Archive for Chart Of The Day

Global Inflation Continues to Fall

This strange new world of disinflation continues.  Yesterday’s CPI reading in the USA came in at 1.7% which was down from 2%.  Core inflation (minus food and energy) was also 1.7%.  Most interestingly, this isn’t just a conspiracy by the BLS to manipulate the way inflation is gauged.  We know that because inflation isn’t just low in the USA.  It is low everywhere in the world.

The latest global readings on inflation show broad disinflation.  The most notable of which is in Europe where we’re fast approach a full on deflation.  Japan is the upside surprise in recent months with several 3%+ readings, but still nothing to write home about.


High Debt and Low Incomes = Low Housing Demand

Here’s an interesting piece of research from the NY Fed that explains why the demand for housing remains relatively low – potential buyers just have too much debt and not enough income:


The recovery continues, but it remains lumpy due to the high levels of debt and the lack of strong income growth.  The Balance Sheet Recession is ending, but it’s still having a lasting impact on the US economy….

The Long View on German Bond Yields

Here’s some perspective for you on the state of the European economy.  German bond yields are at unprecedented nominal levels (via John Mauldin):

While it should surprise no one, German long-term bond yields are at historic lows. I recall reading that Spanish bond yields are lower now than they have been at any other time in their history. I actually applaud the Spanish government for issuing 50-year bonds at 4%. I can almost guarantee you the day will come when Spain looks back at those 4% bonds with fondness. (I assume that the buyers are pension funds or insurance companies engaged in a desperate search for yield. I guess the extra 2% over a ten-year bond looks attractive … at least in the short term.)

And finally, let’s really widen our time horizon on German yields:


Deutsche Bank: Ignoring Food Price Pressures Could be a Mistake

By Sober Look

Economists and central bankers tend to be less focused on what consumers pay at the grocery store because food and energy prices have historically been more volatile – remember, it’s just “noise”. However what they can’t ignore is how shoppers view inflation – i.e. inflation expectations. And food prices have a significant impact on households’ views on future inflation.

Deutsche Bank: – … food prices factor significantly into households’ perceptions of overall price pressures. This is illustrated in the following figure, which shows year-ahead inflation expectations from the University of Michigan Survey of Consumer Sentiment versus CPI food. In fact, it is worth noting that CPI food demonstrates a higher degree of correlation with one-year price expectations than either the headline or core metrics — and it similarly surpasses energy, core goods, core services and shelter. …  while forecasters are focusing on service-sector inflation in general and shelter inflation more specifically, they should be careful to not ignore mounting food price pressures, because this category could provide important insight toward the evolution of inflation expectations. If food price inflation accelerates, as we project, the stability of inflation expectations could degrade – and this would be a vexing development for monetary policymakers.

Food prices

Source: Deutsche Bank

The “Secular Stagnation” Theory is Massively Overblown

There’s been a lot of chatter in recent years about the idea of secular stagnation.  That is the idea that we’re in a prolonged period of sub-par economic growth.  The idea gained a good deal of attention in recent days thanks to a new book from VoxEU on the topic.  The authors are a who’s who of economics including Krugman, Summers, Eichengreen, Blanchard, Eggertsson , Koo and many others.  

I think it’s important to keep this topic in perspective though.  Yes, we’re in a period of sub-par growth.  But how sub-par is is this growth in historical perspective?  The following chart is from Thomas Piketty’s Capital, the groundbreaking book on wealth inequality.  One of the points I highlighted in the book earlier this year was Piketty’s idea that wealth inequality was likely to hurt future growth.  I pointed out that this idea wasn’t supported by recent economic data.  In fact, during the periods when the return on capital was highest the rate of growth appeared to accelerate.


Anyhow, when we look at historical growth in global output we see a clear trend.  And recent history has been a period of incredible growth.  The period from 1950-1990 was the highest on record.   The period from 1990-2012 was lower than the 1950-1990 period, but still substantially higher than any period before that – by a huge margin.

So yes, we might be in a period of sub-par growth relative to the 1950-1990 period.  But when you look at the long-term trends in place you can see that we’re actually still far better off than we were just a lifetime ago.   Sure, things aren’t as good as they were just a few decades ago, but they aren’t anywhere close to being as bad as they were several centuries ago.  We live in a period of incredible global expansion and output.  We shouldn’t lose perspective here just because the current decade isn’t quite as strong as recent decades.

