. . Global Economics Report May 16, 2017 Where We Are Now ....................... 1 Indicators for US Economy ................... 2 US Economic Heartbeat ..................... 4 Global Financial Markets .................... 5 US Key Interest Rates ...................... 10 US Inflation ............................. 11 Exchange Rates .......................... 12 US Banking Indicators ...................... 13 US Employment Indicators ................... 15 US Business Activity Indicators ................ 17 S&P 500 Sentiment Analysis .................. 18 US Consumption Indicators .................. 21 US Housing ............................. 22 Global Business Indicators ................... 24 Global Trade/Export Metrics ................. 26 Canadian Indicators ....................... 27 European Indicators ....................... 29 Chinese Indicators ........................ 31 Global Climate Data ....................... 32 Where We Are Now This month is officially the “it gets better” edition. Economic data has been perking up since the end of the election last year and it seems clear that overall, things are continuing to improve. But what seems to have changed the most is sentiment – this is the expectation that things are getting better in the future. Whether it is broad global surveys like the PMI, US Consumer sentiment surveys or even the sentiment analysis this report does on S&P 500 conference calls, the direction is up up up. There are some warning signs like net operating profit margins – they are already above historical averages and are more likely to de- cline. Part is due to accounting changes, but this isn’t about rising earnings which in a large part are due to share buybacks. This is op- erating margins which are not impacted by share counts. There is the looming interest rate increases which will eventually have an effect – if it is more expensive to borrow, that is a drag. But again, the thing I watch the most is credit deterioration. The uptick in chargebacks is real and an indication that something is breaking down. Formatting Notes The grey bars on the various charts are OECD recession indicators for the respective countries. Subscription Info For a FREE subscription to this monthly re- port, please visit sign up at our website: www.lairdresearch.com Laird Research, May 16, 2017
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....Global Economics Report
May 16, 2017
Where We Are Now . . . . . . . . . . . . . . . . . . . . . . . 1
This month is officially the “it gets better” edition. Economic datahas been perking up since the end of the election last year and it seemsclear that overall, things are continuing to improve.
But what seems to have changed the most is sentiment – this is theexpectation that things are getting better in the future. Whether itis broad global surveys like the PMI, US Consumer sentiment surveysor even the sentiment analysis this report does on S&P 500 conferencecalls, the direction is up up up.
There are some warning signs like net operating profit margins –they are already above historical averages and are more likely to de-cline. Part is due to accounting changes, but this isn’t about rising
earnings which in a large part are due to share buybacks. This is op-erating margins which are not impacted by share counts.
There is the looming interest rate increases which will eventuallyhave an effect – if it is more expensive to borrow, that is a drag. Butagain, the thing I watch the most is credit deterioration. The uptick inchargebacks is real and an indication that something is breaking down.
Formatting Notes The grey bars on the various charts are OECDrecession indicators for the respective countries.
Subscription Info For a FREE subscription to this monthly re-port, please visit sign up at our website: www.lairdresearch.com
Leading indicators are indicators that usually change before theeconomy as a whole changes. They are useful as short-term predictorsof the economy. Our list includes the Philly Fed’s Leading Index whichsummarizes multiple indicators; initial jobless claims and hours worked(both decrease quickly when demand for employee services drops and
vice versa); purchasing manager indicies; trucking indices showing de-mand for transport; new order and housing permit indicies and con-sumer sentiment (how consumers are feeling about their own financialsituation and the economy in general). Red dots are points where anew trend has started.
Leading indicators are indicators that usually change before theeconomy as a whole changes. They are useful as short-term predictorsof the economy. Our list includes the Philly Fed’s Leading Index whichsummarizes multiple indicators; initial jobless claims and hours worked(both decrease quickly when demand for employee services drops and
vice versa); purchasing manager indicies; trucking indices showing de-mand for transport; new order and housing permit indicies and con-sumer sentiment (how consumers are feeling about their own financialsituation and the economy in general). Red dots are points where anew trend has started.
MarketHack Inc. is proud to present our proprietary EconomicHeartbeat index. It uses monthly economic data from 1960 onwardsto create a diffusion index. Each point represents the index value fora given month. Months with a recession are represented by red dots,otherwise they are blue.
