. . Laird Research - Economics May 14, 2014 Where we are now ........................ 1 Indicators for US Economy ................... 2 Global Financial Markets .................... 3 US Key Interest Rates ...................... 8 US Inflation ............................. 9 QE Taper Tracker ......................... 10 Exchange Rates .......................... 11 US Banking Indicators ...................... 12 US Employment Indicators ................... 13 US Business Activity Indicators ................ 15 US Consumption Indicators .................. 16 US Housing ............................. 17 Global Business Indicators ................... 19 Canadian Indicators ....................... 22 European Indicators ....................... 23 Chinese Indicators ........................ 25 Global Climate Change ..................... 26 Where we are now Welcome to the Laird Report. It’s important to know where you are going, but you can’t do that until you know where you are. To make any sense of the world, we have to start with the best data we can find to understand our starting point. The Laird Report is the pin on the global economy’s map that says ”You are here”. The short answer to “How is it going?” is “keeps getting better” – unless you live in Australia. At present, it seems like the cold shock that hit North America hasn’t held back a strong spring. The climate map shows that the bitter winter weather was pretty localized in North America, with above trend weather in the rest of the world. External shocks to the system, like Russia absorbing parts the Ukraine obviously make a difference going forward, but to date haven’t seemed to derail the recovery in Europe. I’d emphasize that this report is backward looking and doesn’t try to guess the impact of political situations going forward on the economy – I’d probably get it wrong anyhow. What is worth noting is that long term bond yields (which are good forward indicators) do seem to be declining - in this case I would inter- pret that as a reduction in risk levels. The big warning sign is inverted yield curves (short term rates higher than long term rates) – in the US that has preceeded recessions by about 6-18 months. With short rates still near zero in the US, it is almost impossible to get an inversion just having lower long term rates. Further, with QE holding short rates down, this indicator is probably somewhat damaged. Formatting Notes The grey bars on the various charts are OECD recession indicators for the respective countries. In many cases, the last available value is listed, along with the median value (measured from as much of the data series as is available). Subscription Info For a FREE subscription to this monthly re- port, please visit sign up at our website: www.lairdresearch.com Laird Research, May 14, 2014
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....Laird Research - Economics
May 14, 2014
Where we are now . . . . . . . . . . . . . . . . . . . . . . . . 1
Welcome to the Laird Report. It’s important to know where youare going, but you can’t do that until you know where you are. Tomake any sense of the world, we have to start with the best data wecan find to understand our starting point. The Laird Report is the pinon the global economy’s map that says ”You are here”.
The short answer to “How is it going?” is “keeps getting better” –unless you live in Australia. At present, it seems like the cold shockthat hit North America hasn’t held back a strong spring. The climatemap shows that the bitter winter weather was pretty localized in NorthAmerica, with above trend weather in the rest of the world.
External shocks to the system, like Russia absorbing parts theUkraine obviously make a difference going forward, but to date haven’tseemed to derail the recovery in Europe. I’d emphasize that this reportis backward looking and doesn’t try to guess the impact of politicalsituations going forward on the economy – I’d probably get it wronganyhow.
What is worth noting is that long term bond yields (which are goodforward indicators) do seem to be declining - in this case I would inter-pret that as a reduction in risk levels. The big warning sign is invertedyield curves (short term rates higher than long term rates) – in the USthat has preceeded recessions by about 6-18 months. With short ratesstill near zero in the US, it is almost impossible to get an inversion justhaving lower long term rates. Further, with QE holding short ratesdown, this indicator is probably somewhat damaged.
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).
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; 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).
