Tuesday, November 13, 2012
Tuesday, October 9, 2012
Monday, September 10, 2012
Friday, August 31, 2012
Welcome to the Leading Indicators Report
Welcome to the Leading Indicators report. This report looks at where we are today based on a presentation of economic indicators with some historical context. The philosophy of this report is that whatever your view about where things are going, you first need to know where things are. As always, this report is a work in progress and we welcome any feedback or suggestions.
US Leading Indicators: While the economy as a whole feels very negative looking at consumer sentiment, the current indicators seem to indicate that the economy is still growing, though at a relatively slow rate. So things are better in the short term than people feel but the onslaught of negative news and backlog of problems are bringing us down.
Global Financial Markets: Financial markets seem to be indicating
positive growth in the economy as well with positive growth in the S&P 500 correlating to positive real GDP over the next two quarters. Despite relatively horrible news, global markets seem to be uniformly up versus last year, although when one remembers the last year it is a very low bar.
More interesting is valuations: our longer term indicators like CAPE indicate that markets are trading at historical medians or slightly above. Our favourite long term indicator - the Tobin's Q - shows that we are not in deep value territory here. Risk premiums are still historically high (and are more forward looking than CAPE or Tobin's Q) by about 1% which makes sense given the mixed economic news and headwinds from Europe.
One interesting trend is the outflow of money from equity mutual funds and the corresponding increase in bond funds. This could be caused by either a switch into ETF's (a reasonable assumption given their growing popularity) or alternatively a switch into the more perceived safety of debt instruments. However given that interest rates remain at such low levels, this probably increases the level of risk faced by investors: an unexpected jump in interest rates in the future would result in significant losses for these fund holders. Given the very low returns from bond funds today (perilously close to negative after inflation and fees) versus the risk they are accepting - this rotation to debt from equity shows a ``flight to safety'' mentality still reigns.
US Economy: The US economy is clearly growing, not shrinking which allows it to chip away at it's problems. Employment is slowly improving with initial claims down, though there is still a huge backlog of unemployed - the average duration of unemployment is still very high. The monster that started it all, housing, also shows improvement - however slight. We are still clearly underwater from the peak in 2007, but possibly the most interesting trend is the backlog of houses for sale - before any improvement in pricing can happen, the overhang needs to be removed. We also note that for the banking industry, delinquencies are still high. Business activity for the most part is in positive territory, though it seems that it is still a fragile recovery.
Some backlogs that the economy is still working through are: the supply of unemployed people, unsold houses, non-performing loan levels and delinquent mortgages. These are items we are watching very closely as they are indicative of the very low ``buffer'' levels in the economy - the good in the economy is focused on chipping away at historically high levels in these items, rather than building buffer that provides the confidence for future growth.
US Interest & Inflation Rates: Interest rates are interesting because they tend to be good forward indicators of economic malaise. The yield curve is normal, though rates are at historical lows and inflation tends to be in the range targeted by the US Fed (around 2%). More interesting is that markets are pricing in very low rates for US Treasuries for the next 10 years at present - we are not seeing the toxic increases that have troubled Europe so much. Finally, similar to equity premiums measured earlier, we are still seeing historically higher spreads for corporate bonds and the TED spread - buyers of risky assets are demanding higher returns.
Global Business Indicators: Our key indicator here remains the PMI measure, which is a survey of purchasing managers across the globe. North America is in positive territory but Europe is still showing an incredible amount of pessimism (though understandable). Austrailia is also in trouble. Shipping indicies have tipped back down over the past couple of months - we will be watching as with Europe in trouble, if China slows down as well we could see another collapse in shipping which would be a strong negative indicator.
Canadian Indicators: Canada itself does not seem to be doing anything spectacular. The data seems to show that while we have more debt than 10-15 years ago, the economy itself doesn't seem to be advancing. The PMI indicator shows a slightly positive move. We need better indicators for Canada. Suggestions on this front are welcome.
