Vote of No Confidence by US Interest Rate Contracts
When I write my thoughts for the weekend, I usually refer to snippets of information that I have taken from various sources. I start by trying to verify some of the things that I have read. For example, Used Car prices are falling, or Consumer Credit as a % of Disposable Personal Income is rising. As we all know, you can’t believe everything you hear, even from ‘experts’. For example, the Fed’s Dennis Lockhart said growth this year will gravitate towards 2-3%. Well, to me gravity usually pulls things DOWN. In looking at some of the recent data, that’s how it currently appears. Lockhart himself noted that “consumer activity is slowing.” He’s the head of the Atlanta Fed whose own GDP Now forecast for Q1 is only 0.3. It doesn’t seem to make much sense to think that 3% is anywhere near possible…but he still maintains that 2 to 3 hikes could occur this year. This, in spite of the fact that the April to October Fed Fund spread is barely 11 bps, encompassing 4 FOMC meetings. Or the fact that no near one-year Eurodollar calendar spreads are above ¼%. The market is pricing ONE hike.
So, here is what I gathered about autos. (Links are at bottom). First, undeniably the sales are well off the highs in terms of number of units, from an 18 million rate to 16.5. Second, in terms of Used Car prices, according to last year’s summary by Edmunds, Used Car prices hit a record in 2015, at $18,500. Therefore, it’s not too surprising to see some softening. What is fairly interesting in the report is the growth in new car leasing, from 2.6 million in 2012, to 3.2 in 2013, 3.6 in 2014 and 4.0 in 2015. Given the three year lease cycle, that means a lot of used cars are going to be coming on the lots in the next few years, which likely foretells a lack of pricing power and a cloud over new car sales. In terms of Consumer Credit, in looking at the Fed’s Financial Obligation Ratio (a measure of debt service obligations as a % of disposable personal income), it simply doesn’t seem to be an issue. From 2012 to 2015 this ratio has been between 14.93 and 15.53, last at 15.38. Household finances are in reasonable shape, with the exception of student debt, and even there, it has been more of a change in composition of debt rather than a change in aggregate. One might even conclude that’s good: a better educated population will make America great again. But anecdotal evidence seems to argue the other way…
The problems are the following: retail sales in total have simply leveled off. In July of 2015 the monthly seasonally adjusted level was $188.06B, and the last data for March is $187.83B. Flatlining. Retail Sales were part of the data set this past week, and came out weaker than expected. From the Nat’l Ass’n of Restaurants, “…the 1.0 percent first quarter increase was the smallest sales gain since the first quarter of 2014 (+0.2 percent), so it does indicate a degree of softening in trend”.
Consider the revenue declines in several of the major banks that reported last week. Earnings beat lowered expectations, but in terms of yoy revenues, JPM down was 3%, BofA down 6.5% and Citi down over 10%. It’s difficult to put a positive spin on those numbers.
Industrial Production is another big red flag. Capacity utilization has been on a steady decline since the end of 2014. Labor markets seem to be showing consistent improvement, so perhaps it looks as if I’m (sour) cherry-picking bad data. However, the markets only show price, and the curve is near the flattest it has been since 2008 (red/gold pack spread or 2/10 treasury spread). Bond rates are lower now than they were in December when the Fed decided lift-off was prudent. The 30 yr bond was around 3% in December and is now 2.56%. This yield is near the lowest it has been since the crisis. As can be seen on the chart below, in 2008 it fell to just above 2.5%. In 2012 during the EU debt debacle it got just below 2.5. In the beginning of 2015 it spiked down to around 2.25%. Yields continue to press lower despite formerly misplaced fears of China selling reserves, and the new threat of Saudi Arabia dumping US bonds. Compressed yields are not a vote of economic confidence.
While equity markets have strongly bounced back due to the Fed’s backpedaling on rate hike prospects, (which in turn weakened the dollar and supported emerging markets and crude oil), there are still strong undertones of nervousness, mostly being reflected in a growing chorus of voices questioning Central Bank policies.
Blackrock’s Larry Fink: ‘We have become too dependent on central bankers’ to boost the global economies, he said, stressing easy money policies were supposed to be a temporary healing. ‘I don’t call seven, eight years temporary… I don’t see how that [still] has a positive impact.’
‘Both households and businesses have become skeptical about the effectiveness of policy measures to address the current economic problems,’ Nobuyuki Hirano, president of Mitsubishi UFJ Financial Group Inc., said
Kyle Bass: “We have pulled all of the demand forward that we can.” Just let that last line sink in for a moment. The primary complaint about the global economy is that there is a lack of demand. All of the policies of Central Banks are designed to spur consumer demand…NOW. It’s theft of future demand, and it’s beginning to look like the future is here.
