Where Are They Now? Meridian Macro Research LLC 8/9/2016

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Moses Lloyd
5 years ago
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1 8/9/2016 Where Are They Now? Pop Culture fans are no doubt familiar with the Where Are They Now? TV retrospectives which detail celebrity lives gone awry, each episode highlighting a meteoric rise to stardom which invariably crumbles under the weight of serious legal and personal troubles. Of course, no exposé is complete without archived police mugshots splashed on screen to serve as an embarrassing bookend to a once promising career. In most instances, there are advance warning signs which seem to go unnoticed (or unheeded), only leading to the individual s accelerated downfall. As for the economy, such warning signs can also be seen in advance and right out in the open. Beneath the seemingly calm waters of an S&P at all time highs, we find an economy teeming with very weak data points a number of which are at recession levels; others at lows not seen since the Apollo 13 mission or the Ali vs. Liston bout. In fact, the unflattering and troublesome macro mugshots have been piling up for some time, so the question really is when (not if) this celebrity du jour (S&P 500) will require its own lengthy and uncomfortable retrospective. Yes, yes, you ve heard us say all this before. Yet, with the latest GDP print at 1.2% and consumer data souring apace, we remain more bearish than ever. And not to forget: S&P 500 EPS are set for the 5 th straight quarter of negative results, plus a weakening European banking system (by way of comparison: at depths of the recession, the S&P was 25x the MSCI Europe Financials Index; today it stands at 41x), both points of serious concern. But not to worry: as our intrepid mainstream financial media has exclaimed time and again: The real growth will come next quarter!. We re not buying it. As for Macro Indicators: Where Are They Now?, we ve compiled a fairly good summary in the first few pages of our highlight reel. The comparisons to data from a decade ago are startling to say the least. And away we go Meridian Macro Research LLC Tel: info@meridianmacro.com 1

2 2006: high print of the year (unless otherwise noted) N/A: no identifiable recession bottom/bounce data Recession Current: better / worse than 2006 data 2006 Low Current GDP Q/Q (saar) 4.9% -8.2% 1.2% GDP Y/Y (nominal) 6.5% -3.2% 2.4% CapEx Y/Y 10.8% -17.8% -0.54% Industrial Production Y/Y 4.1% -15.4% -0.7% 12mo Sum Per Capita Retail Sales (Ex-Autos) Y/Y 7.20% -8% 1.13% Total Manufacturing & Trade Sales Y/Y 8.75% -20.4% -1.44% Redbook Weekly Retail Sales Y/Y (12wk avg) 3.80% -4.78% 0.60% Per Capita Durable Goods Orders Y/Y 2008 high---> 20.5% -28.2% -6.2% (Consumer Goods) Per Capita Factory Orders Y/Y 2008 high---> 15.9% -26.5% -6.6% (Consumer Goods) 2

3 2006 Recession Current Labor Participation Rate 66.4% N/A 62.8% Persons Not In Labor Force (million) low of year---> 77.1 N/A 94.3 Homeownership Rate 69% N/A 62.9% Core PCE Y/Y 2.45% 0.95% 1.6% Core PCE Y/Y minus Core CPI Y/Y Healthcare + Housing/Utilities as % PCE 32.6% N/A 35.2% Durable Goods Spending as % Total PCE 12.8% 10.1% 10.8% Avg. Wkly Earnings Nonsupervisory Employees Y/Y 4.5% 0.93% 2.4% (3mo average) Per Capita Cons. Credit (Ex-Student* & Auto Loans) $7,367 N/A $6,025 (*federal student loans only) Per Capita US Oil Consumption (bpd) 2.11 N/A 1.79 Per Capita Avg. Miles Driven/Year on US Roads 13.2k N/A 12.5k 3

4 2006 Recession Current Oil ($/bbl) (2008 high was $145/bbl) $77 $33.87 $43 Copper ($/lb) $4.07 $1.25 $2.15 Per Capita Construction Spending Y/Y 13.3% % -0.49% Economic Conditions Composite Index Foreign Official US Tsy Purchases 2004 high---> $ > $231 -$312bln (Long-Term data, 12mo sum $bln) NFIB Business Optimism Corporate Tax Receipts Y/Y 41.5% -56.5% -8.63% UMICH 5-10yr Inflation Expectations 3.2% 2.6% 2.6% Wholesale Inv. - Sales ($bln gap) low of year---> $49.7 $128.3 $153.7bln Federal Student Loans ($bln) low of year---> $108.6 N/A $1trillion Baltic Dry Index (2008 high was 11,793) 4, World Exports Y/Y (IMF data) 20% -35.3% -2.3% 4

5 2006 Recession Current High Yield Credit (HYG) 2007 high---> Yr Treasury Yield 5.25% 2.05% 1.57% Fed 5Yr Breakeven Rate 2.83% 1.96% 1.37% Velocity of M2 Money Supply 2.03 N/A 1.42 Fed Bank Credit low of year---> $800bln N/A $4.4tln NYSE Margin Debt (12mo $bln change) $47.4 -$ $57.6 Per Capita US Debt Outstanding low of year---> $27.5k N/A $59.7k Debt/GDP Ratio low of year---> 0.61 N/A 1.05 Stock-Bond Ratio 2007 high---> MSCI German + Italian Financials Y/Y 43.6% -66.5% -34% MSCI World Index (ex-us) Y/Y 34.0% -55.3% -10% S&P high---> 1, ,181 5

About those strong jobs numbers We ve heard the argument that the low employment-population ratio (and by extension, persons not in labor force) are largely a result of more people retiring.

