Stepping on the Monetary Accelerator and Regulatory Brakes (excerpt)

Expectations that the ECB will provide more monetary stimulus next Thursday continue to push bond yields lower in the Eurozone. That’s been pushing US bond yields down as well, especially since ECB President Mario Draghi has said he will do whatever it takes to weaken the euro. That’s made US government bond yields especially attractive relative to yields available on comparable bonds in the Eurozone.

Draghi hopes to boost the region’s CPI inflation rate, which is only 0.7%, by weakening the euro. I’m not convinced that doing so will boost inflation in the Eurozone. The problem is that the region’s banks aren’t lending, which is also depressing monetary growth. Here’s the most recent key developments:

(1) Slow money. M2 growth was only 2.0% y/y during April. That’s down from a recent peak of 4.8% last April, and the lowest since December 2011. The recent slowdown coincides with the decline in the CPI inflation rate.

(2) Weak lending. Banks are starting to lend in the Eurozone, but to each other rather than to nonfinancial businesses. Over the past three months through April, Eurozone lenders provided a measly €13.6 billion (saar) in credit, with €142.8 billion extended mostly to financial institutions. Lending to nonfinancial corporations declined by €169.6 billion over this same period.

(3) Bad loans. The 5/13 FT reported that, according to Fitch, bad loans at Europe’s banks rose 8.1% in 2013 to slightly more than €1 trillion compared with the year before. Fitch surveyed a hundred banks due to be assessed by the European Banking Authority. Twenty-nine saw the number of impaired loans rise by more than 20% as their asset quality deteriorated, while one-third of banks saw their bad loan volumes fall or stay the same. European regulators are preparing a strict classification system, which should eliminate national differences over what constitutes a problem loan.

So European monetary and banking authorities are stepping on the monetary accelerator and the regulatory brakes at the same time. They are providing ultra-easy monetary policy hoping that banks will increase their lending. At the same time, they are toughening loan standards and subjecting the banks to stress tests. As a result, they are driving global bond yields into the ditch.

Today's Morning Briefing: Dancing With the Bull. (1) Morphing from cyclical to secular. (2) Bull market in earnings. (3) 50% jump in P/E since 2011. (4) Secular bull’s favorite sectors mostly the same as the ones during cyclical bull. (5) Eurozone yields driving US yields lower. (6) Will weaker euro boost Eurozone CPI inflation? (7) Draghi blows off Krugman. (8) Eurozone’s problem is lack of bank lending and weak monetary growth. (9) Stepping on the monetary accelerator and the regulatory brakes. (More for subscribers.)

Profits Drive Capital Spending (excerpt)

Profitable companies tend to expand by hiring more workers and investing in capital equipment and structures. They’ve been more cautious about doing so during the current economic expansion. That’s because they were traumatized by the financial crisis of 2008. However, that was five years ago, and they should be getting over it by now. That means that if their profits remain strong, payrolls and capacity will continue to grow, which is why the current expansion is likely to be longer than average.

The profits outlook remains bright according to the S&P 500 forward earnings. This series has been highly correlated with capital spending in real GDP and with nondefense capital goods orders.

Comparing capital spending in real GDP during the current expansion to the previous six shows that it has also been growing at a subpar pace. Spending on structures, on information processing equipment, and on intellectual property products (including software and R&D) have been especially weak. On the strong side have been industrial and transportation equipment.

I believe that as a result of the IT revolution, companies may be getting more bang for their capital-spending bucks now than in the past. They can spend less on IT hardware and software in current dollars and get much more computing and communicating power. The industrial equipment they buy comes with powerful embedded IT capabilities. Nevertheless, if profits remain strong, their capital spending should grow.

Today's Morning Briefing: Durable Economy. (1) Slow, but steady. (2) Below-average expansion could last longer than average. (3) Forward earnings is a very upbeat leading indicator. (4) Other good omens. (5) Regional business surveys and flash PMIs are strong. (6) Young adults are more optimistic. (7) Profits driving capital spending higher. (8) IT revolution increases bang per capital-spending buck. (9) Transportation stocks outperforming ytd. (10) Focus on overweight-rated S&P 500 Industrials. (More for subscribers.)

