Productivity growth is stronger than the Fed believes. Thus, Fed communications are muddied and traders churn markets. This is ugly for investors. Investors can respond by using industry productivity data to both avoid churn and pick better stocks. Measuring productivity is like measuring a basketball championship – it is complex and changing within the season and across years. It would be foolish to bet on this year’s outcome based only on last year’s winner. In productivity, too many people feel overwhelmed by the richness of the data and cling to a single “headline” number. Yet that headline number is…
Author: Brian Barnier
“Real GDP up 3.2%” shouted the headlines — the traders (and politicos) were off to the races. For investors, headlines hold little value – and can be dangerous. Instead, details matter. In this GDP release, details about services, durable goods, and exports especially matter. We start our myth-busting (or headline-busting) with the caution that this release is the “second” estimate. We described the revision process previously. Since then, the U.S. Bureau of Economic Analysis (BEA) has improved the timeliness of trade and inventory data. Thanks to the number crunchers at the BEA, we can see the contributions to percent…
At year end, it’s tempting to buy a company with a “good news” story about dividends, earnings or price. But, that would be wrong. Why? “Headline” numbers are too easily manipulated. To gain advantage from superior insight, check the interplay of shares outstanding, cap ex and debt. Share buybacks are high on the list to check because they can distort financial ratios and hide real growth problems. But, buybacks are just part of the story. To spot opportunity, investors need to understand buybacks relative to factors such as debt and capital expenditures (a.k.a., cap ex, or property, plant, and…
Japanese shoppers bought more as prices fell reports the Japanese Cabinet Office. Strong durables shopping and falling prices continue to be a sign of success for Prime Minister Abe’s structural reforms. But, the Bank of Japan’s (BoJ) “inflation-overshooting commitment” to raise prices conflicts with both structural reforms that tend to lower prices and the reality that shoppers buy more when prices fall. The BoJ increased its Total Assets nearly 25% over the past year — over 90 trillion yen – and still has falling prices as measured by consumption deflators. At the same time, the BoJ – like the U.S.…
Product costs have fallen and shopping habits have changed over decades. But, investment portfolio design and public policy haven’t kept up. So investors have been struggling for stability, and the Fed has been perplexed by the results of their 2% inflation target, low rates and QE. Understanding what’s broken is the step one for better investing. For parents of kids in college, your kids are living in a country where the average person is buying 2.3 times as many durable goods as when you were college-age. While durables in their dorm rooms are at 1978 price levels, their tuition…
Larry Summers repeatedly cites powerful changes in our economy as he makes the case for “secular stagnation.” But he misses the most important changes. First, he fails to distinguish between products growing (such as consumer tech) and those stagnating (such as dental services). Second, he misses the significance of falling product costs that have both enabled growth in purchases and lowered interest rates. Behind both of these, he misses the magnitude of the tech and trade transformation. “Secular Stagnation,” was coined by Alvin Hansen in 1934 to describe long term stagnation at the same time as low real (inflation-adjusted)…
Japan’s two “lost decades” are typically blamed on weak demand – not true. The legacy of “Japan, Inc.” has cut costs leading to lower prices and higher purchases. Thus, policies aimed at increasing purchases per shopper are misguided. For consumption, it’s almost all about population. For production, the need is for innovation. The typical story of Japan is one of weak consumption causing falling prices. The so-called “deflationary mindset” then reinforces a cycle of falling demand and prices. That’s not true. The average consumer has been buying consumer durables (such as electronics and appliances) as prices delightfully fell, and…
Misunderstanding credit spreads has hurt traders and investors in corporate bonds and other assets. Success is more easily achieved after realizing that spreads and volatility are historically high. Yet, the Fed should fear both volatility and high spreads. Credit enables businesses to grow without loss of ownership. Credit markets lower the cost of credit by bringing all the parties together. We recently provided an update on bank lending, delinquencies and charge offs that added to our warning on two lending trends. Now we turn to bond trading markets where monetary and tax policies have reshaped trading. Picture in your…
