The Wage Stagnation Myth (excerpt)

Yesterday, we learned that personal income rose 0.3% during August, while the personal consumption expenditures deflator decreased less than 0.1%. On a y/y basis, the former is up 4.3%, while the latter is up 1.5%. So real incomes are growing at a solid pace.

There is a widespread myth that real incomes have been stagnating for many years. That’s apparently true based on mean real income for households. I have lots of issues with this statistical series, including the impact of demographic trends on it. Consider the following:

(1) While real mean income per household has been stagnating since 2000, real pre-tax compensation per payroll employee (including wages, salaries, and supplements) is up in record-high territory at $61,307 during August, which is an increase of 16.8% since the start of 2000.

(2) Real wages and salaries in personal income is also in record-high territory, up 1.8% y/y and 14.6% since the start of 2000. Real average hourly earnings of production and nonsupervisory workers is up 1.1% y/y and 13.4% since the start of 2000.

Today's Morning Briefing: Life After QE. (1) Will end of QE kill the bull? (2) Market is getting nervous about Fed rate hikes next year. (3) Can Richard Fisher really move markets? (4) More Fed doves than hawks, especially next year. (5) Charles Evans gets to vote in 2015. (6) Bullard says time to drop “considerable time.” (7) Dudley puts the dollar on the table. (8) More tightening tantrums ahead. (9) Profits for accountants. (10) Regional surveys showing very strong economy during September. (11) The wage stagnation myth. (More for subscribers.)

US Manufacturing Renaissance Starting to Happen (excerpt)

Over the past few years, there has been lots of buzz about the coming manufacturing renaissance in the US. The central concept is that plentiful and cheap natural gas will convince manufacturers to expand or to move production to the US to cut their energy costs. Labor is still cheaper overseas, but it isn’t as expensive as it once was in the US. Besides, the IT revolution has increased factory productivity with more automation, including robots and the “Internet of Things.” The recent strength in the dollar could be a spoiler if it continues since it reduces the global competitiveness of US exporters and provides a competitive edge for importers.

For now, the evidence is finally mounting that the highly anticipated new age in US manufacturing may be happening, though the jury is out on how long it will last. Let’s review the relevant data:

(1) Capital spending. One of the strongest components of real GDP in recent quarters has been real capital spending on industrial equipment. It is up 14.7% y/y through Q2, the fastest such pace since Q4-2011.

(2) Factory orders. Industrial machinery orders soared to a record high during July. They are up 37.3% y/y. Nondefense capital goods orders excluding aircraft rose to a record high during August.

Today's Morning Briefing: The Top? (1) Did BABA make the top? (2) The bears have been seeing tops since the start of the bull market. (3) The lamest argument. (4) Bears now focus more on technicals than fundamentals. (5) Another test for buy on dips. (6) “Death Cross” in the Russell 2000. (7) The “internal correction” continues from high to low P/Es as earnings outlook for SmallCaps cools relative to LargeCaps. (8) Manufacturing renaissance finally showing up in the data. (9) No renaissance in the Eurozone and Japan. (10) Updating our “Stay Home” investment strategy. (11) Have EMs become “story” stocks? (More for subscribers.)

Global Crude Oil Demand Growth Slowing (excerpt)

The latest global crude oil demand and supply data from Oil Market Intelligence (OMI) provides additional evidence of the slowdown of global growth this year. While world oil demand rose during August to a record high of 92.7mbd (using the 12-month average to smooth out the volatile monthly data), it was up just 0.8% y/y. That’s down from a recent peak of 1.7% last September, and the lowest growth since May 2012.

Demand growth among the advanced economies of the OECD remained slightly negative for the fifth consecutive month. It has been mostly negative since September 2011. Among the other economies, growth was 1.9% during August, the lowest since September 2009.

By the way, I also track the ratio of global crude oil demand to supply using the OMI data. It starts in 1994. Our ratio tends to track the y/y percent change in the price of a barrel of Brent crude oil. It has been edging lower in recent months, coinciding with the weakness in Brent.