5% today just shy of a record high while all other age groups have not even clawed their way back to prerecession participation levels.

6 About those strong jobs numbers We ve heard the argument that the low employment-population ratio (and by extension, persons not in labor force) are largely a result of more people retiring. In part this is true, yet Labor Participation Rate of persons over 65yrs of age has risen from 16.8% at end of the recession to 19.5% today just shy of a record high while all other age groups have not even clawed their way back to prerecession participation levels. So, when factoring-in the astonishing number of persons who have left the labor force, it is only appropriate to dismiss the headline (U3) unemployment rate as a completely broken indicator. 65 Employment-Population Ratio vs. U3 Unemployment Rate (inverted) source=bls

7 3-month average of Persons Not In Labor Force: record high 96,000 Persons Not In Labor Force (3mo average, 000s) 92,000 88,000 84,000 80,000 76,000 72,000 source=bls 68,

Digging into the data, we find an interesting tidbit: of all employment sectors, only one never sees a reduction in employment during recessions. You guessed it: Health Care employment.

8 Digging into the data, we find an interesting tidbit: of all employment sectors, only one never sees a reduction in employment during recessions. You guessed it: Health Care employment. The reason for this is essentially two-fold: growing population with people living longer and enactment of the Affordable Care Act. Since shortly after enactment of the ACA, Health Care employment has gone parabolic ( million jobs in just the past 2 years). No, people are not suddenly living longer, nor has the population suddenly exploded higher. 19,500 Health Care & Social Assistance Employment (000s) --Total --2yr Change , ,500 18,000 17,500 17,000 16, ,000 source=bls 15,

Given the above, how is employment in the rest of the economy faring? When looking at 2-year growth, we find employment (Ex- Health Care) has weakened vs. overall employment for the past 19 months.

9 Given the above, how is employment in the rest of the economy faring? When looking at 2-year growth, we find employment (Ex- Health Care) has weakened vs. overall employment for the past 19 months. No big deal, right? Well, let s see 4.30 Payroll Employment 2yr % Change --Total vs. --Ex-Healthcare & Social Assistance % 3.48% 2.55 source=bls

When subtracting Overall employment growth rate from the Ex-Health Care growth rate, we find a worrisome trend developing which has served as an early warning signal in the past.

10 When subtracting Overall employment growth rate from the Ex-Health Care growth rate, we find a worrisome trend developing which has served as an early warning signal in the past. As well, the rise in health care employment is unfortunately coinciding with a surge in all health-related costs a non-consumer-friendly environment to be sure. As such, GDP ex-health Care has dropped into recession territory (excluding Health Care and Housing/Utilities, it is even lower). 0.2 Employment 2yr % Change (Ex-Health Care minus Total) vs. GDP Ex-Health Care (2yr % Change)* source=bls, BEA (*nominal GDP data)

When subtracting primary outlays of Healthcare + Housing/Utilities Y/Y from Gross Domestic Income Y/Y, we find the lowest print since Q4 2007. 4 3-2.

11 When subtracting primary outlays of Healthcare + Housing/Utilities Y/Y from Gross Domestic Income Y/Y, we find the lowest print since Q % Gross Domestic Income y/y minus GDP: Healthcare + Housing/Utilities y/y R R source=bea R 11

The Fed s preferred inflation measure: Personal Consumption Expenditures. In short, CPI measures the price trajectory OF things, whereas PCE measures the spending ON things.

Core PCE has been below Fed s 2% target for 50 months in a row and when subtracting Core CPI from Core PCE, we find the largest gap since May 2002.

12 The Fed s preferred inflation measure: Personal Consumption Expenditures. In short, CPI measures the price trajectory OF things, whereas PCE measures the spending ON things. As such, PCE more accurately represents health of the consumer on a shorterterm basis than does CPI. Core PCE has been below Fed s 2% target for 50 months in a row and when subtracting Core CPI from Core PCE, we find the largest gap since May This, in part, could explain why Rate Hike Probabilities are all below 50% until March of next year. 0.6 Core PCE y/y minus Core CPI y/y vs. S&P 500 y/y % 4.77% source=bea, BLS

40% 0-15 -2 source=us Treasury, BEA (nominal GDP) -20 1987 1989

13 Total Tax Receipts y/y and Nominal GDP y/y lowest since recession 20 Net Receipts y/y vs. GDP y/y % 2.40% source=us Treasury, BEA (nominal GDP)

change) vs. NYSE Margin Debt (12mo change) $billion 120 QE3 60 0-60 -120-29.43-57.

