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Wednesday, September 19, 2018
Core and headline inflation remain subdued with the Fed’s preferred measure of inflation, Core PCE, remaining slightly below target.

August was a good month on the U.S. inflation front. While I do not like to write an “elevator report,” in this case most cars are heading to lower floors. In a flurry last week, the full run of price measures was down on a year-over-year (YoY) basis. The “headline” Consumer Price Index for All Urban Consumers (CPI) rose 2.7% YoY in August, compared to 2.9% in July. Core CPI, which excludes food and energy prices, rose 2.2% YoY in August, down from 2.4% in July. If you are more goods oriented, the headline Producer Price Index (PPI) rose 2.8% YoY for August, compared to 3.3% in July. Core PPI — excluding food, energy and trade — in August rose 2.9% YoY, slightly up from 2.8% in July. Export prices were up 3.6% Yoy in August, down by 0.7% from July. Import prices — bolstered by a 5% rise in the U.S. dollar in six months — fell to 3.7% in August, down by 1.2% from July.

There was one modest uptick within all the inflation data: real average hourly earnings rose 2.9% YoY in August, compared to 2.7% in July. That is a long way from the January 2015 peak of 2.4%, but a pleasant surprise. Expect to see more wage increases as the labor market tightens. If the Phillips curve is a labor market output rather than an inflation rate input, then the entire concept of slack or NAIRU (the non-accelerating-inflation rate of unemployment) will not hold. A rise in productivity is required to move real wages higher.

This aligns with economic theory, which holds that employee compensation is not a cost-push phenomenon. As a general consideration, it is a truism that slack — especially the unemployment rate — does not drive inflation; inflation is “always and everywhere a monetary phenomenon,” to quote Milton Friedman. Unemployment below the “natural rate” does not cause causes inflation; rather, there will be inflation if and only if there has been a monetary policy mistake. With the Federal Reserve tightening policy, it is possible that inflation will remain in its current trend for longer than market participants, and possibly the Fed, expect.

Please check out page 60 of the Global Perspectives book for more on inflation - consumer price index.

Tuesday, September 18, 2018
Over 90% of the world’s consumers reside outside the U.S., making global trade imperative for growth. The global growth slowdown corresponds with an overall slowdown in trade..

Another round of trade tariffs on $200 billion of Chinese imports has been announced and will take effect on 9/24. The planned 10% tariff is less than the 25% initially proposed but it will move up to 25% by the end of the year. Retaliatory measures by China are expected. The Chinese trade issue has been hanging over the market for quite some time and the market has become adept at shrugging it off. While some industries and companies are feeling the impact, the overall implications to the global economy have been minimal. Bilateral trade between the U.S. and China accounts for a mere 2.5% of total global exports. In addition, the strength of the dollar versus the Chinese Yuan has helped buffer the additional cost of Chinese imports to the consumer. The uncertainty is certainly a negative for businesses and planning. But the robust U.S. economy and record high corporate earnings continue to provide markets with the gas to move higher. Please follow global imports and exports on page 47 of the Global Perspectives Book

Thursday, September 13, 2018

On the 10-year anniversary of the great financial crisis and the 9/15/2008 Lehman collapse, financial officials are defending the actions of the government post Lehman as necessary in making sure a very bad situation did not get even worse. True enough. It is hard and unfair to judge programs like TARP when the extent of the potential downturn if no action was taken cannot be accurately measured. However, most economists note that the cracks in the financial system began to show six months earlier with Bear Stearns and even so, no one could really see such a disaster coming. Not so fast, Speedy. It was actually in the third quarter of 2007 when corporate earnings growth started rolling over. Companies made less in the third quarter of 2007 than the third quarter of 2006. If investors thought this was a one-off blip, fourth quarter 2007 earnings were posting even more dramatic negative growth. With earnings screaming, “Danger, Will Robinson,” it would be disingenuous to say no one saw it coming. Earnings are the principal indication of macro-economic conditions and the paramount guide to proper global market positioning. The signs were there almost a year before the Lehman collapse that sent the markets to the precipice, they were just ignored. Today, we are way past that and despite U.S. markets at record highs they continue to grind higher following ever-higher earnings. There is optimism on the trade talks with China and as expected, inflation eased a bit in August with both CPI and PPI readings coming in lighter than forecasted with core inflation slowing to 2.2% year-over-year (2.7% headline) and the monthly PPI declining for the first time since February 2017. The bottom-line is that markets follow their fundamental earnings growth and should we see earnings growth go negative then “watch out” as this “canary in the coal mine” sings for a bear market. Today we are not even close to this worry. Please see page 6 of the Global Perspectives Book for earnings growth.

