. . Laird Research - Economics September 13, 2015 Where we are now ........................ 1 Indicators for US Economy ................... 3 Global Financial Markets .................... 4 US Key Interest Rates ...................... 9 US Inflation ............................. 10 QE Taper Tracker ......................... 11 Exchange Rates .......................... 12 US Banking Indicators ...................... 13 US Employment Indicators ................... 14 US Business Activity Indicators ................ 16 US Consumption Indicators .................. 17 US Housing ............................. 18 Global Business Indicators ................... 20 Canadian Indicators ....................... 23 European Indicators ....................... 25 Chinese Indicators ........................ 27 Global Climate Change ..................... 28 Where we are now Welcome to the Laird Report. We present a selection economic data from around the world to help figure where we are today. The prevailing theme now is“headwinds”. The US data shows that their economy continues to tick over with multiyear lows in unemploy- ment – the US consumer seems to be back, with a job and a steady appetite for housing. One odd point: sales/inventory ratios are increasing - either US businesses are getting ready for some kind of massive uptick in demand or they are effectively “stuffing the channel” with extra products and will be caught out as a result. We can see that all the usual metrics indicate that businesses are scaling up production (temp help hours are increasing, job openings are at their multi-year highs) but some- how this feels premature given that the rest of the world (in particular China) seems to be sputtering. The US consumer isn’t strong enough to shoulder the burden themselves. Note that the US Fed still has a tonne of unconventional debt on its balance sheet (QE meant that they were buying up mortgage debt etc) and that needs to be unwound at some point. While QE was a boost to the economy, its unwinding will be a drag by cranking up interest rates - selling debt means they (1) take money out of the system and (2) re- duce the value of the debt by increasing supply which raises yields. At the same time, we are overdue for an interest rate hike - which would be the same thing. Canada is chugging along on no cylinders (cf. the unemployment jump in Alberta while at the same time the crash in the dollar hasn’t moved the needle at all in the Ontario manufacturing industry). China is uncertain - we just don’t have good data on what is hap- pening there (ie. no data untouched by government hands). We can see the effect on the surrounding countries however – Korea and Tai- wan are seeing weakening trade and manufacturing indicators. Aus- tralia is stronger PMI-wise however and that’s the usual canary in the coalmine as it is a commodity based economy heavily reliant upon Chi-
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....Laird Research - Economics
September 13, 2015
Where we are now . . . . . . . . . . . . . . . . . . . . . . . . 1
Welcome to the Laird Report. We present a selection economic datafrom around the world to help figure where we are today.
The prevailing theme now is “headwinds”. The US data shows thattheir economy continues to tick over with multiyear lows in unemploy-ment – the US consumer seems to be back, with a job and a steadyappetite for housing.
One odd point: sales/inventory ratios are increasing - either USbusinesses are getting ready for some kind of massive uptick in demandor they are effectively “stuffing the channel” with extra products andwill be caught out as a result. We can see that all the usual metricsindicate that businesses are scaling up production (temp help hoursare increasing, job openings are at their multi-year highs) but some-how this feels premature given that the rest of the world (in particularChina) seems to be sputtering. The US consumer isn’t strong enoughto shoulder the burden themselves.
Note that the US Fed still has a tonne of unconventional debt on its
balance sheet (QE meant that they were buying up mortgage debt etc)and that needs to be unwound at some point. While QE was a boost tothe economy, its unwinding will be a drag by cranking up interest rates- selling debt means they (1) take money out of the system and (2) re-duce the value of the debt by increasing supply which raises yields. Atthe same time, we are overdue for an interest rate hike - which wouldbe the same thing.
Canada is chugging along on no cylinders (cf. the unemploymentjump in Alberta while at the same time the crash in the dollar hasn’tmoved the needle at all in the Ontario manufacturing industry).
China is uncertain - we just don’t have good data on what is hap-pening there (ie. no data untouched by government hands). We cansee the effect on the surrounding countries however – Korea and Tai-wan are seeing weakening trade and manufacturing indicators. Aus-tralia is stronger PMI-wise however and that’s the usual canary in thecoalmine as it is a commodity based economy heavily reliant upon Chi-
nese trade, though this is a short term indicator - most of the Chinacrash has worked its way through earlier in the year so that may simplybe saying it’s not getting worse.
The best indicator still seems to be commodity prices - we shouldhave a good report on that next time, but I’m sure everyone is awareof the price of oil these days.
One interesting article from Bloomberg highlighted that this may bemore than a cyclical change. Maybe This Global Slowdown is Differentis worth reading - it posits that global trade was a dynamo of growthin previous decades, but that its effects may be peaking - there’s noreason to assume that trade per capita continues to grow as strongly as
the past and as economies like China and the US shift more to services,it is much less resource intensive. That changes the tea leaves that weshould be reading to look at the health of the economy.