Great Crashes and Taper Tantrums (excerpt)

Earlier this year, a few technicians warned that the DJIA seemed to be tracking a similar trajectory to the one during 1928-29, and this could be the year for another Great Crash. I first questioned the apparent parallel in our 1/28 Morning Briefing: “Of course, to make the chart work, the September 3, 1929 pre-crash peak has to be superimposed on this year’s peak, and the scales have to be manipulated to maximize the fear factor.” When the scales are indexed to 100, the parallel virtually disappears.

Mark Hulbert touted the 1928-1929 “scary parallel” in his 2/11 MarketWatch column. While he did note that there is a scaling issue in comparing the current DJIA to the frightening parallel, he nonetheless opined that “[i]f the market follows the same script, trouble lies directly ahead.” That omen is a tautology, of course.

In the 2/18 Morning Briefing, I wrote: “What would it take to repeat the grim fundamental underpinnings of the scary scenario of 1928-1933? Another Lehman moment would do the trick, and make Hulbert and the other promoters of this grim scenario right on the money. Of course, there have been several variations of this ‘endgame’ scenario provoking anxiety attacks and corrections since the start of the current bull market. But Godot has yet to show on stage.” He remains a no-show.

Other bears noted that there has been a very high correlation between the S&P 500 and the Fed’s holdings of bonds. They continue to warn that the Fed’s tapering of QE, which is on track to be terminated by the end of the year, will terminate the bull market in stocks as well.

This week’s Barron’s includes an interview with Stephanie Pomboy, the thought-provoking proprietor of MacroMavens. She argues that QE has propped up the economy, which hasn’t achieved self-sustaining growth. So she believes that “the Fed is going to have to taper the taper” because “the economy can't handle a reduction of stimulus.” I disagree. We won’t have to wait much longer to see who is right given that the Fed is on course to terminate QE by the end of the year.

Today's Morning Briefing: Trekky Bull. (1) Star trekky bull tramples “Clingons.” (2) Will Godot arrive before next great crash? (3) Maven says Fed will have to taper the taper. (4) The problem with going away in May. (5) Great Moderation 2.0 could be bullish or bearish. (6) Will risky assets get riskier? (7) CLO 2.0, and CMBS 2.0 too. (8) Analysts turning more upbeat on earnings. (9) Nitpicking Picketty’s data. (10) The flaw in the neo-Marxist formula. (11) Italy adds vice to GDP. (13) “Godzilla” (- - -). (More for subscribers.)

Anatomy of an Internal Correction (excerpt)

Investors experienced a few hair-raising stock market corrections during the current bull market. From 2010 through 2012, there were five significant ones. The first one was during the spring of 2010 when the S&P dropped 16.0%. The worst hair-raiser was during the summer of 2012 when the S&P 500 plunged 19.4%, near the 20% drop that marks a bear market. That was followed during the fall of that year by a 9.8% decline, just short of the 10% that marks an “official” correction. There was another borderline correction of 9.9% during the summer of 2012, which was followed by a mini-correction of 7.7% during the fall.

The five corrections lasted from 27-154 days. Subsequent selloffs have been shorter and shallower, hardly meriting being called "corrections." All of these five corrections were triggered by macroeconomic events that threatened to precipitate a recession. When those threats dissipated, the bull market resumed. The anxiety attacks that caused the corrections were followed by relief rallies.

This year’s correction is unique so far. The S&P 500 is down just 0.5% from its record high on May 13. However, lots of stocks are down 10%-20% since March. They tend to be SmallCaps, as evidenced by the 8.7% decline in the Russell 2000, and the 12.2% drop in its Growth component. The Nasdaq is down 5.2% from its recent high. However, some LargeCap stocks have also taken big hits. In the S&P 500, Biotechnology, Internet Software & Services, and Consumer Discretionary Retail are down 13.5%, 12.0%, and 9.4% from their recent peaks.

I have characterized the recent selloff as an “internal correction.” Scrambling to avoid giving back the fabulous gains from last year’s melt-up rally, institutional investors have been rebalancing their portfolios away from high-P/E to low-P/E stocks. They’ve moved some of their portfolios out of Growth into Value stocks. Stocks with predictable earnings are outperforming the more cyclical ones. Among the losers have been lots of “innocent bystanders” that have been pummeled mostly because they are included in out-of-favor ETFs.