From dentist visits to allergy pills, the Fed is pushing hard to increase medical care prices, but they are pushing on a string. Consumers in many states have seen their medical insurance policies cancelled or hit with big premium increases. Out of pocket dental costs have increased faster than any other type of medical expense. On the bright side, nonprescription drugs are at least flat – often falling when purchased at a big-box store. But, for the Federal Open Market Committee (FOMC) desperately trying to hit their overall 2% inflation target, you paying less for allergy pills is a…
Delinquencies and charge-offs on business loans have been growing for the past year — a warning to investors. Previously, we warned that growth in business loans not only distorts valuation ratios but also increases the vulnerability of markets and companies with higher debt/equity ratios. See: Investors, be alert for these two credit trends. Today, we add that loan delinquencies* have already turned up from their bottom. For investors, this reflects growing risk in borrowing companies, the economy and banks. Historically, delinquencies grow with loan volume, so loan volume at U.S.-chartered commercial banks also matters. However, loan volume alone has…
From Yahoo! Finance by Lawrence Lewitinn While Fed Chair Janet Yellen and Vice Chair Stanley Fischer recently hinted that another rate hike is likely sometime by the end of the year, low interest rates may be here for the long run irrespective of Fed action. Lower rates are not just the result of central banks buying billions of dollars worth of bonds over the years in the United States, Europe, and Japan, according to Brian Barnier, head of research at ValueBridge Advisors and founder of FedDashboard.com. For the rest of the story, charts and video visit http://finance.yahoo.com/news/why-rates-could-stay-low-000000369.html Here at…
Fed forecasters have erred because they’ve missed how tech and trade have transformed our economy. As monetary policy leaders design a new framework at Jackson Hole, how they adapt to this transformation will be a top measure of their success. Ben Bernanke, in his recent Brookings blog post, helpfully listed three items on which Federal Open Market Committee (FOMC) member views have been shifting because of “persistent errors in forecasting.” These items are Potential Gross Domestic Product (GDP), natural rate of unemployment and longer-run Federal Funds rate. Students heading back to university can see the impact of tech and…
The two percent inflation target is an illusion, ignoring the fork between goods and services. Chasing a 2% target creates a trap that distorts prices and purchases – and hurts growth. Headline “inflation” is typically reported as both the “core,” excluding food and energy that fluctuate more widely; and then food and energy. It seems a simple picture… … except that it is misleading. Among many criticisms, two need more attention: It’s not really inflation, it’s “average change in prices.” Strictly speaking, “inflation” measures price changes due to monetary policy (money supply and interest rates). That is not what…
“No one can see a bubble, that’s why it’s called a bubble” is a myth. Like kids blowing bubbles on a summer day, bubbles are bubbles relative to a reference point — like the base of a kid’s bubble pipe. Financial asset bubbles are revealed when compared to tangibles such as sales or assets. Kids are good at spotting the unusual – like the biggest cookie compared to others. A financial bubble is born when the price of a financial claim (e.g., stock or bond) exceeds the value of the tangible (e.g., hard asset or cash flow) to which…
Risk to investors has been creeping up through two trends – the rise of autonomous financial markets and rise in commercial & industrial lending. Use the right metrics to more easily watch these risks. Let’s make this practical… What is the basis of a loan to a little retail shop? A lender looks to assets (fixtures, equipment or inventory) or flows (production, sales or income). Credit analysis expects consistent ratios such as loan-to-value, debt/assets or loan payments/income. Economy-wide, we’d also expect to see some consistency, subject to tangible changes such as mix of industries (and asset-intensity) and growth rates…
The falling ratio of margin debt to corporate equity seems to be good news. At least it means less leverage and might mean the equity bubble is being taken more seriously. It also seems another sign of the Fed’s footprint in the market – warning investors and (hopefully) the Fed. Securities margin debt at broker-dealers has been falling since 3Q2014. This was the same the time speculation grew about interest rate increases from the Federal Open Market Committee (FOMC). Nominal margin debt being down to the levels of the tech bubble is welcome. Yet, this pattern of falling margin accounts…