Monday, August 29, 2016

It looks like the profits recession bottomed in Q4 2015

 - by New Deal democrat

Corporate profits are one of the established long leading indicators.  They were updated through Q2 as part of Friday's revised report on GDP.

It looks like the end of the surge in the US$ has fed through into a bottom in the downdraft in corporate profits.  This post is up at

Bonddad's Monday Linkfest

Important Charts

Last Week's Sector Performance

The 5-Minute SPY chart has downward bias

The 30-minute QQQ chart is forming a rounding top

The 30-Minute IWM chart briefly broke support last Friday

The daily IEF chart broke support 

The price of wheat has crashed to the lowest level in a decade as huge harvests pile up in big growers from Russia to the US, cutting the cost of staple foods around the world.

Extensive planting and benign weather have forced analysts to repeatedly raise crop outlooks. The International Grains Council last week increased its global wheat production forecast to a record 743m tonnes, up 1 per cent from last year.

Mounting supplies have exacerbated a broad washout in commodity markets and heaped pressure on farm economies. At about 220m hectares, wheat fields cover more land than any other grain.

Benchmark soft winter wheat futures on Friday fell 4.4 per cent to $3.83½ a bushel in Chicago, the weakest price since September 2006. Wheat prices are down 71 per cent since 2008, when the most commonly consumed food grain leapt above $13 a bushel and riots swept the streets of some emerging countries.

1-Year Chart of DBA ETF

1-Year Chart of JJG ETF

Central banks have been so good at creating low inflation since the early 1990s that it is now the expected norm by the body politic. Any deviation from low inflation is simply intolerable. In the US, everyone from the media to politicians to the average person start to freak out if inflation heads north of 2%. This mentality seems even worse in Europe. Inflation-targeting central banks, in other words, have worked themselves into an inflation-targeting straitjacket that has removed the few degrees of freedom they had. It is hard to imagine Yellen and Draghi being able to raise inflation temporarily above 2% in this environment. All they can do is operate in the 1-2% inflation window. Inflation targeting's success has become it own worst enemy. 

Another way of saying this is that the space for doing macro policy has shrunk to the small window of 1-2% inflation. Not only is monetary policy constrained by this, but so is fiscal policy... 

For these reasons inflation targeting has become the poisoned chalice of macroeconomic policy. It was a much needed nominal anchor in the 1990s that helped restore monetary stability. Its limitations, however, have become very clear over the past decade and now is preventing the world from having the recovery it needs...


If a trucker gets stuck in traffic jam, he will have to temporarily speed up afterwards to make up for lost time. On average, his speed for the trip will be the legal speed limit but only if he temporarily speeds up after the traffic jam. Likewise, an economy may need temporarily higher-than-normal inflation after a sharp recession to return to full employment. This also implies temporarily higher-than-normal nominal demand growth. On average, this temporary pickup will keep inflation and nominal demand growth on target. Running a little hot, therefore, is necessary sometimes. Currently, however, this policy flexibility is not possible.

Sunday, August 28, 2016

My Weekly Columns Are Up at XE

US Equity and Economic Week in Review

US Bond Market Week in Review

International Week in Review

A thought for Sunday: when the next recession hits, the powder keg isgoing to blow

 - by New Deal democrat

You know the drill: it's Sunday so I get to write about whatever I feel like.

One of the things I realized over the last several months is that, assuming Hillary Clinton wins the election, not only is Trump not going to graciously concede, but the fact is, he's not going away at all.

Typically after an election, the losing candidate goes back to what he was doing before, e.g., being s Senator.  Well, what was Trump before last year?  First and foremost, Trump is a salesperson who trades on his personal brand.  And even if he loses in November, he is going to have received somewhere near 50 million votes!  Which means that there will be 50 million marks -- er, customers -- many millions of which will have given Trump their email and credit car information.  And Donald Trump will be only too happy to sell them President Donald Trump branded memorabilia. If on average each voter spends $100 on Trump branded chatychkes, that a cool $5 billion for Trump.

Beyond that, the man needs media attention like the rest of us need to breathe oxygen.  Others have speculated that he may launch a Trump cable television network, which certainly could happen.  but whether he does or not, the media is going to keep asking him his opinion of every political event that happens in 2017 and maybe beyond, so long as he makes good copy and puts eyes on their sponsors' advertisements.

All of which means that it is certainly not out of the question that Trump will have a do-over in 2020. His base is probably still going to be there (those that haven't died, anyway).

And that brings me to the matter of the next recession.  It is going to happen sometime, and while expansions don't have expiration dates, it would very much surprise me if we went another four years without having one.

Aside from the fact that only once in the last 160 years has an incumbent candidate won election in the face of a recession (Truman in 1948), Hillary starts out as a deeply unpopular candidate.  She is as status-quo as could be humanly possible.  In the very likely event that there is a recession between now and 2020, and like the last few times, it hits the working class harder than the wealthy and lasts much much longer, the unpopular Hillary Clinton is going to lose her re-election bid.

