Are we caught in an economic Groundhog Day?

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Headline beat, big revisions, muted wages, repeat.  Things are great, oh wait maybe not, repeat.  Fed threatens to or does raise rates, economy brakes either immediately or somewhat shortly thereafter, repeat.

While tomorrow is the real Groundhog Day, frankly I feel like I’ve been in an economic groundhog day since roughly 2000.  For those of you that have followed me, you know I keep repeating my thoughts about the disconnect between the reality of our new economy and how traditional economists fail to understand the nuance between broken and different.  We talk about a jobless recovery.  Then we talk about an inflation-less recovery.  Now that jobs are moving gain, we talk about the lack of wage growth.  We want to read these numbers as great.  Let’s face it, the headline number today was great!  So then isn’t all this tightness in the labor market not pushing through to wages and therefore perplexing the Fed?

The disconnect is economists at large are dismissing the underlying reality which is that consumers and businesses have changed forever.  The consumer experience has changed forever.  What used to be a process of want, buy, enjoy, repeat, has become, need, shop, wait, shop, wait until I get the best price, buy, repeat.  Hold one though, this isn’t just on the consumer.  Let’s push up the chain a bit  because this doesn’t make complete sense.  We want to be happy right?  Shiny new things make us happy right?  So why has QE infinity generally failed?  I’d argue it’s gone something like; company borrows cheap,  keeps the savings because sales are slow, holds wages, no disposable income, people still not euphoric, muted buying, bigger sales to trigger buying, consumer conditioned to not want/need as much, made sales at little to no profit, can’t increase wages, automate processes to find margin, repeat.   It’s this huge economic black hole.  We’ve seen it before, after the Great Depression.  Folks stocking up cans even 40 years after we were long out of it.

The catch 22 is how can companies push wages without price elasticity and how can prices grow if people don’t have disposable income to spend or the desire to spend it??  OK, OK, so then why has there been a measurable recovery in certain segments of the country/economy.  Well I’ve covered that ad nauseam as well.  From my perspective, all the money that has gone to creating some of these mini-booms over the last two decades has been driven by everything except earned income: inheritance, market growth, real estate appreciation, low rates, tax cuts.  And when any or all of those things go away or a family doesn’t experience any of those events, we’re left with wages suck in the late 90’s and therefore no real ability to spend at the level and pace needed for a real, widespread recovery.  Need proof?  Household income in 2017 was negligibly higher (like 2%) than it was in the late 90’s.  The late 90’s!!!!  Make no mistake though, we also have an altered sense or doing well.  5 TVs, 3 iPhones and 4 cars wasn’t exactly the family norm in 1955 when things were “great.”   We consume more and that is no doubt a huge factor is our spending patterns.  One could certainly argue that our heightened level of consumption has a ton to do with our heightened persistence to focus on price and value.

So what does this all mean?  Well at the risk of repeating myself for about the millionth time, until we figure out that automation and information isn’t going away, in my humble opinion; we’re doomed to repeat the rate cycle we’ve been stuck in for nearly two decades now.  I still see no reason to believe that the rate friendly environment we’ve been in since the 80’s won’t keep trucking along.  Every time things start looking good, Ole Punxsutawney Phil seems to duck back into his hole for some more winter…

-Philip Mancuso

How might the shutdown impact mortgage rates?

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Well firstly, it already has to some degree.  Understand that the market doesn’t like uncertainty. We can really distill that reality into two phrases; Risk on and Risk off. If the market is in a Risk on mindset, investors are looking to take on risk to get yield or return.  The opposite is true of a Risk off bias.  Logically, one is less likely to take on risk in times of uncertainly, as it make the risk even riskier.  Therefore, right now the risk to the economy during a shutdown is severalfold.

Firstly, there are hundreds of thousands of workers partially or fully out of the workforce that are directly affected. Presumably they will spend less during this period, so businesses are indirectly affected by these furloughs. Lastly, much of the data that market participants use to trade stocks, bonds and the like aren’t made available during a shutdown. Therefore an already nervous market is somewhat flying blind.  Risk, on risk, on risk.