Wednesday, September 12, 2018

It appears to be a growing consensus that a fiscal policy largely of tax cuts is a ‘sugar high’ whose effects will begin to fade by early 2019. Basically, this mainstream forecast assumes that the “New Normal” of sub-2 percent trend growth is indeed a lasting state. Tax cuts are good for growth and I doubt that the effect fades quickly. Part of the improvement in the economic scene is deregulation; part is the result of rising animal spirits. Here’s how to analyze the policy mix: The correct tool is directed at the correct target. That is: a) monetary policy is focused solely on inflation-stability. Frankly, we have just had an experiment in the efficacy of monetary policy as an instrument of growth. I’ll grade it a “D” for growth, though an “A” for lifting deflation risk; b) Fiscal policy has to be graded at least a “B+”. Deregulation and tax reform have now been turned towards growth generation, and growth is happening; c) Trade policy is an “Incomplete”. If the goal is to pressure China and to lower tariff barriers globally then it will merit an “A+”. For now, there is too much uncertainty for the economy and markets (although I do not believe we will see a trade war) and d) Labor policy is an “Incomplete”. The Administration has to find a balance between growing the labor force without weighing on wages, whether skilled or unskilled. So while the monetary/fiscal policy mix appears to be on track to lift the growth rate, the latter two ‘incompletes’ need to be settled, one way or another to determine where the US is going. Currently, we have uncertainty. And, unnecessary uncertainty detracts from the long-term story. - Special Guest Blogger: Tim Kearney, PhD

Tuesday, September 11, 2018

Small business optimism hit an all-time high in August with more business owners than ever reporting that it is a good time to expand. Shhh, don’t tell anyone. It’s a secret. The number of job openings in the U.S. rose to a record high of 6.94 million according to the latest JOLTS survey, with the most jobs created in insurance, finance and manufacturing while the lower paying retail sector shed jobs. Shhh, that is a secret too. The reason for the secrecy regarding this positive economic data is that everyone knows that the death knell of a bull market is euphoria. When anyone who can fog a mirror has a stock tip for you, you know it’s time to get defensive. (Remember Bitcoin?) Luckily, investors are plenty worried about trade wars, political drama, the growth ability of the tax cuts and the reputation of the month of September as a stock market bully. And 10 years after the Lehman meltdown, investors are still once bitten, twice shy with more than $10 trillion of cash on the sidelines. Please see Doug Coté discuss this perplexing attitude on CNBC.

Friday, September 7, 2018

It’s hard to poke holes in today’s non-farm payroll numbers. In August the U.S. economy added 201K jobs, the 95th straight month of job creation, and the unemployment rate remained at an 18-year low of 3.9%. Despite slight net downward revisions in June and July, this year’s average monthly gain of 207K jobs is running higher than last year’s average job gains. In addition, wage growth accelerated, up 2.9% YoY from 2.7%. But this does not necessarily foretell a spike in inflation. The recent increase in productivity (up 2.9% in Q2 and running 1.2% over the last six quarters) is an offset to higher wages. With higher productivity, employers can offer raises to workers without eroding profit margins. Markets reacted negatively to the payrolls report because it affirms a robust economy and the perceived pressure on the Fed to raise rates. Some economists have also bemoaned the lack of skilled workers as a gaping hole in the employment picture. However, there are still more than 96 million noninstitutionalized civilians between ages 16 and 64 not employed, many of whom can be enticed back into the workforce and trained to fill gaps. Please keep track of labor costs and productivity on page 65 of the Global Perspectives Book.