Chart of the day – Silly Charts Edition

Here’s a lesson in the dangers of charting.  The following quote is from John Mauldin’s latest weekly letter.  He’s making the case for a bond bubble.  This chart specifically refers to US government 10 years:

One day, all the debt will come due, and it will end with a bang. “We are building a bigger time bomb” with $500 billion a year in debt coming due between 2018 and 2020, at a point in time when the bonds might not be able to be refinanced as easily as they are today, Mr. Ross said. Government bonds are not even safe because if they revert to the average yield seen between 2000 and 2010, ten year treasuries would be down 23 percent. “If there is so much downside risk in normal treasuries,” riskier high yield is even more mispriced, Mr. Ross said. “We may look back and say the real bubble is debt.”


I have a couple of thoughts here:

1)  The debt actually doesn’t all “come due”.  In a credit based monetary system it’s actually impossible for ALL of the debt to come due because that would actually eliminate most of the money we use.  Repaying loans destroys deposits just like new loans create deposits.  But think of this specifically from the government’s perspective.  The only way the debt goes away is if the government goes away or is reduced SUBSTANTIALLY.  But the reason the government’s debt continually expands is because the services never go away.  The government tends to grow in-line with the economy and the population as the needs of the public grow.  That doesn’t mean the government can’t shrink or that debt can’t be reduced, but it’s virtually impossible for it to all “come due”.  I’m not against shrinking the size of government at all, but I think the terminology here is a little misleading.

2)  More importantly, the chart is a case of manipulating the axis on one side to make the other lines appear similar.  If you look closely you’ll see that the Nasdaq expanded over 400% over this period while the bonds are up just 33%. Using this sort of analysis could lead one to justify the idea of a “bubble” using almost any level of price rise at all.  That’s obviously not very useful and in this case a 33% rise and a 400% rise are obviously apples and oranges.

I’ve been debunking the US government “bond bubble” story for over 4 years now so you’ve probably read some version of this over the years.  But this doesn’t mean bonds aren’t potentially overpriced. Especially junk bonds and some other corporate bonds that have benefited from the chase for yield induced by the Fed. But I think we have to be careful about the term “bubble”, especially when discussing government bonds. “Bubble” implies an extraordinarily overpriced market susceptible to tremendous downside. Frankly, I don’t think Treasury Bonds look remotely similar to something like the Nasdaq….

Today’s (not so) Pretty Picture: The Europe vs US Divergence

No comment necessary on this one.


Update on VIX Curve Inversion

By GaveKal Capital

A few weeks ago, we noted the relationship between an inverted VIX curve and declines in the S&P500 (see here).  Taking a longer-term view, we see that the last few years have been relatively quiet–characterized by few, intermittent inversions and minor pullbacks in the index.  A larger spike than we saw last week and/or a sustained inversion between prices of the VIX and the 3-month VIX would be symptomatic of a more meaningful correction:


AAII: Equity Allocations Hit a 2014 High in July

The AAII’s July asset allocation survey showed growing overall bullishness from retail investors as equity allocations jumped to their highest levels of 2014.  The current reading of 67.5% is the second highest monthly reading since the bull market began in 2009.  Here’s more detail from AAII:

“Allocations to stocks and stock funds reached their highest level of the year in July, according to the latest AAII Asset Allocation Survey. Bond and bond fund allocations rebounded to levels not seen since last January, while cash allocation fell to a 14-year low.

Stock and stock fund allocations rose 0.5 percentage points to 67.5%. This is the largest allocation to equities since December 2013 (68.3%). It is also the 16th consecutive month and the 18th out of the past 19 months with equity allocations above their historical average of 60%.

Bond and bond fund allocations rose 0.7 percentage points to 16.7%, the largest allocation since January 2014. The historical average is 16%.

Cash allocations declined 1.3 percentage points to 15.8%. The drop puts cash allocations at their lowest level since March 2000 (15%). July was the 32nd month with cash allocations below their historical average of 24%.”