Today's Morning Briefing: Exit & Entry Strategies. (1) Hair-raising corrections. (2) Internal vs. external corrections. (3) Innocent bystanders. (4) Will Congress invert corporate inversions? (5) Too many bulls again. (6) Central banks: coming or going? (7) ECB set to do more of whatever it takes next month. (8) Janet Yellen and John Wayne. (9) New Fedspeak word: "Normalization." (10) Dudley is ready to raise rates eventually, but not by much. (11) Surprisingly weak earnings in UK and Eurozone. (12) Not all sectors in Japan getting a lift from Abenomics. (More for subscribers.)

Global Oil Demand Showing Slower Growth (excerpt)

According to Oil Market Intelligence (OMI), world crude oil supply rose to a record 90.2mbd on average over the past 12 months through April. The price of a barrel of Brent crude oil has been remarkably flat (with some volatility) around $110 since early 2011. World oil supply has been well balanced with world oil demand at this price.

Let’s review some of the highlights of the latest demand data compiled by OMI through April using 12-month averages to smooth out seasonal volatility:

(1) World. World crude oil demand rose to a record 91.7mbd last month. However, the growth rate has slowed from a recent high of 1.5% y/y during September 2013 to 1.0% during April. This suggests that the global economy is growing, but at a relatively slow pace.

(2) Emerging countries. Most of the recent slowdown is attributable to emerging economies. The OMI data show that the growth rate among non-OECD countries is down from 3.7% a year ago to 1.9% currently. Among the 34 advanced economies of the OECD, oil demand growth is close to zero on a y/y basis, but that’s an improvement from negative readings during 2012 and 2013.

(3) China & India. Oil demand rose sharply in China from 2009 through mid-2013. Since then, it’s been flat around a record 10mbd, confirming that the country’s economy is in the midst of a significant slowdown. On the other hand, India’s oil demand rose to a record high of 3.8mbd last month, up 3.8% y/y.

(4) Europe. I have often shown that oil demand is a useful indicator of economic growth. In addition to suggesting a significant slowdown in China, it is confirming that the Eurozone’s economic recovery is very weak. Oil demand in Germany has been flat around 2.4mbd since 2010. Demand in France, Italy, and Spain remains on a downtrend that’s been going on for over five years.

Today's Morning Briefing: The Oil Story. (1) Regina and Saskatoon. (2) Bigger than Saudi Arabia. (3) Counting rigs. (4) National oil companies seeking experienced Western partners. (5) $110 a barrel remains the right price for now. (6) Global oil demand at record high, but growing slowly. (7) Emerging economies are slowing. (8) China’s oil demand has been flat for a year at record high. (9) Eurozone oil demand confirms weak economic recovery. (10) Focus on underweight-rated S&P 500 Energy sector. (More for subscribers.)

Tracking Global Inflation (excerpt)

The IMF’s measure of the world CPI inflation rate recently peaked at 4.9% during September 2011 and fell to 2.8% during March. Inflation is subdued for advanced economies (1.3%) and relatively low for emerging ones (5.0%).

We believe that the ultra-easy monetary policies of the major central banks might actually be keeping a lid on inflation. That’s not what we all learned in school, of course. We were taught that easy money stimulates demand, which boosts inflation, especially when economies are growing at full capacity. However, easy money can also boost capacity. That certainly might explain why the commodity “super cycle” lasted only 10 years (from 2001-2010) rather than 25-50 years, as was widely hyped. China’s borrowing binge financed lots of excess capacity, as evidenced by its PPI, which has been falling for the past 26 months.

The core CPI inflation rate for the 34 advanced economies in the OECD remains subdued below 2.0% y/y. However, it did rise during March to 1.7%, the highest since October 2012. The comparable inflation rate for the G7 was only 1.4% for the fifth consecutive month through March.

Credit conditions are especially easy in the advanced economies. Rather than stimulating demand and consumer price inflation, easy money has boosted asset prices. It has also facilitated financial engineering, especially stock buybacks. Private equity investors are funding capacity expansion by seeding entrepreneurs who are developing productivity-enhancing innovations.