Couple this with a softening of data that lead into the shutdown and the result is a pretty friendly rate environment. Investors take off risk and embark on another term you may have heard, a flight to quality. The concept here is that government bonds are a safe haven asset as opposed to riskier stocks and other tradable instruments. This flight into bonds lowers yields and that usually lowers all other rates.

At the risk of getting a bit too technical here, we have seen the spread between government bonds and mortgage rates widen during this stretch.  This means mortgage rates haven’t dropped quite as much as bond yields, despite the correlation between the two.  With seemingly no end to the shutdown in sight, I wouldn’t be shocked to see rates continue to drift lower, however I advise some caution.  As aforementioned, the shutdown itself isn’t the primary driver here and moreover will end.  Therefore there will be some relief on investors when it ends and a bunch of data that could change the landscape of the risk appetite of the market.

Additionally, there’s an entire world around us that isn’t in a shutdown and those events impact our rates too, which leads me to one last economic catch phrase:  cautious optimism.

-Philip Mancuso

How the Fed Stole Christmas

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My annual tribute to the markets around the holiday’s tweaked slightly for 2018.  Amazing how much of it still applies 4 years later…

‘Twas the night before Christmas, when all thro’ the house,

The Markets were stirring, bonds were aroused

The Fed dropped the hammer, rates started soaring,
Oh wait, no – they’re actually snoring;
The pundits were sparring, ’bout grandeur and dread,

While visions of recovery danc’d in their heads,
And Powell on the hot seat, with rate hikes on tap,
Had low rates been settled for a long winter’s nap?
When out in markets there arose such a clatter,
Bond traders said hey wait, let’s look at the data!

So yields went the other way in a quick flash,
Dropped below 2.80, a big green hulk smash.
The range stayed the range, as it has for some time,
Rates didn’t jump, the result was sublime;
When, what to my wondering eyes should appear,
Rate have been rallying, borrowers had nothing to fear,

With trading in holiday mode, not so lively and quick,
Instead of flashing lights, we get a few ticks.
More rapid than rate hikes the answers they came,
Powell whistled, and shouted, and call’d them by name:

“New! normal, new! Job starts, new! products, and spending,
“On! Rate Hikes, on! Tightening, Stop shouting and dissing;
“To the top of the charts! Go out to the mall!
“Now spend away! Spend away! Spend away all!”

So is the great bond rally done? Should we even ask why?
When rates meet with this obstacle, should they sink or fly?
Another year in the books, time indeed flew,
With the sleigh full of app drops – Oh boy, Oh boo hoo.
With higher bond yields, closings went poof
Borrowers and Lenders all shouted ooof!

As markets meandered and twisted, they spiraled around,
With soaring expenses, came reality with a bound:
Instead of dressing in fur, from our head to our feet,
Or eating lobster and caviar or even prime meat;
Lenders hunkered down a bit, as applications contracted,
PB&J and puddings, brown bagged lunches were pack-ed:
Apple is struggling! Still better than Blackberry
Microsoft is surging, oil’s almost buried;
Yachts, and G4s, cars wrapped in bows,
All the Fed’s money still missed main street, OH NO!!

Lining the pockets of big companies and Wall Street,
Not helping the masses, the plan’s incomplete.
They had good intentions, albeit misdirected
Now markets, the wealth gap and expectations’r disconnected!
They talk’bout dual mandates, jobs and inflation,
Playing with the future of a once powerful nation;
A wink of their eye and jab of the elbow,

When will their plans work and the economy really go?

Let’s be realistic though, maybe things aren’t so bad,
We’re still a free country, the new iPhone is rad!
Cell phones and satellites, watches that talk,
Boards that we ride on, no need to walk : /

Flat Screens and tablets, the web’s everywhere,
Nose jobs and waist training, even surgically replaced hair!
So let’s keep looking forward, aspire to greater heights,
Happy Christmas to all, and to all a good night.