Today's Morning Briefing: Cyclical Sectors & the M-PMI. (1) US is hot. Europe is not. (2) Germany’s indicators are falling. (3) US flash M-PMI strong and could be bearish for P/Es of cyclical sectors, or not. (4) Valuation multiples more likely to move sideways for cyclicals, which could be driven higher by earnings. (5) Global oil demand at record high, but growth is decelerating. (6) Both OECD and non-OECD oil demand growth rates slowing. (7) Demand/supply ratio for crude oil has turned bearish lately. (8) Focus on underweight-rated S&P 500 Energy. (More for subscribers.)

Best Cure for High Commodity Prices (excerpt)

During the previous decade, there was lots of buzz about the commodity super-cycle. In my opinion, super-cycles should last at least 20 years. If so, then the latest one in commodities wasn’t so super. I reckon it lasted about 10 years, kicked off by China’s joining the World Trade Organization in December 2001 and starting to peter out when China’s industrial production growth peaked at a record 20.7% on a y/y basis during February 2010. It was down to 6.9% last month.

The proponents of the super-cycle assumed that rapidly growing demand for commodities in China would outstrip supplies for a very long time, pushing prices higher. They did rise for a while. But as they say in the commodity pits, the best cure for high commodity prices is high commodity prices. High prices stimulate capacity expansion and more output, which bring prices down, especially if the long-term demand assumptions turn out to be too optimistic.

Today's Morning Briefing: Super-Cycles. (1) No more buzz about commodity super-cycle. (2) China’s super-cycle may be petering out. (3) The best cure for high commodity prices. (4) CRB spot index falling. (5) Capacity expansion. (6) Remember the Baltic Dry Index? (7) Bumper crops in US and China too. (8) US & Canada out-produce Saudi Arabia. (9) Heavy metals weighing on prices. (10) The dollar is weighing on commodity prices too. (11) Chinese government not rushing to stimulate. (12) Super-cycle in Age Wave suggests low inflation and bond yields for many more years. (More for subscribers.)

The Bears Are Growling Again (excerpt)

The weakness in small-cap stocks this year suggests that perhaps the melt-up actually occurred last year when the S&P 600 SmallCaps soared 39.7%. The S&P 500 LargeCaps and S&P 400 MidCaps also soared 31.6% and 29.6%, respectively. So far this year, the S&P 600 has been moving sideways, underperforming the two larger-cap indexes. The bears are already growling that this is a sign of a top for the larger-cap indexes.

They note that valuation multiples are stretched. With the Fed’s release of the latest Flow of Funds data last week, we now know that the ratio of the market cap of all equities traded in the US (excluding foreign issues) to nominal GDP was 1.67 at the end of Q2, the highest reading since Q3-2000. Tobin’s Q valuation measure rose to 1.12, the highest since Q4-2000.

Today's Morning Briefing: Our Three Scenarios. (1) What’s next: melt-up or meltdown? (2) Rational exuberance scenario remains our most likely. (3) Inflation remains a no-show in all three scenarios. (4) In irrational exuberance scenario, foreigners could pile into the US dollar, bonds, and stocks. (5) 30% up and down? (6) The secular bull survives in two of our three scenarios. (7) Are small-cap stocks signaling that the end is near? (8) Hard to see recession in US. (9) Not so hard to see recessions in Eurozone and Japan, and slowdown in China. (10) Focus on market-weight-rated S&P 500 housing-related industries. (More for subscribers.)

Why Is the Yield Curve Flattening? (excerpt)

In a 9/9 interview on CNBC, Jeffrey Gundlach, CEO and CIO of Doubleline Capital, provided some very useful insights into the recent behavior of the bond market and its implications for Fed policy. He noted that short-term interest rates have been rising, while bond yields have been falling. The yield curve has flattened since the start of the year. Through Friday, the 2-year Treasury yield rose 21bps ytd to 0.59%, while the 10-year Treasury yield has dropped 45bps to 2.59%.