Today's Morning Briefing: Tracking Global Inflation. (1) The Comeback Kid? (2) World inflation remains subdued according to IMF. (3) Theory vs. practice. (4) Easy money can boost capacity too. (5) The not-so-super cycle in commodities. (6) Easy money can also boost asset prices rather than CPIs. (7) Is Eurozone’s lowflation due to strong euro or structural reforms? (8) Does the world really need more capacity in Japan? (9) New and old PPI in the US telling same story. (10) Rent inflation inflating US CPI. (More for subscribers.)

Global Growth Is Slow But Improving a Bit (excerpt)

Currently, global is showing relatively slow but improving growth, with global industrial production up 3.9% y/y during February. That’s up from a recent low of 1.1% during February 2013.

Output growth has slowed to around 4.5% among the emerging economies over the past year. However, industrial production growth among the advanced economies has rebounded smartly from a recent low of -1.2% during January 2013 to 3.3% in February.

Interestingly, industrial production indexes have been stalled at their record highs for the past two to three years in Brazil, India, Mexico, South Korea, and Taiwan. Still ascending to new highs are Indonesia, Malaysia, Poland, and Singapore.

China’s output, of course, continues to set record highs. However, the country’s economy seems to have slowed much faster during Q1-2014 than widely recognized. China’s real GDP growth is reported on a y/y basis because the underlying data aren’t seasonally adjusted. Haver Analytics, our data vendor, provides a seasonally adjusted quarterly series. While the y/y growth rate was 7.4% during the first quarter, the q/q growth rate (saar) was only 5.7%, the lowest since Q4-2008.

Today's Morning Briefing: Man on the Train. (1) Hazardous work. (2) Google it. (3) Don’t be evil. (4) Momentum stocks testing their 200-dmas. (5) Not ruling out a broad melt-up. (6) No “Great Rotation” out of bonds. (7) Dividend-yielding stocks are high priced. (8) Internal valuation correction goes global. (9) Last week’s landslide in India and EM stocks. (10) Emerging economies' growth is slow. (11) China’s real GDP growth already under 6%! (12) Eurozone’s recovery harder to see. (13) Confidence down again in Japan. (More for subscribers.)

Gold in the Future (excerpt)

Shorting gold when it rose to a record $1,895 per ounce on September 6, 2011 would have been a great trade, with the benefit of hindsight. It is down to $1,305 currently, with most of the decline occurring last year after the bulls lost their confidence in the precious metal when it didn’t soar after ECB President Mario Draghi’s whatever-it-takes speech and on the introduction of Abenomics.

A few contrarians I know are turning bullish on gold. They note that both the price of gold and the price of silver seem to be finding support at their 2013 lows. Silver is back at that low. However, it settled at its highest level in a month on Wednesday, buoyed by a report that said physical demand for the metal rose to a record last year. Gold rose back over $1,300 an ounce yesterday.

If the precious metals head higher, it will be either because of rising geopolitical tensions or rising inflation, say the contrarians. The former scenario seems like a more likely one than the latter, in my opinion.

I believe that the price of gold is a good indicator of the underlying trend in industrial commodity prices, which I expect will remain on the flat side for a while longer. So if the price of gold takes off, I will have to reassess my outlook for commodities.

Today's Morning Briefing: The Contrarians. (1) Favoring the out-of-favor. (2) A review of the most recent hits. (3) Greek yield drops from 44% to 6%. (4) Betting that China will have to do something. (5) Could US bond yields go lower? (6) Will precious metals become more precious? (7) Global boom would be a contrary bet leading to higher commodity prices, rising EM stock prices, and a weaker dollar. (More for subscribers.)

Small Business Owners More Upbeat (excerpt)

April’s survey of small business owners by the National Federation of Independent Business (NFIB) provides additional evidence of an improvement in revenues. The percentage of respondents saying that sales are poor (on a six-month-average basis) dropped to 15%, the lowest since May 2008 and down sharply from the record high of 33% during March 2010.

Interestingly, the poor-sales series happens to be highly correlated with the unemployment rate. Of course, as small business owners turn more optimistic about their sales prospects, they tend to increase their hiring. Sure enough, on a 12-month-average basis, the percent of firms with one or more job openings rose to 21% in April, the highest since June 2008. The percent expecting to increase employment rose to 8%, the highest since August 2008.

