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.)