Jan 2, 2016 Back to 2009
At this time of year, inboxes are crammed with projections and predictions. No real predictions here. I’ll only bring up three quick themes worth keeping in mind as January unfolds, and a few trade ideas.
- Many indicators are back at 2009 levels. Maybe that’s good because we’re back at a low base and will see better comparisons this year. But maybe it’s bad because the Fed is in the midst of a campaign to remove accommodation. Manufacturing vs service.
- China’s outflows continue, and the currency is weakening. Maybe that’s good because a weaker currency and other stimulus measures will restart the engine of Asian growth. Maybe it’s bad because rather than accelerate reforms, China is falling back on an export model which accentuates global deflationary pressure.
- US debt levels. Passing the hot potato. Will the household sector re-lever?
Back to 2009
On Thursday, Chicago PMI was released at 42.9. The last time it was this weak was in 2009, as the economy tentatively emerged from the worst of the crisis. On Thursday morning there was a post on ZeroHedge citing FTR Transportation Intelligence, indicating that orders for trucks haven’t been this soft since, you guessed it, 2009.
FTR has released preliminary data showing November 2015 North American Class 8 truck net orders at 16,475, 59% below a year ago and the lowest level since September 2012. This was the weakest November order activity since 2009 and was a major disappointment, coming in significantly below expectations. All of the OEMs, except one, experienced unusually low orders for the month.
There was an article on Bloomberg earlier in the week which also cited 2009: US Junk Bonds See Highest Distressed Ratio Since ’09, S&P Says. “The ratings firm’s so-called distress ratio increased to 20.1 percent in November, up from 19.1 percent in October and the most since September 2009, when it hit 23.5 percent. The ratio is calculated by dividing the number of distressed securities by the total amount of speculative-grade debt outstanding.”
In fact, there are a lot of indicators and market prices that haven’t been this low or high since 2009.
For example, the inventory to sales ratio at 1.38*, highest since ‘09. Some measures of the curve are at the lowest levels since ‘09, for example, red/gold eurodollar pack spread at 89 and 2/10 treasury spread at 122. The 2 year yield is at its highest level since 2009. Same with BAML Hi Yld CCC Effective Yield at 18%! ISM, Dec 48.6, lowest since 2009. Dallas Fed Mfg Outlook (essentially at the bottom of the past five years’ range). Most commodity indices are at 2008 levels or lower. The Baltic Dry Freight Index is sub 2008/2009.
Given the horrendous winter weather of the previous couple of years that restrained Q1 growth, perhaps this year will see a large rebound, helped by the “broken window” growth of rebuilding after the midwestern and southern floods.
What’s it going to be? New single family home sales (closer to the nadir) or New Car Sales (which are at their peak around 18 million units)?
China’s Reserves Decline
At the peak of the 2006 mortgage withdrawal orgy, I believe the US consumer was pulling something like $60 billion per month from the housing piggybank. When it stopped the economy went into a tailspin. The gov’t plugged the hole by replacing private debt with government debt which is illustrated by the flow of funds table (attachment).
According to the FT, [China’s] “Forex reserves fell $87bn in November, near the record $94bn decline suffered in August — the same month that the central bank surprised global markets by allowing the renminbi to depreciate by 3 per cent in three days.” Since the high in 2014, China’s reserves have declined by about $550bn. These are big numbers, perhaps comparable to the mortgage withdrawal phenomenon. Anecdotal reports indicate Chinese outflows have supported high end condos in a lot of major metro areas. The outflows also pressure the currency, (which closed at the low of the year) and reduce China’s reserves. The gov’t is clamping down and financial executives keep disappearing. So what happens to high end projects? They’ll flame out faster than a Dubai hotel.
China reserve chart
Flow of funds Z.1
Since 2007 let’s consider debt levels of the three major sectors. First, households. Total debt has fallen by $55 billion since ‘07. Mortgage debt FELL by a whopping $1.16tn. Consumer credit rose $881bn, but $716 of that is student debt. So, the household sector is in relatively good shape. The high non-payment rates on student debt shifts the burden to gov’t, and, in a way, as the home ownership rate fell from 68% to 63.7%, household renters shifted long term ownership obligations onto the business sector. What happens when homeowners don’t pay? The government steps in to help. What happens when renters don’t pay? Crickets.
Now let’s consider the business and corporate sector. Since 2007, debt there has risen to a record $12.6tn, having gone up by $2.5tn. In 2015 S&P 500 corporate revenue declined and in the first 3 qtrs profits fell by about $25 bn. This, at the same time the market is demanding higher interest rates, and labor is pushing for higher wages. The tailwind of lower raw materials prices is likely behind us. Is it any wonder lenders are demanding a higher risk premium?
Finally, the gov’t. Since 2007, fed’l gov’t debt increased $8.4tn. This growth is slowing. Is the household sector going to re-leverage and pull the economy forward? Obviously, it’s not showing up in charts like new single family homes (above). The multi-unit rental places are getting built, as are high end condos. For now.
