. . Laird Research - Economics October 13, 2014 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. It’s job is to stick a the pin on the global economy’s map that says ”You are here”. We present a com- pendium of economic data from around the world to help figure this out. What is wrong with Europe? Germany is likely to be officially in a recession after two negative quarters of real GDP growth (still waiting for the final numbers) and its industrial output is dropping. Germany was the strongest of the lot in Europe and made up for stagnation in France and some pretty terrible ongoing results in countries like Italy and Greece. If Germany goes down, then the need for some kind of QE-type program goes up dramatically (the European Central Bank has indicated they want to do this already). That plus the tension from Russia isn’t helping matters any. Eu- rope can’t seem to catch a break, though on the economy much of the damage is self-inflicted thanks to austerity. The Germans like to be the adults in the room with much clucking over their deficit crazed, tax avoiding, unproductive brethren and they don’t want to waste the op- portunity of a fiscal crisis to have everyone smarten up. Unfortunately, it just makes everyone hate them and blame them for their lost decade. The US remains very strong but there are some caveats on that growth: (1) in a globalized world, if your neighbors house is in fire be very nervous; (2) the US strength has caused the dollar to become very strong relative to everyone else - this has had the effect of holding down inflation but it also puts a big drag on exports. China continues to be in the middle of a restructuring. They have been slowing down for a while now and output is decreasing well below the levels from previous years. The country is in the middle of a mas- sive transition “from manufacturing to services on the supply side, and from investment to consumption on the demand side, and as measures to rein in the rapid accumulation of credit [come] into force.” (per a quote from the World Bank’s June update on China). The canary in the coalmine for China is Australia, who’s economy is
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....Laird Research - Economics
October 13, 2014
Where we are now . . . . . . . . . . . . . . . . . . . . . . . . 1
Welcome to the Laird Report. It’s job is to stick a the pin on theglobal economy’s map that says ”You are here”. We present a com-pendium of economic data from around the world to help figure thisout.
What is wrong with Europe? Germany is likely to be officially in arecession after two negative quarters of real GDP growth (still waitingfor the final numbers) and its industrial output is dropping. Germanywas the strongest of the lot in Europe and made up for stagnation inFrance and some pretty terrible ongoing results in countries like Italyand Greece. If Germany goes down, then the need for some kind ofQE-type program goes up dramatically (the European Central Bankhas indicated they want to do this already).
That plus the tension from Russia isn’t helping matters any. Eu-rope can’t seem to catch a break, though on the economy much of thedamage is self-inflicted thanks to austerity. The Germans like to bethe adults in the room with much clucking over their deficit crazed, tax
avoiding, unproductive brethren and they don’t want to waste the op-portunity of a fiscal crisis to have everyone smarten up. Unfortunately,it just makes everyone hate them and blame them for their lost decade.
The US remains very strong but there are some caveats on thatgrowth: (1) in a globalized world, if your neighbors house is in fire bevery nervous; (2) the US strength has caused the dollar to become verystrong relative to everyone else - this has had the effect of holding downinflation but it also puts a big drag on exports.
China continues to be in the middle of a restructuring. They havebeen slowing down for a while now and output is decreasing well belowthe levels from previous years. The country is in the middle of a mas-sive transition “from manufacturing to services on the supply side, andfrom investment to consumption on the demand side, and as measuresto rein in the rapid accumulation of credit [come] into force.” (per aquote from the World Bank’s June update on China).
The canary in the coalmine for China is Australia, who’s economy is
heavily skewed towards raw materials for Asian consumption. Australiais a tough place to be for the past couple of years.
Across the board, there are fears about global growth. As regularreaders are aware, I have a tough time figuring out what GDP growth(or declines) actually mean - they are huge aggregates of economic re-sults and its tough to figure out the consequences.
The IMF puts out a semi-annual global economic outlook that isnice reading and kindly supplies multiyear forward estimates on realGDP growth. Their October “World_Economic_Update” report is out- and the graph below compares the changes in estimates for 2014 and2015. In short, things are getting worse around the planet.
These charts show the declines in estimates between their view of
the world in April 2014 and October 2014. It matches the rest of theeconomic data we’ve seen - North America is doing slightly better, butthe rest of the world is doing worse. The report itself is good to read ifyou have the time as it also has analysis on the impact of war etc thatis a good thought exercise.