Gundlach thinks that this is remarkable. He suggests that strong economic data are driving the short end of the yield curve higher on expectations that the Fed will start tightening sooner. However, the economy might be more vulnerable to rate hikes than is widely appreciated. He concludes that “if you read the tea leaves of the bond market, it might be if the Fed raises rates even moderately like to 1% or 2%, maybe the economy can’t take it.”

Gundlach may be right. However, I have been noting that the widely unexpected drop in US bond yields since the start of the year is mostly attributable to the plunge in Eurozone yields. They declined broadly on Friday, with the yield on the 10-year German government bond falling to 1.04%. The yield on the 10-year government bond in Spain dropped to 2.19%. On Thursday the ECB announced that Eurozone lenders had borrowed just €82.6 billion through the new TLTRO, falling short of many analysts’ expectations and increasing the likelihood that the ECB will have to implement QE despite legal hurdles to doing so.

Today's Morning Briefing: Yellen’s Spin. (1) Fairy dust in the air. (2) “2014 by 2014” was achieved intra-day on Friday. (3) The third press conference was the charm--giving a new meaning to time. (4) Yellen says pay no attention to “dot plot” for the third time. (5) Will interest-rate hikes be at a “measured” pace? (6) How the Fed caused the last financial crisis. (7) The other Bond King explains the yield curve. (8) TLTRO disappoints. (9) Selfies and their BFFs. (10) Married couples in households with and without kids are no longer the majority. (11) Singles living solo account for 28% of households, while those living with someone else are at 24%. (12) “This Is Where I Leave You” (+). (More for subscribers.)

Inflation Remains a No-Show (excerpt)

Despite all the liquidity provided by the major central banks since 2008, inflation remains remarkably subdued around the world. On September 2, I wrote: “If we knew six years ago about the extraordinary rounds of ultra-easy monetary policy that the major central banks were about to pursue, most of us would have predicted hyperinflation. Instead, the widespread worry is about deflation. Over the past five years, Milton Friedman’s dictum that ‘inflation is always and everywhere a monetary phenomenon’ hasn’t played out.”

I also observed that in the US there is clearly less slack in the labor market and in the overall economy than a year ago. Yet both wage inflation and price inflation remain remarkably low. I noted that there are lots of reasons why this is happening and may continue to do so. Globalization continues to keep a lid on wages. Easy money has financed excess capacity around the world, which is keeping a lid on prices. There have been lots of technological innovations, which tend to be deflationary. Low price inflation is keeping a lid on wage inflation.

So inflation isn’t always and everywhere a monetary phenomenon. Furthermore, deflation may be a monetary phenomenon if ultra-easy monetary policy boosts production capacity more than it does demand.

According to the IMF, the world CPI down-ticked to 3.2% during July. The inflation rate for advanced economies was just 1.6% y/y. That’s the 27th consecutive month of readings under 2%. The inflation rate for emerging economies fell to 5.3%, the lowest since October 2009.

Today's Morning Briefing: Yellen’s Theory of Relativity. (1) Fed is in no rush to hike rates. (2) What is the meaning of time? (3) Yellen says “considerable time” is data dependent, not date related. (4) So time is relative, or simply irrelevant. (5) Don’t watch the clock, watch the game. (6) PBOC stealthily injecting liquidity? (7) Inflation remains a no-show. (8) Friedman’s phenomenon remains a phantom. (9) Nonmonetary explanations for lowflation. (10) Europe is on the edge of deflation, while Japan edges away from it. (More for subscribers.)

Another Earnings Season Ahead with Positive Surprises (excerpt)

Here we go again. As the Q3 earnings season approaches at the start of October, industry analysts are scrambling to lower their forecasts. They seem to do so just prior to every earnings season. It happens because companies guide analysts to lower their numbers to avoid reporting negative surprises. For some reason, analysts willingly accommodate their wishes.