14 Margin Debt being reduced at fastest pace since June 2008; Corporate Tax Receipts dropping at fastest pace since March mo Sum Corporate Tax Receipts (12mo change) vs. NYSE Margin Debt (12mo change) $billion 120 QE source=us Treasury, NYSE

For now, the S&P is looking the other way 180 150

S&P 500 (12mo change) 540 120 340 90 60 140 30 0-60

32-260 -460-150 *S&P monthly + latest data point

15 For now, the S&P is looking the other way NYSE Margin Debt (12mo change, $bln) vs. S&P 500 (12mo change) *S&P monthly + latest data point margin debt data thru: 6/30/

24 18 12 6 0-6 S&P decoupling from Europe Financials MSCI Europe Financials Index (12mo change) vs.

16 S&P decoupling from Europe Financials MSCI Europe Financials Index (12mo change) vs. S&P 500 (12mo change) *weekly data + latest data point

XRT downside pressure likely to continue. 2,200 S&P 500 vs.

17 Retailers lag well behind S&P (note: S&P is up +2.4% from 2015 highs while XRT is down -12%). We would expect more headlines (and earnings reports) in the near future painting a rather dour outlook for the consumer. XRT downside pressure likely to continue. 2,200 S&P 500 vs. Retail ETF (XRT) 53 2, , , , ,950 1,900 1, Chg: +6.70% Chg: +3.58% *daily data 1,800 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug

S&P continues to defy deflationary signals 125 --S&P 500 --Copper --Oil --10yr Yield (2014=100) 115 105 95 Stocks

16, 2014: Fed's Bullard hints at possibility of QE4: "...if the market is right.

18 S&P continues to defy deflationary signals S&P Copper --Oil --10yr Yield (2014=100) Stocks elevated despite deflation signals Oct. 16, 2014: Fed's Bullard hints at possibility of QE4: "...if the market is right...then the committee would have an option of ramping up QE..." *all data daily; Copper, Oil = generic 1st futures 25 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 18

19 Some recent headlines have suggested China s Strategic Petroleum Reserve may soon be full. While this is based largely on guesswork as their data is fairly nebulous, such a development could have huge implications. If it becomes fact, we are left only to analyze other consumption data which, here in the US, remains very weak. Should oil turn decidedly lower on heels of such a revelation, we ll be right back to worrying about Energy sector credit defaults which would likely result in a huge negative reaction in equities. What the chart below lays bare is that the amount of growth needed to turn consumption around is staggering. As for now, it just isn t there. 2,200 Per Capita US Oil Consumption (bpd)* vs. S&P ,980 2, , , , , *Lowest per capita oil consumption since 1967 when oil, in current dollar terms, averaged $22/bbl (March 2002 levels) source=doe, BLS (s&p monthly + latest data point) *(3mo consumption average / total population)

For starters, we will need to see a meaningful turnaround in Labor Participation, which has been stuck at 38-year lows for the better part of the past 3 years.

20 For starters, we will need to see a meaningful turnaround in Labor Participation, which has been stuck at 38-year lows for the better part of the past 3 years. The correlation is impossible to ignore, and says quite a bit about the true state of employment and growth. 68 Per Capita US Oil Consumption (bpd)* vs. Labor Force Participation Rate % Labor Participation = 38yr low Per Capita Oil Consumption = 48yr low source=doe, BLS *(3mo consumption average / total population)

Velocity of Money continues to post fresh all-time lows. Again, a stark reminder of a broken labor market and weakening economic activity. 68 67 Labor Participation Rate vs.

21 Velocity of Money continues to post fresh all-time lows. Again, a stark reminder of a broken labor market and weakening economic activity Labor Participation Rate vs. Velocity of M2 Money Supply % source= BLS, Federal Reserve, BEA Labor Participation, Money Supply data quarterly + latest data point /9/ Meridian Macro Research LLC. All Rights Reserved. The information and data contained herein is assumed to be accurate, but is not guaranteed. Specific Meridian reference to Macro any specific Research security should LLC never be Tel: construed as a solicitation to either info@meridianmacro.com buy or sell. The charts and commentary released under its banner may not be reproduced, forwarded or referenced without the express consent of Meridian Macro Research LLC. 21

Total Retail Sales --As Reported ($bln) --Per Capita

Total Retail Sales --As Reported ($bln) --Per Capita 11/22/2016 Despite the stronger than expected +0.8% m/m Retail Sales print last week, when stepping back to view the big picture, it is clear that retail sales have an enormous way to go to match pre-recession