The reasonably decent economy of 2016 kept s lid on things, and even so Bernie Sanders gave Hillary a run for her money.  If the status quo of Gilded Age inequality continues and even worsens, in the next recession the powder keg is going to blow.  And that means that in 2020 it will be very hard to stop Donald Trump or someone very much like him.

Sent from my iPad

Saturday, August 27, 2016

Weekly Indicators for August 22 - 26 at

 - by New Deal democrat

My Weekly Indicators piece is up at

Amid a sea of improving, or at least less bad, data, the regional Fed manufacturing indexes stick out as measures that refuse to budge.

Friday, August 26, 2016

Bonddad's Friday Linkfest

Durable Goods Orders Increase 4.4%

1-Year Chart of XLIs

1-Year Charts of the 10 Largest XLI Members

Valuation Levels of the 10 Largest XLI Members

4-Week Moving Average of Initial Unemployment Claims

Thursday, August 25, 2016

Bonddad's Thursday Linkfest

Drug Prices in the Spotlight?

Members of Congress are in an unusual position as they demand an explanation for Mylan NV’s 400 percent price hike for the EpiPen and focus attention squarely on its CEO: Heather Bresch.

If lawmakers follow the usual script, Bresch could get called up to Capitol Hill next month to explain her company’s justification for raising the price on the life-saving allergy shot. But that could be awkward, since she’s the daughter of Democratic Senator Joe Manchin of West Virginia. 

The scrutiny on EpiPen intensified Wednesday after Democratic nominee Hillary Clinton called the price increase “outrageous,” sending Mylan’s stock down as much as 6.2 percent. The intense political pressure could lead regulators to speed up their review of a rival product by Teva Pharmaceutical Industries Ltd., according to some analysts, or force Mylan to curb prices -- in both cases hurting revenue and profits.

Table of the 10 Largest Companies in PPH

1-Year Chart of the PPH ETF

Table of the 10 Largest IBB Members

1-Year Chart of the Biotech ETF

Income from bonds, especially government and fixed-income bonds, is a bedrock of pension investing. Years of declining bond yields have made it far harder for funds to buy an income for their members, leading to desperation tactics like those seen at Central States.


Bond yields have been falling globally since the early 1980s, initially in response to the US Federal Reserve’s success in bringing inflation under control. Meanwhile the returns on stocks, where pension funds put most of their assets, have been hurt by two major market crashes since 2000. In the US, the assets held by pension funds have roughly doubled — up 105 per cent — since 1999, but the cost of their liabilities to pensioners has almost quadrupled — up 278 per cent, according to the actuarial group Ryan ALM.

The result is enormous pension deficits. In the US, pensions run by companies in the S&P 1500 index were underfunded by $562bn by the end of last month, according to Mercer — nearly $160bn wider just seven months earlier thanks to further drops in bond yields.

Long Term Chart of the 30 Year CMT

When the US monthly unemployment rate topped out 10% back in October 2009, it was obvious that the labor market had a lot of "slack"--an economic term for underused resources. But the unemployment rate has been 5.5% or below since February 2015, and 5.0% or below since October 2015. At this point, how much labor market slack remains? The Congressional Budget Office offers some insights in its report, An Update to the Budget and Economic Outlook: 2016 to 2026 (August 23, 2016).

I'll offer a look at four measures of labor market slack mentioned by CBO: the "employment shortfall,"  hourly labor compensation, rates at which worker are being hired or are quitting jobs, and hours worked per week. The bottom line is that a little slack remains in the US labor market, but not much.

The collapse of oil prices that began about two years ago—from just over $100/bbl to just under $30/bbl—threw a wrench into the gears of the US economy by causing a sharp drop in oil exploration and drilling-related activity. In turn, this resulted in a slump in industrial production and a rash of layoffs, all of which subtracted meaningfully from the health of the US economy. The impact of the oil patch slump was most acute last February, when spreads on high-yield energy bonds soared to almost 2000 bps—a level matched only during the depths of the 2008 financial panic. From the beginning of the US economic recovery in mid-2009 through the third quarter of 2014, just before oil prices started to plunge, the economy grew at a 2.25% annualized rate. From September 2014 through last June, the economy grew at only a 1.7% annualized rate. Arguably, the oil price collapse subtracted half a percentage point of growth per year from the US economy for almost two years.

It now appears that the negative effects of the oil price collapse have passed. Drilling activity appears to have recovered in recent months, and oil prices have bounced from just under $30/bbl to almost $47/bbl today. High-yield energy bond spreads are back down to 740 bps, and the S&P 500 index is up almost 20% since mid-February. The ISM indices have bounced reassurringly.

6-Month Charts of the Larger Energy Sector ETFs