Their collective downward revisions rarely depress stock prices because investors have come to expect that the analysts once again are setting the stage for more positive earnings surprises. Besides, while they are lowering their numbers for the coming quarterly earnings season, they rarely do so for the following quarter until a few weeks before its earnings season begins, and so on and so forth.

Since the start of Q3 during the first week of July through last week, the consensus forecast for the quarter has dropped by 4.1% to $29.12, which is below Q2’s $30.10. The latest estimate is up 5.4% from last year’s result for the same quarter. However, we can probably count on upside surprises to bust Q3’s growth. That’s what happened during Q2 when the pre-season forecast of 6.0% y/y turned out to be actually 9.9%.

Today's Morning Briefing: Bear Necessities. (1) Is the bull market aging or maturing? (2) A stealth bear market in the Nasdaq. (3) Internal correction of speculative SmallCaps is bullish for overall bull market. (4) Some wise guys are bearish. (5) Bears are MIA. Do we really need them? (6) Fed may issue hawkish statement, but Yellen should remain dovish. (7) Some things to fear. (8) Bulls don’t die from old age. They are killed by recessions. (9) Recession scenarios not compelling right now. (10) Nothing to fear but a melt-up? (11) Earnings roundup. (More for subscribers.)

US Is Gushing Oil (excerpt)

The weakness in the price of crude oil in the face of all the turmoil in the Middle East is extraordinary. It certainly suggests that global economic growth remains subpar. Despite a sharp drop in Libyan output recently, OPEC production continues to hover between 36mbd and 38mbd. Non-OPEC output rose to a record 54.8mbd during July.

Contributing to that record high is US oil field production, which is soaring and reached almost 9.0mbd in early September. The US is now exporting 3.7mbd of crude oil and petroleum products.

Today's Morning Briefing: Losing Energy. (1) Interesting week. (2) Separatists are agitating in Scotland & Spain. (3) Draghi throwing more spaghetti on the wall to see if it sticks. (4) Oil and gasoline prices plunging. (5) Oil at $75 would be bad news for Ras-Putin. (6) A timely call to underweight Energy. (7) US oil output close to 9.0mbd. (8) Industrial commodity prices also losing altitude. (9) China has too much debt, corruption, and capacity. (10) Chinese output fell in August m/m. (11) Railways freight traffic on slow track in China. (12) China’s shadow banks are getting squeezed. (13) Focus on overweight-rated S&P 500 IT. (More for subscribers.)

Retail Sales Revised Higher (excerpt)

Preliminary data showed that retail sales stalled during June (0.2% m/m) and July (0.0). I wasn’t surprised that June and July were revised up to 0.4% and 0.3%, respectively, last week when the Commerce Department also reported a 0.6% gain in August to a new record high. Maybe last month’s gain will be revised higher too.

I wasn’t surprised because the retail sales series is now even more closely in line with our rising Earned Income Proxy, which tracks the private sector’s wages and salaries in personal income. In addition, forward earnings for the S&P Consumer Discretionary Retailing Industry rose to yet another record high in early September. Furthermore, the Consumer Sentiment Index rose in mid-September, led by a 4.3-point jump in the expectations component to a 14-month high of 75.6. The present situation component eased a bit to 98.5, remaining near August’s cyclical high of 99.8.

Today's Morning Briefing: A Brief History of Considerable Time. (1) Fed will normalize once the economy has escaped. (2) Are we there yet? (3) Charles Evans saw it coming last year. (4) “Considerable time” has been around for a considerable time. So has NZIRP. (5) Time to drop time? (6) The case for 2.5%-3.0% bond yields. (7) Hilsenrath’s take. (8) Yellen will soften the blow. (9) How can we measure escape velocity? (10) Another solid batch of US economic indicators. (11) Upward revisions give retail sales a boost. (12) Focus on market-weight-rated S&P 500 Consumer Discretionary Retailers. (13) “The Drop” (+ +). (More for subscribers.)