European Indicators: What can we say? Run Forest, Run! Let's see: high unemployment across the board; strongly negative sentiment and getting worse in most cases; most of the Eurozone showing economic slowdown.
Some future items we are working on are indicators for China and Asia, as well as commodity prices. Keep the comments coming!
The full report is located here:
US Leading Indicators: While the economy as a whole feels very negative looking at consumer sentiment, the current indicators seem to indicate that the economy is still growing, though at a relatively slow rate. So things are better in the short term than people feel but the onslaught of negative news and backlog of problems are bringing us down.
Global Financial Markets: Financial markets seem to be indicating
positive growth in the economy as well with positive growth in the S&P 500 correlating to positive real GDP over the next two quarters. Despite relatively horrible news, global markets seem to be uniformly up versus last year, although when one remembers the last year it is a very low bar.
More interesting is valuations: our longer term indicators like CAPE indicate that markets are trading at historical medians or slightly above. Our favourite long term indicator - the Tobin's Q - shows that we are not in deep value territory here. Risk premiums are still historically high (and are more forward looking than CAPE or Tobin's Q) by about 1% which makes sense given the mixed economic news and headwinds from Europe.
One interesting trend is the outflow of money from equity mutual funds and the corresponding increase in bond funds. This could be caused by either a switch into ETF's (a reasonable assumption given their growing popularity) or alternatively a switch into the more perceived safety of debt instruments. However given that interest rates remain at such low levels, this probably increases the level of risk faced by investors: an unexpected jump in interest rates in the future would result in significant losses for these fund holders. Given the very low returns from bond funds today (perilously close to negative after inflation and fees) versus the risk they are accepting - this rotation to debt from equity shows a ``flight to safety'' mentality still reigns.
US Economy: The US economy is clearly growing, not shrinking which allows it to chip away at it's problems. Employment is slowly improving with initial claims down, though there is still a huge backlog of unemployed - the average duration of unemployment is still very high. The monster that started it all, housing, also shows improvement - however slight. We are still clearly underwater from the peak in 2007, but possibly the most interesting trend is the backlog of houses for sale - before any improvement in pricing can happen, the overhang needs to be removed. We also note that for the banking industry, delinquencies are still high. Business activity for the most part is in positive territory, though it seems that it is still a fragile recovery.
Some backlogs that the economy is still working through are: the supply of unemployed people, unsold houses, non-performing loan levels and delinquent mortgages. These are items we are watching very closely as they are indicative of the very low ``buffer'' levels in the economy - the good in the economy is focused on chipping away at historically high levels in these items, rather than building buffer that provides the confidence for future growth.
US Interest & Inflation Rates: Interest rates are interesting because they tend to be good forward indicators of economic malaise. The yield curve is normal, though rates are at historical lows and inflation tends to be in the range targeted by the US Fed (around 2%). More interesting is that markets are pricing in very low rates for US Treasuries for the next 10 years at present - we are not seeing the toxic increases that have troubled Europe so much. Finally, similar to equity premiums measured earlier, we are still seeing historically higher spreads for corporate bonds and the TED spread - buyers of risky assets are demanding higher returns.
Global Business Indicators: Our key indicator here remains the PMI measure, which is a survey of purchasing managers across the globe. North America is in positive territory but Europe is still showing an incredible amount of pessimism (though understandable). Austrailia is also in trouble. Shipping indicies have tipped back down over the past couple of months - we will be watching as with Europe in trouble, if China slows down as well we could see another collapse in shipping which would be a strong negative indicator.
Canadian Indicators: Canada itself does not seem to be doing anything spectacular. The data seems to show that while we have more debt than 10-15 years ago, the economy itself doesn't seem to be advancing. The PMI indicator shows a slightly positive move. We need better indicators for Canada. Suggestions on this front are welcome.
European Indicators: What can we say? Run Forest, Run! Let's see: high unemployment across the board; strongly negative sentiment and getting worse in most cases; most of the Eurozone showing economic slowdown.
Some future items we are working on are indicators for China and Asia, as well as commodity prices. Keep the comments coming!
The full report is located here:
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