as well as the development of markets for the trading of goods, services and assets.

Capitalism’s core engine has taken us far in at least one direction.  Two of its main alternatives socialism and communism have long since foundered on the human condition and the many issues associated with their decision making structures, and while less susceptible to the same issues, capitalism is nonetheless not immune to corruption of its process, concentration of power (asymmetries etc) and impairment by its own emergent traits.   

As an ever lasting engine of growth, capitalism has been increasingly beset with  problems: it has required ever lower interest rates and monetary stimulus to keep it chugging along, at a rate of growth set by man, I must add, and not its own mechanics; it has become increasingly burdened with higher levels of debt, financial instability and as a result has become itself susceptible to natural demographic realities; indeed, the financial instability has not been wrought of its mechanics but the aims and objectives of the social and moral structure it inhabits.  It appears as if the construct we know as capitalism has been thus engineered for one trajectory and one alone, whereas outcomes of natural forces would adjust to fit the natural dynamics of the universe it inhabits.   For anyone doubtful of what I believe is an overly “consumerism” bent of capitalism I would suggest watching the BBC documentary “The Century of the Self”.

Continue reading