Australian and Canadian Dollars Rolling Over Again (excerpt)

The currencies of countries that are major exporters of commodities tend to be highly correlated with the CRB raw industrials spot price index. This is especially so for the Australian and Canadian dollars. It’s not a perfect correlation, but they both do reflect the major trends in industrial commodity prices. Both currencies were especially weak last year. They regained some ground earlier this year, but seem to be rolling over again.

Today's Morning Briefing: Decoding Currencies. (1) Interesting times. (2) When dollar goes up, commodities go down, and vice versa. (3) That’s especially true for industrial commodities, crude oil, and gold. (4) Fundamental driver of dollar and commodity prices is relative strength of US economy. (5) Dollar should strengthen as US becomes less dependent on oil imports. (6) Draghinomics and Abenomics boil down to currency depreciation policies. (7) Scots free? (8) Australian and Canadian dollars remain commodity currencies. (9) Focus on underweight-rated S&P 500 Materials. (More for subscribers.)

Why Are Emerging Markets Outperforming? (excerpt)

The recent outperformance by the EM MSCI has been remarkable since many emerging markets depend on exports to the Eurozone, which has been very weak, and to China, which has been slowing. In addition, in the past, the EM MSCI (in dollars) usually declined when commodity prices were falling and the dollar was strengthening. The EM MSCI has diverged from this pattern so far this year.

Perhaps a macroeconomic perspective isn’t as useful as in the past in gauging the likely performance of the EM MSCI. It may simply be that there are enough positive internal developments underway in enough of the emerging economies to drive the overall EM MSCI stock price index higher. There clearly are positive homegrown stories in India, Indonesia, Mexico, and a few other EMs that are attracting global investors. The stories tend to be about economic reforms that could spur more domestic growth.

An even simpler explanation for the outperformance of the EM MSCI is that it has been and still is relatively cheap compared to the other MSCI stock composites based on their forward P/Es at the end of August: US (16.0), EMU (13.7), Japan (13.7), UK (13.6), and EM (11.3).

Today's Morning Briefing: Ahead of the Pack. (1) US is ahead of the world benchmark this year and since the start of the bull market. (2) Faltering economies weighing on EMU and Japan MSCIs. (3) No sign of secular stagnation in US stock market performance. (4) Emerging Markets MSCI also outperforming this year despite weakening commodity prices and strengthening dollar. (5) Homegrown stories may be boosting EM stocks. (6) Or maybe they are just relatively cheap. (7) Forward earnings at record highs for 7 of 10 S&P 500 sectors. (8) Interest-rate-sensitive sectors underperforming again. (9) Energy has had a round trip this year in the performance derby. (10) Consumer Discretionary showing some life. (More for subscribers.)

China’s Imports Have Stalled (excerpt)

The quality of Chinese economic data has long been questionable. Last year in May, the government launched new rules to crack down against speculative capital inflows disguised as trade payments, which boosted the exports data. I assume that the data are more accurate now. However, I am amazed that it is always available one month ahead of the other major economies. We already have August readings for China.

They show that China’s merchandise trade surplus remained at July’s record high of $520 billion (saar) during August. However, the seasonally adjusted data show slight downticks in both exports and imports during August. On balance, exports remain near July’s record high, suggesting global growth remains solid. On the other hand, imports seem to have stalled over the past three years, confirming that China’s domestic economy isn’t as hot and spicy as it had been in the past when imports were growing rapidly.