The green line is selected to maximize the probability that dots
above the line indicate a recession – especially as it crosses the line.Our current month is shown in Purple at the far right of the series.
The index is based on such as: incomes, employment, industrial pro-duction, prices, housing, orders and inventories and credit/monetarypolicy.
North AmericaUSA S&P 500 May 12 2,390.9 -0.3% t 2.0% s 2.7% s 15.8% s 1.00 0.62USA NASDAQ Composite May 12 6,121.2 0.3% s 4.9% s 6.2% s 29.2% s 0.91 0.54USA Wilshire 5000 Total Market May 12 24,855.9 -0.5% t 1.8% s 2.0% s 16.6% s 0.96 0.62Canada S&P TSX May 12 15,537.9 -0.3% t -0.7% t -1.4% t 12.7% s 0.62 1.00Europe and RussiaFrance CAC 40 May 12 5,405.4 -0.5% t 6.0% s 10.6% s 25.9% s 0.59 0.41Germany DAX May 12 12,770.4 0.4% s 5.1% s 8.5% s 29.5% s 0.57 0.42Russia Market Vectors Russia ETF May 12 20.5 0.7% s 2.4% s -5.7% t 20.4% s 0.45 0.49AsiaTaiwan TSEC weighted index May 12 9,986.8 0.9% s 1.7% s 2.8% s 23.2% s -0.13 -0.08China Shanghai Composite Index May 15 3,090.2 0.4% s -3.3% t -3.8% t 8.4% s 0.02 0.03Japan NIKKEI 225 May 12 19,883.9 -0.1% t 7.2% s 2.2% s 19.4% s 0.30 0.28Hong Kong Hang Seng May 12 25,156.3 2.8% s 3.5% s 6.1% s 26.3% s -0.05 -0.08Korea Kospi May 12 2,286.0 -0.3% t 7.4% s 10.0% s 15.6% s 0.01 -0.06South Asia and AustrailiaIndia Bombay Stock Exchange May 12 30,188.2 1.1% s 1.8% s 6.5% s 17.1% s 0.19 0.04Indonesia Jakarta May 12 5,675.2 -0.1% t 0.6% s 4.9% s 18.2% s -0.14 -0.01Malaysia FTSE Bursa Malaysia KLCI May 12 1,775.9 0.7% s 1.8% s 3.8% s 7.7% s -0.02 0.16Australia All Ordinaries May 12 5,870.9 0.1% s -1.6% t 1.0% s 8.3% s 0.09 0.20New Zealand NZX 50 Index Gross May 12 7,452.4 1.2% s 2.8% s 4.4% s 7.6% s 0.06 0.11South AmericaBrasil IBOVESPA May 12 68,222.0 3.8% s 6.8% s 1.9% s 28.1% s 0.46 0.58Argentina MERVAL Buenos Aires May 12 21,502.4 1.6% s 3.3% s 10.2% s 60.8% s 0.26 0.46Mexico Bolsa index May 12 49,426.1 -0.1% t 1.0% s 3.7% s 8.2% s 0.35 0.47MENA and AfricaEgypt Market Vectors Egypt ETF May 12 28.1 2.9% s -0.7% t 1.7% s -25.3% t 0.06 0.18(Gulf States) Market Vectors Gulf States ETF Oct 07 23.0 3.2% s 1.2% s 6.4% s -6.4% t 0.16 0.05South Africa iShares MSCI South Africa Index May 12 59.2 2.3% s 4.1% s 5.9% s 22.9% s 0.40 0.47(Africa) Market Vectors Africa ETF May 12 21.2 2.6% s 0.2% s -2.1% t 7.1% s 0.22 0.34CommoditiesUSD Spot Oil West Texas Int. May 08 $46.5 -4.9% t -12.4% t -11.3% t 6.9% s 0.18 0.38USD Gold LME Spot May 15 $1,231.5 0.1% s -4.2% t 0.5% s -3.9% t -0.28 -0.14
Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.
www.lairdresearch.com May 16, 2017 Page 5
S&P 500 Composite Index
The S&P 500 Composite Index is widely regarded as the best singlegauge of the large cap U.S. equities market. A key figure is the valua-tion level of the S&P500 as measured by the Price/Earnings ratio. Wepresent two versions: (1) a 12-month trailing earnings version which
reflects current earnings but is skewed by short term variances and (2)a cyclically adjusted version which looks at the inflation adjusted earn-ings over a 10 year period (i.e. at least one business cycle). Forecastedearnings numbers are estimates provided by S&P.