 

It’s a few days early, but Merry Christmas and happy holidays everyone.

-Philip Mancuso

Diversion from the Inversion

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Hey folks. 

Since my Toys-R-Us post, not much has really changed.  Still banging around 2.9, data still not stellar, Fed still hell-bent of hikes, long end still resisting.  If I go back to some of my posts 2-3 years ago, there are things that have changed, pockets of some economic hope.  At the same time, the very basis for my unmitigated, unwavering bullishness in bonds remains; technology and information. 

Unless the internet goes away, unless every machine is shut down, the very anchor on price and wage growth remains and dare I say strengthens it’s grip on inflation, and therefore; persistently low-ish rates.  As far as I’m concerned, everything else is a diversion.  I recall the reasons we boomed out of the dot.com bust; home prices, inheritance, historically low rates, intra-year tax cuts.  All transitory influences on spending. 

Note the big exclusion; WAGES.  Here we are, nearly two decades later.  In nearly the longest, yet unimaginably lumbering recovery the free world has ever seen.  What is driving us?  Home prices, tax cuts, stock prices. Familiar?  Note what is missing, yep, WAGES.  So how is now different?  Why is now different?  See every post I’ve ever done.  I don’t believe it is.  It’s a diversion, some noise from the reality of a new economy.  One that generally doesn’t support long term inflation and further creates a wealth gap that doesn’t support sustained and widespread growth. 

What does this mean for mortgage rates?  We always want to play protect, but on longer term basis I’ll just say I like the way things are shaping up.  So will there be an inversion?  It looked for some time like the Fed learned from the mid 2000’s, but perhaps they didn’t.

-Philip Mancuso

It’s All Fun and Games Until Someone Gets Hurt

OK, so I guess it’s time for the hermit to emerge from his winter’s slumber to speak a bit about the market.  I do again apologize to my followers for not speaking more often.  Anyway:

 The Fed hiked as expected yesterday, yet perhaps the market didn’t react in kind.  I going to spend a few bullet points on this before I get to why I write:

  1. Many folks were bracing for 4 hikes in 18
  2. Fed signaled 3
  3. Powell said forget about 19-20, which at the time of the statement were reason for concern
  4. We’ve been unable to break 2.9ish for some time

The longer we stay(ed) at these levels (2.9ish), the more likely it is we’ll see(saw) a bounce, just as our inability to break lower in q3 2017 inversely hurt us.  I’ll just add that I’m not so sure the Fed should have shrugged off the weak q1 consumer…

Now that’s a good segue into my point.

If you were a kid growing up in America (they later became worldwide), was there a greater place than Toys r us? I mean who didn’t want to go there?  Who’s parents didn’t shop there?  For goodness sakes, their name IS TOYS R US.  They R TOYS!!!   Well no longer.  No more fun and games.  No more holiday time retreats for kids to show their parents the toys they so want for Christmas.  They are closing the doors.  Replaced by a computer or smart phone.  Very romantic.  And why does this matter??  See every post I’ve ever written.  This compression of the retail distribution channel and erosion of price elasticity is the culprit of the persistently low inflation numbers that is so perplexing to the Fed.  Why?  I don’t get it.  To me it’s clear as day.  In a bit of irony I can’t help but feel like just as Toy R Us didn’t see this new wave of commerce as a threat, the Fed continues to miss the mark similarly of why we are in a growth and inflation-less recovery. 