North AmericaUSA S&P 500 May 13 1,897.5 1.6% s 3.7% s 3.7% s 16.1% s 1.00 0.78USA NASDAQ Composite May 13 4,130.2 1.2% s 2.7% s -2.6% t 20.1% s 0.92 0.74USA Wilshire 5000 Total Market May 13 20,079.5 1.4% s 3.2% s 2.5% s 16.4% s 0.99 0.80Canada S&P TSX May 13 14,679.8 0.5% s 2.8% s 4.8% s 17.2% s 0.78 1.00Europe and RussiaFrance CAC 40 May 13 4,505.0 1.7% s 2.7% s 4.5% s 14.2% s 0.65 0.53Germany DAX May 13 9,754.4 3.0% s 4.4% s 1.6% s 17.8% s 0.57 0.49United Kingdom FTSE May 13 6,873.1 1.1% s 4.4% s 3.2% s 3.6% s 0.53 0.54Russia Market Vectors Russia ETF May 13 24.3 6.1% s 6.7% s -7.1% t -8.8% t 0.49 0.41All Europe Euro Stoxx 50 May 12 3,207.0 1.1% s 0.5% s 3.6% s 15.5% s 0.66 0.56AsiaTaiwan TSEC weighted index May 13 8,817.9 -1.1% t -0.4% t 4.1% s 6.9% s 0.09 0.11China Shanghai Composite Index May 14 2,047.9 1.9% s -3.9% t -3.2% t -7.6% t -0.04 0.10Japan NIKKEI 225 May 13 14,425.4 -0.2% t 3.7% s -0.8% t -2.4% t 0.06 0.14Hong Kong Hang Seng May 13 22,352.4 2.8% s -3.0% t 0.8% s -2.8% t 0.18 0.28Korea Kospi May 13 1,982.9 2.2% s -0.7% t 2.9% s 1.8% s 0.18 0.18South Asia and AustrailiaIndia Bombay Stock Exchange May 13 23,871.2 6.1% s 6.2% s 18.2% s 21.2% s 0.27 0.21Indonesia Jakarta May 13 4,921.4 1.8% s 1.2% s 9.6% s -2.6% t 0.06 0.15Malaysia FTSE Bursa Malaysia KLCI May 12 1,866.1 0.3% s 0.8% s 2.2% s 4.4% s 0.10 0.09Australia All Ordinaries May 13 5,475.4 0.2% s 2.3% s 2.9% s 5.4% s -0.01 0.07New Zealand NZX 50 Index Gross May 13 5,199.3 0.5% s 2.7% s 6.7% s 11.3% s 0.11 0.27South AmericaBrasil IBOVESPA May 13 53,907.0 0.2% s 4.5% s 12.7% s -1.0% t 0.32 0.34Argentina MERVAL Buenos Aires May 13 6,866.9 0.8% s 7.3% s 15.7% s 91.7% s 0.23 0.25Mexico Bolsa index May 13 42,236.8 1.8% s 4.2% s 4.8% s 1.1% s 0.50 0.48MENA and AfricaEgypt Market Vectors Egypt ETF May 13 70.4 -0.6% t 6.7% s 12.0% s 62.4% s 0.28 0.26(Gulf States) Market Vectors Gulf States ETF May 13 34.0 1.0% s 3.3% s 14.0% s 45.1% s 0.39 0.30South Africa iShares MSCI South Africa Index May 13 69.6 3.7% s 5.5% s 17.3% s 10.5% s 0.66 0.54(Africa) Market Vectors Africa ETF May 13 33.4 0.8% s 5.4% s 10.5% s 12.1% s 0.62 0.54CommoditiesUSD Spot Oil West Texas Int. May 12 $100.9 1.2% s -3.0% t 0.5% s 6.5% s 0.18 0.28USD Gold LME Spot May 14 $1,300.2 -0.8% t -1.8% t -0.6% t -9.5% t -0.27 -0.19
Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.
Laird Research Inc. May 14, 2014 Page 3
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, May = 18.4)10−year CAPE ( median = 19.4, May = 24.3)
Laird Research Inc. May 14, 2014 Page 4
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 Apr 01, 2014 to May 13, 2014
Average Median Median MedianSector Change P/Sales P/Book P/EEnergy 5.5% s 2.0 1.8 17.9Consumer Staples 4.2% s 1.9 5.2 19.9Telecommunications Services 3.5% s 1.3 2.1 20.2Industrials 2.3% s 1.6 3.3 21.2Utilities 2.0% s 1.4 1.6 17.9
Average Median Median MedianSector Change P/Sales P/Book P/EMaterials 1.9% s 1.6 3.4 21.9Health Care -0.1% t 3.2 3.6 25.9Information Technology -0.2% t 3.2 3.8 22.1Financials -0.8% t 3.0 1.5 17.9Consumer Discretionary -1.5% t 1.5 4.0 19.1
Laird Research Inc. May 14, 2014 Page 5
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 (
%)
13 14 15 16 17 18 19 20 21 22 23 24
0.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5May 13, 2014 (Today)Apr 14, 2014 (1 mo ago)Feb 13, 2014 (3 mo ago)13 May 2013 (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%. These charts track that progress.
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 May 07: $4.6
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
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 Beverage 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)
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 − Q4 2013
−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 − Q4 2013
−10%
−8%
−6%
−4%
−2%
0%
2%
4%
6%
8%
10%
YoY Change in this quarter
YoY Percent Change
Fre
quen
cy
−15% −5% 5% 15%
Laird Research Inc. May 14, 2014 Page 18
Global Business Indicators
Global 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
3040
5060
70
3040
5060
70
Business Conditions Contracting
Business Conditions Expanding
Laird Research Inc. May 14, 2014 Page 19
Global 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)
Tracking the Chinese economy is a tricky. As reported in the Finan-cial 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.
Manufacturing PMI
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
4045
5055
60
Apr 2014: 48.10
Shanghai Composite Index
Inde
x V
alue
(M
onth
ly H
igh/
Low
)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
1000
2000
3000
4000
5000
6000
May 2014: 2011.14
Electricity Generated
100
Mill
ion
KW
H (
log
scal
e)
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
1000
2000
3000
5000
Mar 2014: 4528.00
Electricity GeneratedLong Term TrendShort Term Average
Consumer Confidence Index
Inde
x
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
9810
010
210
410
610
8
median: 102.90Mar 2014: 107.90
Exports
YoY
Per
cent
Cha
nge
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
−20
020
4060
80
median: 19.60Apr 2014: 0.032
Retail Sales Change
YoY
Per
cent
Cha
nge
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
1015
20
median: 13.20Mar 2014: 12.20
Laird Research Inc. May 14, 2014 Page 25
Global Climate Change
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 1961-1990 for precipitationand 1971-2000 for temperature.
Average Temperature Anomalies from Aug 2013 - Feb 2014
<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0
Anomalies in Celcius WarmerCooler Anomalies in Celcius
−4 −2 0 2 4
Average 6 month Precipitation Anomalies from Aug 2013 - Feb 2014
<−40.0 −30.0 −20.0 −10.0 0.0 10.0 20.0 30.0 >40.0
Anomalies in millimeters WetterDrier Anomalies in millimeters