Formatting Notes The grey bars on the various charts are OECDrecession indicators for the respective countries. In many cases, the lastavailable value is listed, along with the median value (measured fromas much of the data series as is available).
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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; new order and housing per-mit indicies; delivery timings (longer timings imply more demand inthe system) and consumer sentiment (how consumers are feeling abouttheir own financial situation and the economy in general). Red dotsare points where a new trend has started.
North AmericaUSA S&P 500 Sep 11 1,961.1 2.1% s -5.9% t -7.0% t -1.8% t 1.00 0.81USA NASDAQ Composite Sep 11 4,822.3 3.0% s -4.3% t -5.1% t 5.0% s 0.97 0.80USA Wilshire 5000 Total Market Sep 11 20,691.7 1.9% s -5.6% t -7.3% t -2.3% t 1.00 0.82Canada S&P TSX Sep 11 13,461.5 -0.1% t -6.6% t -9.2% t -13.3% t 0.81 1.00Europe and RussiaFrance CAC 40 Sep 11 4,548.7 0.6% s -10.8% t -8.5% t 2.4% s 0.52 0.59Germany DAX Sep 11 10,123.6 0.9% s -10.4% t -10.7% t 4.5% s 0.52 0.58United Kingdom FTSE Sep 11 6,117.8 1.2% s -8.2% t -10.6% t -10.0% t 0.53 0.62Russia Market Vectors Russia ETF Sep 11 15.8 2.7% s -5.0% t -14.3% t -32.6% t 0.65 0.68AsiaTaiwan TSEC weighted index Sep 11 8,305.8 3.8% s -1.1% t -10.7% t -10.9% t 0.41 0.53China Shanghai Composite Index Sep 11 3,200.2 3.9% s -18.5% t -37.5% t 38.4% s 0.32 0.34Japan NIKKEI 225 Sep 11 18,264.2 2.7% s -11.9% t -10.4% t 14.8% s 0.40 0.38Hong Kong Hang Seng Sep 11 21,504.4 3.2% s -12.2% t -20.1% t -12.8% t 0.37 0.44Korea Kospi Sep 11 1,941.4 2.9% s -2.3% t -5.6% t -4.6% t 0.43 0.47South Asia and AustrailiaIndia Bombay Stock Exchange Sep 11 25,610.2 1.6% s -8.1% t -2.9% t -5.1% t 0.44 0.53Indonesia Jakarta Sep 11 4,360.5 -1.2% t -5.7% t -11.5% t -15.1% t 0.40 0.46Malaysia FTSE Bursa Malaysia KLCI Sep 11 1,603.6 0.9% s -2.0% t -7.6% t -14.1% t 0.27 0.37Australia All Ordinaries Sep 11 5,096.3 0.7% s -6.9% t -8.4% t -8.1% t 0.37 0.46New Zealand NZX 50 Index Gross Sep 11 5,648.2 1.8% s -3.0% t -3.6% t 7.3% s 0.12 0.23South AmericaBrasil IBOVESPA Sep 11 46,401.0 -0.2% t -5.4% t -13.6% t -20.5% t 0.62 0.63Argentina MERVAL Buenos Aires Sep 11 10,887.9 -0.4% t -6.1% t -4.2% t -0.7% t 0.59 0.62Mexico Bolsa index Sep 11 42,780.7 0.1% s -3.6% t -4.1% t -6.3% t 0.68 0.71MENA and AfricaEgypt Market Vectors Egypt ETF Sep 11 39.2 -1.2% t -13.2% t -24.2% t -43.5% t 0.37 0.35(Gulf States) Market Vectors Gulf States ETF Sep 11 25.4 1.6% s -6.4% t -7.5% t -22.5% t 0.39 0.50South Africa iShares MSCI South Africa Index Sep 11 54.3 2.3% s -12.1% t -13.8% t -19.3% t 0.63 0.53(Africa) Market Vectors Africa ETF Sep 11 19.9 0.1% s -10.4% t -20.2% t -36.7% t 0.59 0.55CommoditiesUSD Spot Oil West Texas Int. Sep 08 $45.9 1.2% s 2.2% s -21.0% t -50.4% t 0.32 0.45USD Gold LME Spot Sep 11 $1,106.3 -1.7% t -0.6% t -6.3% t -11.3% t -0.23 -0.24
Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.
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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.
12−month P/E ( median = 17.4, Sep = 20.7)10−year CAPE ( median = 19.5, Sep = 23.9)
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S&P 500 Composite Distributions
This is a view of the price performance of the S&P 500 index com-panies. The area of each box is proportional to the company’s marketcap, while the colour is determined by the percentage change in price
over the past month. In addition, companies are sorted according totheir industry group.
