We Are All Dependent on Asset Prices Now

Tue, Dec 11, 2018 - 12:55pm

Originally published at The Boock Report.

Here is an updated chart of U.S. net worth as a percent of disposable income after the Fed released its third quarter flow of funds statement last week. We are now at 700 percent (699.9 percent to be exact). The late 1990s bubble took it to 615 percent. It topped at 649 percent at the peak of the housing bubble. Thus, it emboldens my belief that with the question, "When will the next recession come?", it will be determined by the direction of asset prices and its impact on confidence and funding because this chart visualizes how dependent we are on them relative to disposable income.

There was some softness in the NFIB small business optimism index for November. It fell to 104.8 from 107.4. That matches the lowest since March. Here are some key internals: Plans to Hire was unchanged at 22 percent while Positions Not Able to Fill did fall four points from its record high. Current Compensation was unchanged just off a record high and future Compensation Plans increased by two points to 25 percent, the most since 1989. Capital spending plans fell one point to match the lowest since March. The Plan to Increase Inventory fell three points to the lowest since April. Earnings Expectations dropped to the weakest since March as Higher Selling Prices was unchanged and thus impacted profit margins. Those that Expect a Better Economy dropped by a sharp 11 points to 22 percent, the least optimistic since Nov. 2016. Those that Expect Higher Sales fell four points and those that said it’s a Good Time to Expand was down by one point.

The NFIB said "The general consensus among forecasters is that the fourth quarter will be solid but slower. Growth appears to have peaked early this year and will slow as we move into 2019." The NFIB is mostly citing "a lack of qualified workers to fill open positions and a low rate of labor force growth." There was no talk of tariffs which is an obvious influence on business behavior. There was no commentary on rising interest rates but the component on borrowing rose another two points to a multi-year high. The quality of labor remains the number one small business concern.

Bottom line, clearly a tempering of enthusiasm.

Those that Expect a Better Economy

We know China encouraged banks to pick up lending again, setting aside the desire to slow excessive credit growth. That was reflected in the November loan data as Aggregate Financing totaled 1.52 trillion, about 170 billion higher than expected. While still down year-over-year, it was double the level seen in October. Bank loans made up 1.25 trillion of this, 100 billion more than forecasted. Higher corporate bond issuance was a catalyst for the increase as it jumped month-over-month. The shadow side saw loan growth slow further.

Bottom line, while surprising to the upside, loan growth has declined by 15 percent year-over-year for the first 11 months of 2018. Much has to do with the crackdown on non-bank lending. This is also reflected in M2 money supply growth which is rising at an eight percent year-over-year rate, matching the slowest pace since at least 1996.

While it might seem we’re getting some good news on the tariff front, it’s all optics and is only confirming what was said last week. BN is reporting that China will cut its tariffs on cars made in the U.S. to 15 percent from 40 percent, but they were raised to 40 percent back in July in retaliation against U.S. tariffs. And, in July China announced that they were cutting its auto tariffs to 15 percent from 25 percent for everyone else. As we seem no better off, the real news to be gleaned is that maybe some progress can made on a broader deal and maybe what is going on with Huawei can be separated out. I hope so and believe the behavior the stock market of late has been intense pressure on the administration to make a deal and China wants its own deal too because of the economic weakness they've been experiencing.

Theresa May is in Brussels to discuss what comes next. I'm still of the belief that some deal will be had as a no deal Brexit is highly unlikely. The pound is bouncing back above 1.26 against the dollar.

The U.K. did report better than expected jobs data. For the three months ended October 79,000 new jobs were added, well more than the estimate of 25,000. The unemployment rate though did hold at 4.1 percent just off the lowest level since the 1970s. Also positively, wage growth further improved as weekly earnings ex bonus' was higher by 3.3 percent year-over-year, one tenth more than expected, up one tenth from the month prior and that's the best in 10 years. While there was no Brexit impact here, the November jobless claims count did increase by another 21,900 and is the third straight month above 20,000 on average for the first time since 2011. Bottom line, if it wasn't for Brexit, the BoE would be raising interest rates on wage data like this.

Wage Growth in the U.K.

Lastly, the German ZEW economic expectations index (surveying investors) for December did improve to -17.5 from -24.1 and that was 7.5 points better than expected. The current situation component was weaker though, falling to 45.3 from 58.2 and 10 points below expectations. The ZEW said "Although the rise in economic expectations is a welcome one, it should not be over interpreted. The assessment of the economic situation has worsened dramatically for both Germany and the Eurozone. This is indicative of relatively weak economic growth in the fourth quarter. In addition, uncertainties also remain in terms of the looming international trade dispute and Brexit, which have a particularly negative impact on private investment and Germany's exports." Notwithstanding the data and these dour comments, the number is never market moving. Markets focus more on the IFO which comes out next week as it surveys actually businesses. The euro is higher, just below $1.14 versus the U.S. dollar.

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