Today's Morning Briefing: Above the Rest. (1) Earnings and revenues are looking up. (2) Q1 wasn’t so chilly for earnings and revenues. (3) Four big S&P 500 sectors with record forward earnings. (4) Fewer small business owners say that sales are poor. (5) More job openings. (6) Revenues stuck in the mud for the rest of the world. (7) US stands out. (8) EMU MSCI at six-year high despite drab earnings. (9) Bundesbank ready to support more of whatever it takes from ECB. (More for subscribers.)

China’s “New Normal” (excerpt)

Today, let’s review the latest news out of China:

(1) China’s top boss says get used to slower growth. Chinese President Xi Jinping said the nation needs to adapt to a “new normal” in the pace of economic growth and remain “cool-minded.” China’s growth fundamentals haven’t changed, and the country is still in a “significant period of strategic opportunity,” Xi said. At the same time, the government must prevent risks and take “timely countermeasures to reduce potential negative effects,” he said.

(2) Reading the tea leaves: No new big spending programs. In other words, the government isn’t likely to roll out a large stimulus program. That’s because such spending previously created too much excess capacity. That’s why the PPI has been deflating for the past 26 consecutive months through April. Interestingly, the employment component of China’s official M-PMI has been under 50 for the past 23 consecutive months.

(3) Too much debt, too little effect. On the other hand, Chinese bank loans continue to rise at a rapid pace. However, such lending activity doesn’t seem to be delivering as much bang per yuan as in the past. Again, that’s probably because there is already too much excess capacity in China.

A week ago, China’s central bank said it would monitor more closely default risk from loans to the property sector, local-government financing companies, and industries with overcapacity.

(4) Trade data are weak. Both exports and imports dropped sharply during February, with imports' decline extending into March. They were attributed to the Lunar New Year holiday, which often distorts the data at the start of the year. However, the March/April rebound in exports and the April bounce in imports still left both below their January record highs. It’s too soon to be sure, but both exports and imports show signs of flattening out over the past year.

(5) No bull in China. The China MSCI stock price index has been moving sideways in a volatile range since 2011. So far this year, it is down 7.8%. It tends to be a leading indicator for the CRB raw industrials spot price index. So it is currently indicating that the rebound in the commodity since last fall may not be sustainable.

Today's Morning Briefing: No Rest for the Bull. (1) From high-flyers to laggards and back? (2) SMidCap correction pushes LargeCap to record high. (3) Meltdown in melt-up stocks is healthy. (4) A broader melt-up wouldn’t be healthy, but it’s still a high-probability scenario. (5) Buybacks, M&A, and the Great Rotation could drive valuations back up. (6) Industry analysts more upbeat on earnings after better-than-expected Q1. (7) How do you say “New Normal” in Chinese? (8) Deflation and job losses at China’s factories. (9) Less bang per borrowed yuan. (10) No bull in China. (More for subscribers.)

Is the Phillips Curve Signaling Higher Inflation? (excerpt)

Last Tuesday, Allan Meltzer, a renowned historian of the Fed, warned in a WSJ op-ed: “Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money--and in a reckless fashion--for years.”

Meltzer notes that the Fed relies on the Phillips Curve model, which posits an inverse correlation between inflation and unemployment. When there is too much (too little) slack in the labor market, wage inflation, which is the main driver of price inflation, tends to fall (rise). He states that the relationship has been unreliable and warns: “The Fed's forecasts of inflation ignore Milton Friedman's dictum that ‘inflation is always and everywhere’ a result of excessive money growth relative to the growth of real output.” Maybe so. However, even Friedman’s model is a “slack” model because monetary growth is excessive--and inflationary--when it exceeds the potential growth of the economy and resource utilization is high.

The slack models of both Keynesian and monetarist macroeconomists ignore microeconomic factors, particularly the structure of markets. A competitive economy is likely to “produce” more output and less inflation for a given amount of monetary and fiscal stimulus than an uncompetitive one, which will be prone to produce less output and more inflation. I'm of the opinion that our economy is more competitive and less prone to inflation, as I've discussed previously. Technological innovations are boosting productivity and keeping a lid on labor costs.