Thursday, September 6, 2018

It’s hard for investors to keep their eyes on the road with so many distractions. The latest political drama and intrigue, contentious Supreme Court justice hearings, and upcoming midterm elections are all investor eye candy, potentially causing them to swerve. On the other hand, the economic data – 49-year low on new jobless claims, ISM services index soaring to 58.5, productivity climbing to 2.9%, the highest in three years – should help to keep investors on the straight and narrow. Earnings are the fundamental driver of markets and now that Q2 earnings season is winding down a spectacular 25% YoY growth quarter, investors may be tempted to change lanes during the lull between reporting quarters. Letting extraneous headline events affect your investing behavior is like texting and driving. Don’t do it. Company earnings are the GPS of the global economy. Follow them. And if you need yet another reason to keep your eyes on the road, a recent WSJ article claimed you would need 130% of your income in retirement, not the often-cited 70%. Why would you need 130% of your income in retirement? Well, in order to live the high life of global travel; bungee jumping in the jungles of an exotic destination; and golfing at Pebble Beach to name a few. Please note the S&P 500 all-time high operating profits on page 21 of the Global Perspectives Book.

Wednesday, September 5, 2018

U.S. data and animal spirits continue to run high. The August ISM manufacturing report burst to a 14-year high rocketing to 61.3, up 3.2 points from July. New orders hit 65.1, running above 60 since May 2017. The Dallas Fed Manufacturing Activity and Richmond Fed Manufacturing indices also edged higher in August. The UMich consumer sentiment outperformed expectations and is holding at a 14-year high. As measured by the Conference Board, August consumer confidence hit a level not seen since the dawn of the new millennium. Q2 GDP was revised upward in ways that show continued solid growth. Nonresidential fixed investment (CAPEX) was revised higher, with imports revised downward. There are some estimates that $500bn was repatriated in the first half of 2018, so it is interesting that given the rising investment, the current account has remained moderate thus far. The July PCE report showed a supportive consumer. While the PCE deflator was up 2.3% YoY and the core was up 2.0%, it appears that inflation remains in check. The three-month moving annualized measure of the core PCE deflator is 1.9%. It’s a good situation for the U.S. – and the rest of the world as well. Globally, the August PMI run has been showing above 50. There are a few caveats: 1) Europe seems to still be ebbing, definitely down from the blistering Q4 2017 and 2) Emerging Markets are still reeling a bit. Not unexpectedly, South Africa showed a major downward bump. But, with the U.S. moving smartly, there seems to be a room for the world to get a second wind. - Special Guest Blogger: Tim Kearney, PhD

Friday, August 31, 2018

Last year we could not stop talking about the global synchronized recovery. This year the global economic outlook is still good but has become somewhat unsynchronized with the U.S. soaring to the head of the class after enacting pro-business policies. It’s not always easy being the teacher’s pet. The Fed’s interest rate hikes and the U.S. dollar strength have had global implications, especially in emerging markets. Emerging markets have seen their currencies weaken and capital outflows surge. However, in theory a weaker currency helps increase the export outlook and therefore the economy and profits in these markets. Conversely, a significantly weaker dollar would help U.S. exports and the U.S. GDP, potentially sparking cheating accusations and a trip to the principal’s office. You can’t please everyone. As we head out for a long weekend, remember the words of Maya Angelou – “Nothing will work unless you do.” But you deserve some rest too. Happy Labor Day. Please watch Karyn Cavanaugh’s latest comments about the market on CNBC.

Thursday, August 30, 2018

The U.S. consumer is the economic game changer accounting for nearly 70% of the economy. The consumer sure did its share of heavy lifting during the economic recovery helping to bolster GDP when business spending and investment lagged. More recently, tax cuts, wage gains, home price increases, scarce layoffs and market highs are keeping consumer spending strong. As a result, Q2 GDP was revised up to 4.2% and consumer confidence soared to an 18-year high according to The Conference Board. All this spending also increased the Fed’s preferred measure of inflation, the PCE Index, up 2.3% YoY, core 2.0%, the highest levels since 2012. With so much positive consumer data, it is natural for the bears to come out of the woods calling for a correction, crash, recession, meltdown, alien invasion, etc. Sure, the global trade issue is an ongoing fly in the ointment. A few steps forward after an announced deal with Mexico were met with a step back today after an affirmation of China tariffs. No one said it would be easy. Rules, discipline, diversification are investment anti-bear spray. And of course, an eye on corporate earnings which are the true driver of markets. Take a look at inflation and the PCE index on page 60 of the Global Perspectives Book and note that the Fed has been waiting many years to finally hit its inflation target.


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