The Bigger they Come the Harder they Fall

Just passing along an interesting data point from Guggenheim:

“The S&P500 has now gone nearly 800 days since a correction of more than 10 percent – the “meaningful” level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.”



Rail Traffic: Still Chugging Along

Just catching up on an update from last week.  The latest rail data showed a continued downward trend in momentum, but coming off of very strong weekly readings over the last 2 months.

The current 12 week moving average is down to 7.2% which is well off the highs of 9.4% from early June.

If rail is an indicator of broader macro trends then this continues to point to a strong Q2 rebound in economic growth.


The Scale of Monetary Happiness

Does money really buy you happiness?   

The opening quote in my new book is:

“The person who mistakes “money” for “wealth” will live a life accumulating things all the while mistaking a life of owning for a life of living.”

Although my book is all about understanding money, investing and the economy I tried my best to highlight what I think is one of the most important elements of understanding our monetary system – while money is important and necessary in this system it should not be viewed as the ends when it is merely a means to an end.

I got to thinking about this in more detail this weekend as I was reading this piece in the FT which discusses how greater wealth is indeed linked to greater happiness.  I don’t think this is necessarily wrong, but I would argue that greater wealth has a diminishing rate of return with regard to how effectively it can contribute to our happiness.

In order to conceptualize this I took Maslow’s Hierarchy of Needs and applied it to a spectrum showing that the higher up the hierarchy you go the less effective money is in helping you attain certain things.


Money is obviously a necessity because we all need things at the bottom of the hierarchy.  But as you climb higher you find that money has a diminishing rate of return in helping you acquire those things.  Money cannot buy you morality, purpose, meaning or many of the things that are higher on the scale.

So, does money buy you happiness?  Money can buy you a certain level of happiness and there is little doubt that money makes life easier in many ways.  But money cannot buy what might be seen as the ultimate forms of happiness. That includes things like purpose, meaning, friends, family, etc.  So don’t confuse the means with the end.  Doing so will warp your perspectives on what matters and what doesn’t.

Reminder: Tapering is not Tightening

A strange thing has happened ever since the “tapering” began last December – interest rates have fallen, stocks have risen and inflation expectations have actually increased.  This is almost exactly the opposite of what many people might have expected.  After all, if “tapering is tightening” and QE is “money printing” then something doesn’t add up here because stocks should have fallen and inflation expectations should have declined.  But when we look at the operational realities of QE it becomes clear that “tapering” really isn’t “tightening” in any meaningful sense.

As you can see in the chart below, the Fed really hasn’t started tightening in any meaningful sense.  In fact, their balance sheet is still expanding quite rapidly.  So, as I explained early last year, if we want to call QE “money printing” then tapering is really just “less money printing”.  Of course, that’s not how I view QE at all (see my QE primer here), but if you want to remain consistent with the mainstream view of things then that’s one way to view the tapering.



Perhaps more importantly, the stock market doesn’t even perform poorly during the early phases of a tightening.  And the logic behind that is rather simple – the Fed reacts to an improving economy and if the Fed isn’t even reducing their balance sheet then we’re not even at the point in the economic cycle where the Fed thinks tightening is necessary.  And that means the economy is probably still too weak to warrant a real tightening.  And that, in a counterintuitive sort of way, is actually a good thing.

Chart o’ the day: Dividends and Buybacks Jump to new All-time High

We’ve officially round tripped it now.  Not only is the VIX at pre-crisis lows, but corporations are now issuing dividends and buying back shares like the crisis never happened (via Fact Set):

“Dividends per share (“DPS”) for the S&P 500 grew 12.5% in the trailing-twelve month (“TTM”) period ending in April. This also marks the thirteenth consecutive quarter in which DPS has grown at double-digit rates. Long-term, significant dividend growth—coupled with growth in share repurchases (which grew over 50%)—has helped quarterly shareholder distributions to reach record levels since at least 2005. In total, $249.1 billion was distributed to shareholders in Q1, which modestly surpasses the $242.1 billion distributed in Q3 2007.”



Chart O’ the Day: Round Trippin’ it

Not much to say here.  Just a chart of the volatility index.  Right back to where we were before the crisis occurred and fast approaching the all-time lows (via Bloomberg):