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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Laird Research, October 13, 2014
ESP GBR IND KOR CAN CHN IDN DEU JPN USA FRA RUS BRA
Change in IMF's 2014 Real GDP Growth Estimates between Apr−Oct 2014
Cha
nge
in E
stim
ate
(%)
−1.5
−1.0
−0.5
0.0
0.5
ESP GBR IND KOR CAN CHN IDN DEU JPN USA FRA RUS BRA
Change in IMF's 2015 Real GDP Growth Estimates between Apr−Oct 2014
Cha
nge
in E
stim
ate
(%)
−1.5
−1.0
−0.5
0.0
0.5
Country codes are ISO 3-character names: ESP = Spain, GBR = United Kingdom, IND = India, KOR = Korea, Republic Of, CAN = Canada,CHN = China, IDN = Indonesia, DEU = Germany, JPN = Japan, USA = United States, FRA = France, RUS = Russian Federation, BRA = Brazil
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 Oct 10 1,906.1 -3.1% t -4.5% t -3.0% t 12.6% s 1.00 0.69USA NASDAQ Composite Oct 10 4,276.2 -4.5% t -6.8% t -2.7% t 13.7% s 0.94 0.68USA Wilshire 5000 Total Market Oct 10 19,975.7 -3.6% t -5.6% t -4.0% t 10.6% s 0.99 0.69Canada S&P TSX Oct 10 14,227.4 -3.8% t -8.0% t -5.9% t 10.3% s 0.69 1.00Europe and RussiaFrance CAC 40 Oct 10 4,073.7 -4.9% t -8.5% t -5.3% t -3.4% t 0.52 0.41Germany DAX Oct 10 8,788.8 -4.6% t -9.4% t -9.0% t 1.2% s 0.49 0.43United Kingdom FTSE Oct 10 6,340.0 -2.9% t -7.2% t -5.0% t -1.4% t 0.55 0.45Russia Market Vectors Russia ETF Oct 10 21.3 -4.0% t -15.2% t -20.5% t -26.3% t 0.55 0.38AsiaTaiwan TSEC weighted index Oct 09 8,966.4 -0.1% t -5.0% t -5.5% t 7.5% s 0.26 0.17China Shanghai Composite Index Sep 05 2,326.4 4.9% s 4.8% s 13.4% s 9.6% s -0.05 0.14Japan NIKKEI 225 Oct 10 15,300.5 -2.6% t -3.1% t 0.6% s 7.8% s 0.03 0.10Hong Kong Hang Seng Oct 10 23,088.5 0.1% s -6.5% t -0.6% t 0.6% s -0.03 0.19Korea Kospi Oct 10 1,940.9 -1.4% t -4.6% t -3.1% t -3.0% t -0.01 0.11South Asia and AustrailiaIndia Bombay Stock Exchange Oct 10 26,297.4 0.1% s -2.8% t 3.6% s 29.7% s 0.12 0.21Indonesia Jakarta Oct 10 4,963.0 0.3% s -3.5% t -2.6% t 10.6% s -0.15 -0.15Malaysia FTSE Bursa Malaysia KLCI Oct 10 1,808.9 -1.7% t -3.3% t -4.4% t 1.9% s -0.01 0.01Australia All Ordinaries Oct 10 5,185.7 -2.4% t -7.0% t -4.9% t 0.8% s -0.10 0.14New Zealand NZX 50 Index Gross Oct 10 5,225.1 -0.2% t -0.2% t 1.9% s 10.8% s -0.09 -0.04South AmericaBrasil IBOVESPA Oct 10 55,312.0 1.4% s -5.0% t 1.3% s 4.4% s 0.32 0.33Argentina MERVAL Buenos Aires Oct 10 10,040.2 -12.1% t -6.8% t 15.4% s 94.4% s 0.36 0.25Mexico Bolsa index Oct 10 43,435.7 -2.8% t -5.4% t -0.1% t 7.3% s 0.56 0.50MENA and AfricaEgypt Market Vectors Egypt ETF Oct 10 70.3 -2.3% t -3.7% t 3.1% s 38.3% s 0.11 0.24(Gulf States) Market Vectors Gulf States ETF Oct 10 33.4 -0.7% t -1.9% t 3.4% s 33.0% s 0.16 0.03South Africa iShares MSCI South Africa Index Oct 10 62.5 -2.5% t -10.1% t -9.1% t -1.7% t 0.67 0.51(Africa) Market Vectors Africa ETF Oct 10 29.9 -2.8% t -8.5% t -9.2% t 0.7% s 0.66 0.64CommoditiesUSD Spot Oil West Texas Int. Oct 06 $90.3 -4.4% t -2.5% t -13.3% t -12.4% t 0.21 0.29USD Gold LME Spot Oct 10 $1,222.2 1.2% s -2.6% t -9.0% t -5.8% t 0.04 0.02
Note: Correlations are based on daily arithmetic returns for the most recent 100 trading days.