We will see how this plays out in coming months now that April’s unemployment rate was down to 6.3%, the lowest since September 2008. The short-term unemployment rate at 4.1% shows even less slack. Both of these jobless rates have been inversely correlated with wage inflation in the past. In recent months, wage inflation has risen slightly, but remains low.

Today's Morning Briefing: Tornado Watch. (1) Tornado warning. (2) U-Haul says Houston is tops. (3) False alarms reduce response times, and corrections. (4) Investors are serene. (5) Yellen says small stocks overvalued, rest are fine. (6) Financial Stability Oversight Council annual report is less reassuring. (7) Meltzer says inflation is coming. (8) Less slack, more inflation? (9) Phillips Curve showing falling unemployment rate may be starting to boost wage inflation a bit. (10) Slicing and dicing the wage inflation data. (11) Will price inflation follow wage inflation? (More for subscribers.)

Yields Plunging in Europe (excerpt)

More surprising than the rally in US Treasury bonds is the plunge in Eurozone government bond yields, especially in the peripheral countries. The German and French yields are both back below 2.00% at 1.37% and 1.94%, respectively. The Italian and Spanish yields are at 3.02% and 2.98%, respectively, with the Italian yield down 108bps ytd and 140bps since the start of last year; the Spanish yield is down 116bps and 220bps over the comparable time periods. They were both around 7.00% during the summer of 2012. To global bond investors, US Treasury yields of 2.50%-3.00% must be very attractive given how low rates have fallen in the Eurozone.

The plunge in Eurozone yields reflects mounting concerns about deflation in the region. The Eurozone’s core CPI inflation rate has dropped from a recent high of 1.7% y/y during July 2012 to 1.0% during April of this year. Inflation is also low in the US with the core PCED up 1.2% y/y during March, down from a recent high of 2.0% two years ago. Interestingly, the expected inflation rate implied by the 10-year TIPs yield has remained remarkably stable around 2.2% since mid-2013.

Today's Morning Briefing: Vagabonds & Vigilantes. (1) QE tapering: Bonds were sold on the chatter, bought on the news. (2) A range-bound forecast. (3) Bond Vigilantes want to know: “Who are those masked vagabonds buying bonds?" (4) New pension fund rules in Budget Act of 2013. (5) Portfolio rebalancers. (6) Individuals are back. (7) Fed isn’t done buying just yet. (8) Yields plunging in Eurozone. (9) Inflation remains subdued, and global growth is slow. (10) NZIRP for the foreseeable future. (11) Yellen is watching “disappointing” housing activity. (12) Bonds displacing gold as the new safe haven. (More for subscribers.)

Fed Is Stepping on Accelerator and Brakes (excerpt)

Bad weather may be a poor excuse for the recent stalling of the housing recovery. On Monday, Jeff Gundlach, the CEO of DoubleLine Capital, recommended shorting homebuilders. He did so at the Sohn Investment Conference, the annual gathering of big-name investors. I have noted that the weakness in new and existing home sales in recent months might reflect declining affordability, as home prices and mortgage rates have risen sharply.

The Fed’s senior loan officer survey released Monday showed that banks are not making it easier for potential homebuyers. The survey of 74 domestic and 23 foreign banks operating in the US shows that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months.

Fed officials have frequently stated that their ultra-easy monetary policy is aimed at keeping mortgage rates low to revive home sales. Their tapering talk last spring caused the 30-year mortgage rate to jump by about 100bps. It is still 82bps above the May 2, 2013 low. Meanwhile, the Fed is subjecting the banks to regular stress tests, which discourages them from making risky loans to would-be homeowners. In other words, the Fed is tapping on the mortgage-lending brakes and the monetary accelerator at the same time. This hasn’t stopped banks from making lots of business loans secured by inventories and other working capital.

Today's Morning Briefing: Train Spotting. (1) Stocks, the economy, and the weather. (2) Exports rising very slowly. (3) Homegrown growth. (4) Are railroads too busy hauling oil to ship autos? (5) Gundlach shorts housing. (6) Fed stepping on brakes and accelerator. (7) Transportation stocks rising along with business inventories. (8) Focus on overweight-rated S&P 500 Transportation stocks. (More for subscribers.)