% Change in Price from Apr 3, 2017 to May 12, 2017
Average Median Median MedianSector Change P/Sales P/Book P/EInformation Technology 5.7% s 3.6 5.5 25.9Consumer Discretionary 2.8% s 1.6 3.6 18.7Industrials 2.1% s 1.7 4.3 22.6Health Care 1.5% s 3.6 3.9 28.6Consumer Staples 1.4% s 2.6 5.0 25.2Materials 1.1% s 1.9 3.9 26.8
Average Median Median MedianSector Change P/Sales P/Book P/EUtilities 1.0% s 2.2 2.1 20.5Financials -0.4% t 2.8 1.5 16.3Real Estate -0.6% t 8.6 2.6 31.2Energy -2.5% t 2.9 2.0 30.4Telecommunication Services -5.3% t 1.5 1.9 21.5
www.lairdresearch.com May 16, 2017 Page 7
US Equity Valuations
A key valuation metric is Tobin’s q: the ratio between the marketvalue of the entire US stock market versus US net assets at replacementcost (ie. what you pay versus what you get). Warren Buffet famouslyfollows stock market value as a percentage of GNP, which is highly(93%) correlated to Tobin’s q.
We can also take the reverse approach: assume the market hasvaluations correct, we can determine the required returns of future es-
timated earnings. These are quoted for both debt (using BBB ratedsecurities as a proxy) and equity premiums above the risk free rate (10year US Treasuries). These figures are alternate approaches to under-standing the current market sentiment - higher premiums indicate ademand for greater returns for the same price and show the level ofrisk-aversion in the market.
Tobin's q (Market Equity / Market Net Worth) and S&P500 Price/Sales
10%Implied Equity Premium (median = 4.1%, May = 4.4%)Debt (BBB) Premium (median = 1.6%, May = 1.3%)Debt (BAA) Premium
www.lairdresearch.com May 16, 2017 Page 8
US Mutual Fund Flows
Fund flows describe the net investments in equity and bond mutualfunds as well as ETF’s in the US market, as described in ICI’s “Trendsin Mutual Fund Investing” report. Previously we just looked at mutual
fund flows, but with the global trend to ETF’s, this only presented apartial picture.
US Net New Investment Cash Flow to Mutual Funds & ETFs
US Net New Investment Cash Flow to Mutual Funds & ETFs
US
$ bi
llion
s (M
onth
ly)
2014 2015 2016 2017
−60
−40
−20
020
4060
Flows to EquityFlows to BondsNet Market Flows
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US Key Interest Rates
Interest rates are often leading indicators of stress in the financialsystem. The yield curve show the time structure of interest rates ongovernment bonds - Usually the longer the time the loan is outstanding,the higher the rate charged. However if a recession is expected, thenthe fed cuts rates and this relationship is inverted - leading to negativespreads where short term rates are higher than long term rates.
Almost every recession in the past century has been preceeded by an
inversion - though not every inversion preceeds a recession (just mostof the time).
For corporate bonds, the key issue is the spread between bond rates(i.e. AAA vs BBB bonds) or between government loans (LIBOR vsFedfunds - the infamous “TED Spread”). Here a spike correlates to anaversion to risk, which is an indication that something bad is happen-ing.
US Treasury Yield Curves
For
war
d In
stan
tane
ous
Rat
es (
%)
16 17 18 19 20 21 22 23 24 25 26 27
0.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5May 12, 2017 (Today)Apr 12, 2017 (1 mo ago)Feb 13, 2017 (3 mo ago)12 May 2016 (1 yr ago)
Generally, the US Fed tries to anchor long run inflation expectationsto approximately 2%. Inflation can be measured with the ConsumerPrice Index (CPI) or the Personal Consumption Expenditures (PCE)index.
In both cases, it makes sense to exclude items that vary quickly likeFood and Energy to get a clearer picture of inflation (usually called
Core Inflation). The Fed seems to think PCI more accurately reflectsthe entire basket of goods and services that households purchase.
