Weekly Economic Update 04-14-2017

Highest Valued Stock Market in History
Based  on the total U.S. stock market capitalization, is now approximately 207% of GDP. Compare this to the peak in 2007, which was 181% of GDP and the dot-com peak at 202% of GDP. It doesn’t help that GDP growth is very low compared to the prior peaks and the stock market is near its highest point in history. When you have high stock prices and very low growth that should be a warning sign that one of those two is wrong. Either stocks are overpriced or growth is about to massively accelerate.

More on the March Nonfarms Payroll Report
Few things to consider: it was the worst report since May 2016; no significant wage growth and the number of multiple job holders increased significantly. Compared to last year there are 7.2% more people holding more than one job. That’s not an indication of prosperity, but an indication that we are near the end of the cycle as people are willing to work multiple jobs to make ends meet.

Auto Inventories Continue to Grow
We’ve looked at this in the past, but now JD Powers is estimating there are 4.1 million unsold new cars as of the end of March, marking the highest level of dealer inventory since 2004. Last week in the bonus section we looked at a chart showing the inventory-to-sales ratio was at the highest level in history when excluding the peak that was set in the middle of the Great Recession. With incentives at very high levels, it just means that if you’re looking to buy a car that when the economy is in a recession the deals ought to be even sweeter. Swelling inventories and incentives should be an indication of deflation, not inflation.

Deflation is Coming!
This week quite a few industrialized nations are releasing their CPI (Consumer Price Index) data for March. The data is showing that the rate of inflation in some countries has slowed or in the case of others, that the rate of inflation has fallen.

  • France: 1.1% YoY for March vs 1.2% YoY for February.
  • Germany: 1.6% YoY for March vs 2.2% YoY for February.
  • United States: 2.4% YoY for March vs 2.8% YoY for February.
  • Import prices to the U.S. dropped 0.2% in March.
  • Retail sales dropped 0.2% and February was revised down from +0.1% to (0.3%).

This data is hardly inflationary. What this means is that bond yields are likely to continue falling.

Don’t Invest Based on Politics
Unless it’s going in your favor! Even the Oracle of Omaha, Warren Buffett, has said that it’s not a good idea to mix investing and politics. Yet after the election, he made substantial investments in stocks, one of them being United Airlines.

The main reason stocks are up and interest rates are up is due to Trumponomics, which is due to the belief he will implement pro-business policies which coincide with a strong dollar. As a result, investors dumped bonds and bought big into stocks.
On Wednesday Trump stated in a press conference that he felt the dollar was too strong and that interest rates should remain low. He also said that Janet Yellen will not be “toast” when her term expires in 2018. In response yields immediately dropped late afternoon as did the US dollar.

What that means is that a falling USD is bullish for gold and bearish for equities, and falling yields are bullish for bonds. That is the exact opposite of how the public is currently positioned.

Government Shutdown Not Priced In
When Congress returns from their two-week vacation they will have 5 days to pass some sort of budget plan, even if it is a temporary fix, to prevent the government from shutting down on April 28. This isn’t a reason to panic, but events like this can occasionally be a catalyst to move markets.

Client Update
The mining stocks have performed well since buying in relative to the major stock indices. There is still cash remaining to be deployed, but due to the high volatility in the mining stocks, I have been hesitant to make further purchases. Prices have also risen on declining volume, which isn’t an ideal sign. While prices can go up on declining volume, I would like to see big buyers step in to put momentum behind this asset class. For the moment this hasn’t happened, but it could very soon.

On Wednesday gold touched its secular downtrend line. Since 2011, it has failed to cross this line multiple times and when that happens, prices fall. If prices can break over this line, then things get interesting quickly. I will cover this chart in the video and why it is critical we wait to see what happens before making any additional investments or before selling all the mining positions.

Ten-year Treasury yields continue to fall and are getting very close to 2.2%. If yields break below 2.2% there is quite a bit of dead air that suggests yields are likely to fall below to the 1.9% range. From there it will likely become apparent there is a trend change that drives yields even lower, especially considering growth is likely to remain low and the consumer price index is likely to fall. This would be very bullish for our Treasury positions.

Bonus (30 min):

  • M2 Money Stock YoY% vs Recessions
  • CPI (Year over Year % Change)
  • CPI vs Crude Oil (YoY%)
  • CPI vs Average Hourly Earnings of Nonsupervisory Employees
  • Retail Sales: Food Services & Drinking Places
  • GDP vs Atlanta Fed GDPNow Model
  • Commercial & Industrial Loans
  • Consumer Loans vs Delinquency Rate on Consumer Loans
  • S&P 500 (SPY) to iShares 20+ Treasuries (TLT) Ratio
  • S&P 500 Volume Analysis
  • 10-Year Treasury Yield (TNX) Support Levels & Price Targets
  • Gold Futures (GCM7) Support Levels & Price Targets
  • SPDR Gold (GLD) Support Levels & Price Targets
  • Vaneck Vectors Gold Miners (GDX) Support Levels & Price Targets
  • iShares 7-10 Year Treasury Bond (IEF) Support Levels & Volume Analysis
  • Inverse VIX (XIV) 20 Year Daily Bar Chart
  • S&P 500 vs % of S&P 500 Stocks Above 50-day MA
  • S&P 500 vs % of S&P 500 Stocks Above 200-day MA

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