% Change in Price from Aug 3, 2015 to Sep 11, 2015
Average Median Median MedianSector Change P/Sales P/Book P/EInformation Technology -4.2% t 3.3 4.4 23.4Telecommunications Services -4.5% t 1.4 2.0 26.6Industrials -4.5% t 1.4 3.5 18.1Consumer Discretionary -5.1% t 1.6 3.8 19.5Utilities -6.0% t 1.5 1.6 16.6
Average Median Median MedianSector Change P/Sales P/Book P/EMaterials -6.1% t 1.4 3.3 20.2Energy -6.7% t 1.3 1.7 18.3Health Care -7.6% t 3.1 3.6 25.1Financials -8.2% t 2.9 1.5 16.9Consumer Staples -8.3% t 2.1 5.8 24.7
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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 BAA 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
Fund flows describe the net investments in equity and bond mutualfunds in the US market, as described in ICI’s “Trends in Mutual FundInvesting” report. Note however that this is only part of the story as
it does not include ETF fund flows - part of the changes are investorsentering or leaving the market, and part is investors shifting to ETF’sfrom mutual funds.
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 BAA 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 (
%)
14 15 16 17 18 19 20 21 22 23 24 250.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5Sep 10, 2015 (Today)Aug 10, 2015 (1 mo ago)Jun 10, 2015 (3 mo ago)10 Sep 2014 (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 US has been using the program of Quantitative Easing to pro-vide monetary stimulous to its economy. The Fed has engaged in aseries of programs (QE1, QE2 & QE3) designed to drive down longterm rates and improve liquidity though purchases of treasuries, mor-gage backed securites and other debt from banks.
The higher demand for long maturity securities would drive up theirprice, but as these securities have a fixed coupon, their yield would bedecreased (yield ≈ coupon / price) thus driving down long term rates.
In 2011-2012, “Operation Twist” attempted to reduce rates withoutincreasing liquidity. They went back to QE in 2013.
The Fed chairman suggested in June 2013 the economy was recover-ing enough that they could start slowing down purchases (“tapering”).The Fed backed off after a brief market panic. The Fed announced inDec 2013 that it was starting the taper, a decision partly driven byseeing key targets of inflation around 2% and unemployment being lessthan 6.5%. In Oct 2014, they announced the end of purchases.
QE Asset Purchases to Date (Treasury & Mortgage Backed Securities)
Trill
ions
0.00.51.01.52.02.5
0.00.51.01.52.02.5
QE1 QE2 Operation Twist QE3 TaperTreasuries
Mortgage Backed Securities
Total Monthly Asset Purchases (Treasury + Mortgage Backed Securities)
Bill
ions
−100−50
050
100150200
−100−50050100150200
Month to date Sep 09: $0.2
Inflation and Unemployment − Relative to Targets
Per
cent
02468
10
0246810
Target Unemployment 6.5%Target Inflation 2%
U.S. 10 Year and 3 Month Treasury Constant Maturity Yields
Per
cent
012345
012345
2008 2009 2010 2011 2012 2013 2014 2015
Short Term Rates:Once at zero, Fed moved to QE
Long Term Rates:Moving up in anticipation of Taper?
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).
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.
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
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)
Jul 2015
r2 : 89.4%Range: Jan 1959 − Jul 2015Blue 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 2015
−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 2015
−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
04 05 06 07 08 09 10 11 12 13 14 15
3040
5060
70
3040
5060
70
Business Conditions Contracting
Business Conditions Expanding
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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 OECD calculates import and export values for member coun-tries. Figures are seasonally adjusted and measured in billions of USdollars. Red lines indicate exports, while blue lines indicate imports.Green lines indicate the zero level.
The top part of the graph shows the changes in exports and importson a year-over-year basis, while the bottom part shows the differencebetween exports and imports for that given month (i.e. the trade bal-ance)
Series Dates Aug 2015 Aug 2015 Jul 2015 Jul 2015 Jul 2015 Jul 2015 Aug 2015 Aug 2015� France -9.5 s 10.4 s 1.11 t 105.3 t 110.5 u 0.2 t -14.4 s 48.3 t� Germany -1.1 t 4.7 u 0.71 t NA 117.0 s 0.1 u -10.3 t 53.3 s� United Kingdom 9.2 s 5.6 u 2.03 t 112.9 t NA 0.0 t -4.8 s 51.5 t� Italy 0.3 s 12.0 t 2.04 t 100.8 s NA 0.3 s -14.7 t 53.8 t� Greece -37.1 t 25.2 s 11.43 s 74.6 t NA -1.3 t -43.4 t 39.1 s� Spain 5.0 s 22.2 t 2.10 t NA NA 0.0 u -3.9 s 53.2 t� Eurozone (EU28) -0.9 s 9.5 t 1.26 t 106.4 t 111.2 s 0.1 t -12.4 u 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 Feb 2015 - Jul 2015
<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0Anomalies in Celcius WarmerCooler Anomalies in Celcius