Finally, we can make a reasonable estimate of future inflation ex-pectations by comparing real return and normal bonds to construct animputed forward inflation expectation. The 5y5y chart shows expected5 year inflation rates at a point 5 years in the future. Neat trick that.
The banking and finance industry is a key indicator of the healthof the US economy. It provides crucial liquidity to the economy in theform of credit, and the breakdown of that system is one of the exac-erbating factors of the 2008 recession. Key figures to track are the
Net Interest Margins which determine profitability (ie. the differencebetween what a bank pays to depositors versus what the bank is paidby creditors), along with levels of non-performing loans (i.e. loan lossreserves and actual deliquency rates).
A “charge-off” is an accounting declaration by a creditor that aparticular debt is unlikely to be collected, either in whole or in part.Usually, the creditor is severely delinquent by the time this determina-tion is made. For credit card debt, as an example, this determinationis usually made by the bank after six months without payment.
However, there are charge-offs for a number of different kinds of
loans and increasing charge-offs are an important barometer of thehealth of creditors. In this graph, the various charge-offs are presentedas a percentage of total relevant debt outstanding. For example, creditcard charge-offs as a percentage of total credit card debt owed by con-sumers.
Charge−off Rates for Various Categories (Seasonally Adjusted)
Credit Card Loans − All Commercial Banks (median: 4.25%, last: 3.56%)Consumer Loans − All Commercial Banks (median: 2.26%, last: 2.12%)All Loans − All Commercial Banks (median: 0.80%, last: 0.47%)Commercial and Industrial Loans (median: 0.66%, last: 0.39%)Single Family Residential Mortgages (median: 0.17%, last: 0.07%)Commercial Real Estate Loans (Ex− Farmland) (median: 0.16%, last: 0.01%)
www.lairdresearch.com May 16, 2017 Page 14
US Employment Indicators
Unemployment rates are considered the “single best indicator ofcurrent labour conditions” by the Fed. The pace of payroll growth ishighly correlated with a number of economic indicators.Payroll changesare another way to track the change in unemployment rate.
Unemployment only captures the percentage of people who are inthe labour market who don’t currently have a job - another measure
is what percentage of the whole population wants a job (employed ornot) - this is the Participation Rate.
The Beveridge Curve measures labour market efficiency by lookingat the relationship between job openings and the unemployment rate.The curve slopes downward reflecting that higher rates of unemploy-ment occur coincidentally with lower levels of job vacancies.
There are a number of other ways to measure the health of employ-ment. The U6 Rate includes people who are part time that want afull-time job - they are employed but under-utilitized. Temporary helpdemand is another indicator of labour market tightness or slack.
The large chart shows changes in private industry employment lev-els over the past year, versus how well those job segments typically pay.Lots of hiring in low paying jobs at the expense of higher paying jobsis generally bad, though perhaps not unsurprising in a recovery.
Sentiment analysis tries to determine the attitude of a speaker withrespect to some topic or the overall contextual polarity of a document.In this particular case, we are evaluating earnings conference calls forthe S&P 500 companies over the past 10 years.
We use a proprietary sentiment mining model to determine the“sen-timent” from the transcripts of 18,382 conference calls. The object is
to understand how the communication from executives on those con-ference calls changes over time.
The model focuses on “relative sentiment” – the tone relative to thearbitrary date of January 2012. While it is not an exact science, themodels do capture the significant negative sentiment in 2007-2008 andthe subsequent recovery.
−10
000
500
1000
1500
Normalized Sentiment (Based on 18,382 Earnings Calls)
Housing construction is only about 5-8% of the US economy, how-ever a house is typically the largest asset owned by a household. Sincepersonal consumption is about 70% of the US economy and house val-ues directly impact household wealth, housing is an important indicatorin the health of the overall economy. In particular, housing investment
was an important driver of the economy getting out of the last fewrecessions (though not this one so far). Here we track housing pricesand especially indicators which show the current state of the housingmarket.
15 20 25 30 35 40
150
200
250
300
Personal Income vs. Housing Prices (Inflation adjusted values)
New
Hom
e P
rice
(000
's)
Disposable Income Per Capita (000's)
March 2017
r2 : 89.9%Range: Jan 1962 − Mar 2017Blue dots > +5% change in next yearRed dots < −5% change in next year
The Federal Housing Finance Agency provides a quarterly surveyon house prices, based on sales prices and appraisal data. This gener-ates a housing index for 355 municipal areas in the US from 1979 topresent. We have provided an alternative view of this data looking atthe change in prices from the peak in the 2007 time frame.