Today's Morning Briefing: Good Trade. (1) Most reliable indicators. (2) Volume of global exports up 3.4% y/y. (3) US exports at record high, fueled by petroleum. (4) Surprising strength in German orders, output, and exports during July. (5) Canada, France, and Italy exporting more. (6) Abenomics isn’t working for Japanese exporters. (7) Mexico and India are EM export leaders. (8) China isn’t so hot and spicy anymore. (9) Transportation’s forward earnings at record high. (10) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Earned Income Proxy at Record High (excerpt)

There was widespread disappointment with August’s payroll employment gain of only 142,000. In addition, the previous two months were revised downwards by 28,000. This weakness simply doesn’t jibe with lots of other labor market indicators showing very low layoffs, plenty of job openings, and lots of national and regional business surveys with solid employment indicators. This more upbeat view of the economy was confirmed by our Earned Income Proxy (EIP), which is aggregate hours worked multiplied by average hourly earnings in the private sector. It is highly correlated with private wages and salaries in personal income. Our EIP rose 0.4% m/m to yet another new record high last month, auguring well for consumer spending.

Today's Morning Briefing: Selfies. (1) Half of US adults are now single. (2) More one-person households. (3) Childless singles are more self-centered in the way they spend. (4) Increase in singles is exaggerating income inequality. (5) They earn less, but have fewer mouths to feed. (6) Singles tend to rent. (7) Are they more liberal or conservative? (8) Weak August payrolls distracts from improvements in Yellen’s dashboard and strength in earned income. (9) Euro trashed by ECB. (10) “The Last of Robin Hood” (+). (More for subscribers.)

Lots of Bumpers (excerpt)

Auto dealers sold a bumper crop of vehicles during August. They sold 17.5 million units (saar), up from 16.5 million units during July. We aren’t surprised given that railcar loadings of motor vehicles rose to a new cyclical high during August. The economy is chugging along and barreling down the highway. No wonder that manufacturing is doing so well, as I discussed yesterday.

So why aren’t commodity prices reflecting this strength in the US? The rest of the world isn’t doing as well. The Eurozone and Japan are noticeably weak, while China is slowing. Meanwhile, commodity producers have increased their capacity to produce more commodities and are doing so. Remember: The best cure for high commodity prices is high commodity prices.

Today's Morning Briefing: Bumper Crops. (1) No shortage of beans. (2) The commodity “super-cycle” wasn’t so super. (3) Old adage from the pits. (4) Message from the commodity pits: Ample supplies and slow global growth. (5) Food and energy inflation heading lower. (6) We still recommend underweighting Energy and Materials. (7) Stronger dollar and weaker commodities tend to tango. (8) Gold’s message. (9) Fewest bears since 1987! (10) From nothing to fear to some things to fear. (11) US is rolling down the highway. (12) Focus on market-weight-rated Autos. (More for subscribers.)

Demography Having an Impact on Inflation and Bond Yield (excerpt)

Global economic growth has slowed over the past few years. Economists such as Larry Summers are talking about secular stagnation. If this is happening, then demography may be the best explanation for it. The post-war baby boom generation is in their 50s and early 60s. People are living longer everywhere and burdening government budgets with social welfare spending on their senior citizens. The resulting budget deficits are financed with credit that is a growing liability for younger generations without creating any offsetting income-producing or productivity-enhancing assets.

Demography can account for the dramatic decline in both inflation and bond yields in the US. Indeed, there has been a very close fit among the Age Wave (i.e., the percentage of the labor force that is 16-34 years old), the inflation trend, and the 10-year US Treasury yield.

Today's Morning Briefing: A Dozen Lessons. (1) Doing our homework. (2) A dozen lessons. (3) Central bankers are know-it-alls who don’t. (4) Deflation may be a monetary phenomenon too. (5) Bond vigilantes go on a European vacation. (6) Yellen admits she is guessing about slack. (7) Could it be that low price inflation is driving low wage inflation? (8) Europe and Japan going down same dirt road. (9) US remains outstanding. (10) Corporations are managed to be profitable. (11) Time to pull out reasons why P/Es have more upside. (12) Demography can explain a lot. (13) Hillary vs. Mitt. (14) Jihadists on a deadly crusade. (15) “The November Man” (+ +). (More for subscribers.)