www.lairdresearch.com October 13, 2014 Page 4
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, Oct = 17.8)10−year CAPE ( median = 19.4, Oct = 24.3)
www.lairdresearch.com October 13, 2014 Page 5
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 Sep 2, 2014 to Oct 10, 2014
Average Median Median MedianSector Change P/Sales P/Book P/EConsumer Staples 2.0% s 1.9 5.2 20.3Utilities 1.1% s 1.4 1.6 16.9Health Care -1.1% t 3.1 4.0 23.3Telecommunications Services -2.1% t 1.4 2.0 23.2Financials -3.4% t 3.0 1.5 17.8
Average Median Median MedianSector Change P/Sales P/Book P/EInformation Technology -5.7% t 3.2 3.7 20.6Consumer Discretionary -5.8% t 1.5 4.0 19.7Industrials -6.8% t 1.6 3.1 19.5Materials -7.4% t 1.6 3.3 22.1Energy -12.9% t 1.8 1.8 17.1
www.lairdresearch.com October 13, 2014 Page 6
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 23 240.0
0.5
1.0
1.5
2.0
2.5
3.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Oct 9, 2014 (Today)Sep 9, 2014 (1 mo ago)Jul 9, 2014 (3 mo ago)09 Oct 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 Oct 08: $−4.0
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 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)
Aug 2014
r2 : 89.2%Range: Jan 1959 − Aug 2014Blue 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 2014
−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 2014
−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%
www.lairdresearch.com October 13, 2014 Page 19
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
www.lairdresearch.com October 13, 2014 Page 20
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)
Series Dates Sep 2014 Aug 2014 Aug 2014 Aug 2014 Aug 2014 Aug 2014 Sep 2014 Sep 2014� France -12.9 t 10.5 u 1.41 t 105.8 s 108.7 t 0.5 t -22.5 t 48.8 s� Germany -1.5 s 4.9 u 0.95 t NA 110.8 t 0.8 u -10.9 t 49.9 t� United Kingdom 9.6 s 6.2 t 2.12 t 113.4 s NA 1.5 t -5.7 t 51.6 t� Italy -9.1 t 12.3 t 2.63 t NA NA -0.2 t -24.1 t 50.7 s� Greece -1.2 t 26.4 t 6.09 t NA NA -0.2 s -26.6 t 48.4 t� Spain -6.2 s 24.4 t 2.41 t NA NA -0.5 t -12.3 t 52.6 t� Eurozone (EU28) -3.0 u 10.1 t 2.00 t 104.6 t 109.0 s 0.7 s -15.5 t 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.
Manufacturing PMI
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
4045
5055
60
Sep 2014: 50.20
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
010
0030
0050
00
Sep 2014: 2363.87
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
Aug 2014: 4959.00
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: 103.05Aug 2014: 103.80
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: 19.30Aug 2014: 9.40
Retail Sales Growth
YoY
Per
cent
Cha
nge
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
1015
20
median: 13.15Aug 2014: 11.90
www.lairdresearch.com October 13, 2014 Page 27
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 Mar 2014 - Aug 2014
<−4.0 −3.0 −2.0 −1.0 0.0 1.0 2.0 3.0 >4.0Anomalies in Celcius WarmerCooler Anomalies in Celcius
−4 −2 0 2 4
Average 6 month Precipitation Anomalies from Mar 2014 - Aug 2014
<−40.0 −30.0 −20.0 −10.0 0.0 10.0 20.0 30.0 >40.0Anomalies in millimeters WetterDrier Anomalies in millimeters