The goal is to provide a sense of where the housing markets are
weak versus strong.The colours represent gain or losses since the startof the housing crisis (defined as the maximum price between 2007-2009for each city). The circled dots are the cities in the survey, while thebackground colours are interpolated from these points using a loesssmoother.
Change from 2007 Peak − Q2 2016
−50%
−40%
−30%
−20%
−10%
0%
10%
20%
30%
40%
50%
Today's Home Prices
Percentage Change from 2007−2009 Peak
Fre
quen
cy
−75% −50% −25% 0% 25% 50% 75%
Year over Year Change − Q2 2016
−10%
−8%
−6%
−4%
−2%
0%
2%
4%
6%
8%
10%
YoY Change in this quarter
YoY Percent Change
Fre
quen
cy
−15% −10% −5% 0% 5% 10% 15%
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Global Business Indicators
Global Manufacturing PMI Reports
The Purchasing Managers’ Index (PMI) is an indicator reflectingpurchasing managers’ acquisition of goods and services. An index read-ing of 50.0 means that business conditions are unchanged, a numberover 50.0 indicates an improvement while anything below 50.0 suggests
a decline. The further away from 50.0 the index is, the stronger thechange over the month. The chart at the bottom shows a moving av-erage of a number of PMI’s, along with standard deviation bands toshow a global average.
Purchase Managers Index (Manufacturing) − China, Japan, USA, Canada, France, Germany, Italy, UK, Australia
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
3040
5060
70
3040
5060
70
Business Conditions Contracting
Business Conditions Expanding
www.lairdresearch.com May 16, 2017 Page 24
Global Manufacturing PMI Chart
This is an alternate view of the global PMI reports. Here, we lookat all the various PMI data series in a single chart and watch theirevolution over time.
Red numbers indicate contraction (as estimated by PMI) whilegreen numbers indicate expansion.
The CPB Netherlands Bureau for Economic Policy Analysis pub-lishes the World Trade Monitor. The WTM summarizes worldwidemonthly data on international trade and production. Data is from a
variety of sources, which are normalized into a set of indexed curveswhich show trends in world trade.
Series Dates Apr 2017 Mar 2017 Apr 2017 Mar 2017 Mar 2017 Mar 2017 Apr 2017 Apr 2017� France -4.2 t 10.1 u 0.88 t 115.7 s 109.6 s 1.4 u -8.3 s 55.1 s� Germany 6.8 s 3.9 u 0.22 t NA 118.1 t 1.5 t 2.7 s 58.2 t� United Kingdom Of Great Britain And Northern Ireland 1.6 t 4.5 t 1.00 t 119.0 t NA 2.3 u 5.9 t 57.3 s� Italy 4.7 s 11.7 s 2.26 t 102.4 t NA 1.4 t -5.7 s 56.2 s� Greece -2.0 t 23.5 u 6.70 t NA NA 1.7 s -23.6 t 48.2 s� Spain 7.7 s 18.2 u 1.61 t NA NA 2.1 t 1.3 s 54.5 s� Eurozone (EU28) 5.0 s 8.0 t 1.32 t 113.1 t 115.5 u 1.6 -2.2 s NA
Tracking the Chinese economy is a tricky. As reported in the Fi-nancial Times, Premier Li Keqiang confided to US officials in 2007 thatgross domestic product was “man made” and “for reference only”. In-stead, he suggested that it was much more useful to focus on three alter-native indicators: electricity consumption, rail cargo volumes and bank
lending (still tracking down that last one). We also include the PMI- which is an official version put out by the Chinese government anddiffers slightly from an HSBC version. Finally we include the ShanghaiComposite Index as a measure of stock performance.
Temperature and precipitation data are taken from the US NationalClimatic Data Center and presented as the average monthly anomalyfrom the previous 6 months. Anomalies are defined as the difference
from the average value over the period from 1971-2000 for the tem-perature map and over the 20th century for the global temparaturechart.
Average Temperature Anomalies from Oct 2016 - Mar 2017
<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0Anomalies in Celsius WarmerCooler Anomalies in Celcius
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