Emerging Markets Aren’t All the Same (excerpt)

Emerging Markets have been mostly underperforming other stock markets since 2011. Over the same period, the forward earnings of the EM MSCI has been mostly falling after rebounding rapidly during 2009 and 2010. That might explain why the index’s valuation multiple is low.

However, forward earnings have also been falling for the EMU MSCI and UK MSCI since 2011, and they both have higher P/Es of 13.9 and 13.4, respectively. So EMs still look cheap relative to Europe. They are especially cheap relative to the 15.3 multiple in the US, which is clearly discounting that the index’s forward earnings continues to rise into record territory, as discussed below.

What about the forward earnings of individual EMs? India, Indonesia, and South Africa have relatively expensive P/Es because their forward earnings are making new highs. On the other hand, Mexico’s forward earnings is declining. China seems cheap, especially since its forward earnings is also in record-high territory, but it’s been falling recently. Brazil’s forward earnings looks terrible, continuing to flat-line as it has been doing since 2006! Turkey has been flat-lining since mid-2011, but may be starting to move to new highs again.

Today's Morning Briefing: Urge to Emerge. (1) Rotating in Chicago. (2) A year of living less dangerously. (3) Hunting for value among EMs. (4) Some EMs are cheaper than others. (5) Forward earnings rising to record highs in India, Indonesia, and South Africa. (6) China looking toppy. (7) Mexico isn’t cheap. (8) Brazil’s earnings in a coma. (9) Fragile Five leading the EM rally. (10) As expected, Q1 earnings season showing typical better-than-expected results. (11) No sign of profit margin reverting to the mean. (More for subscribers.)

Falling Unemployment Rate Isn’t Boosting Wage Inflation (excerpt)

I am inclined to believe that the unemployment rate remains a relatively accurate measure of the labor market. It continues to be very highly correlated with the jobs-hard-to-get series in the monthly Survey of Consumer Confidence. If the labor market has gotten tighter as suggested by the unemployment rate, why aren’t wages rising at a faster rate? During Q1-2014, the Employment Cost Index showed wages and salaries up just 1.7% y/y. Average hourly earnings for all workers increased just 1.9% y/y during April. I believe that employers won’t respond to tightening labor markets by bidding up wages. Instead, they will use technology, when possible, to keep a lid on their labor costs.

Today's Morning Briefing: Field of Dreams. (1) A nonpartisan question. (2) Conservatives and liberals split on extended unemployment benefits. (3) Termination of such benefits may be boosting employment and reducing unemployment. (4) Not much chill in winter employment. (5) Earned Income Proxy at yet another record high. (6) Incentives not to work. (7) Lots of dropouts. (8) Are baby boomers hogging jobs? (9) Yellen’s Dashboard still showing distress in labor market. (10) Wage inflation subdued despite low short-term jobless rate. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

No Confidence In Abenomics (excerpt)

Abenomics had a very fleeting positive impact on consumer confidence in Japan. The index compiled by the Cabinet Office of Japan jumped from 39.9 at the end of 2012 to 45.7 during May of last year. By March of this year, it was down to 37.5, the lowest since August 2011. Abenomics has actually managed to depress consumer confidence!

Japanese consumers may be depressed that the weak yen has boosted price inflation, while wage gains remain slim and certainly aren’t enough to offset the April 1 sales tax hike. Not surprisingly, retail sales soared 11.0% y/y in March in advance of the tax increase. It’s the fastest gain since the government raised the sales tax in 1997. Undoubtedly, sales fell sharply during April.

Yesterday, Markit reported: “Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax. In contrast, April saw the highest rate of growth in payroll numbers since February 2007. Both prices charged and input prices rose in April, with selling prices increasing marginally following a decline in March.” The overall M-PMI dropped from 53.9 during March to 49.4 during April.

Today's Morning Briefing: Around the World. (1) On balance, global growth is slow. (2) Industrial commodity index is surprisingly strong. (3) What’s weighing on global growth? (4) US auto and housing recoveries stalling. (5) Euro is too strong. (6) Japanese consumers are depressed by tax hike. (7) China is polluted. (More for subscribers.)