We’re now almost through the first quarter of 2018 and the consumer numbers have been weak.  Really weak.  Like negative weak.  Sure there’s some stronger numbers printing here and there, but we can’t have a recovery without consumer spending.  We’ve seen homes pause here as of late as well.  Is that the result of higher rates?  Not sure, but it’s hard for me to digest a recovery if the folks who are recovering all of the sudden aren’t spending money on goods or homes.  It makes me wonder if something is brewing below the surface.  I think the next few months will be very telling. They historically have been rate friendly, let’s see what happens.  I certainly wouldn’t base my recovery estimates on the Feb BLS number.  It’s not the first time we’ve seen a blowout Feb number.  March has historically been a down month, so if we see that pattern continue it could extend the rally.  You know I’m a big ISM guy, so I’m really interested in those March numbers as well.  I’ve been surprised by the fact that the spending numbers haven’t weighed down the ISMs and wondering if/when that may happen. 

TO BE CLEAR, I’m NOT making a call here.  That said, I do think some moons are aligning that could leave us with some surprisingly disappointing economic data in the coming months.  I’m not ready to make a call yet, because frankly I do see things as being a bit better.  I get that, I see that.  For me the 64k question though is better how?  What I’m not convinced about is that unlike in the pre-web days, some extra money, a bigger smile and a job doesn’t necessarily equate to a convergence of disposable income and the willingness to spend it like a drunken sailor and both are needed to fuel real growth and inflation.

NOT making a political statement here, but maybe we’ve all gotten to be a bit too serious.  Maybe we could all use some fun and games and just maybe that’s a bit more important than saving a dollar. 

RIP Toys R Us   

I just wanted to add this to my rant from earlier.  This is quoted from an AP article.  THIS is the impact of online sales vs brick and mortar that IMHO the Fed is discounting too greatly.  While TRU only has about 30k employees, check out how many jobs outside the company might be lost if they shutter.*  Do you think this many folks have a stake in an online toy sale????

The demise of Toys R Us will have a “devastating effect” on the toy industry, said Larian, who believes that 130,000 U.S. jobs could be lost when layoffs at suppliers and logistic operations are included.

* I write IF, as there is a long shot attempt to salvage parts of the company by the CEO of toy manufacturer MGA Entertainment.

Here’s the link to the article  https://www.msn.com/en-us/money/companies/toy-company-ceo-leads-effort-to-salvage-toys-r-us/ar-BBKxNlL?ocid=spartanntp

Maybe we should be reading the tea leaves…

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Q2 GDP just printed and while you can draw some near term conclusions, I’m compelled to push back a bit as I usually do.
Frankly I don’t care about 2.2 v 2.5 v 2.8 right now.  As we know this number could be off 1 anyway.  We saw 2015 rev up, 2016 and Q1 2017 rev down.  Make no mistake, net, this is a bad 2017 report.  The combined total of Q1 and Q2 miss, earnings missed, prices missed.  The other components were a bit of a mixed bag.
I don’t want to get caught up in the weeds though, I’m a bit more focused on the leaves…Tea leaves.  Why?  Starbucks is shuttering all their Teavana stores by Q1 2018.  Why?  Mall traffic or lack thereof.  Why does this matter?  Well, to TEA (sic) it up for you, here’s a refresher you can catch later:
So why do we care about mall traffic, people are just buying on the web right?  I’ve covered this topic before as well, so I’ll keep it short.  All commerce isn’t equal.  E-commerce clearly has a much smaller eco-system and lower margins.  Both equate to a much smaller segment of the population benefitting from an E-tailer’s propriety, versus a brick and mortar shop.  The result is an anchor on prices and thus inflation and wages, and oh yes, an extended period of low growth.

If you don’t believe that, check this out:

Therefore, in the near term, I still see the range intact.  Who knows if the Fed moves.  Maybe we do make a run at 3 before year end as ridiculous as I think that would be.  I have difficulty seeing a break above 2.41 in the near term though.  We have a ton of data next week, so it makes sense to play it close to the vest until then as you never know, perhaps with a slight bias to lower rates.  More importantly, until something big comes along to change things, all I keep seeing is #LowerForLonger.  It’s #InTheLeaves
#WhatRecovery #ThingsAren’tBroken #Hashtag
-Philip Mancuso

It’s 5 O’clock somewhere

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Hey folks, it’s been too long.  I just haven’t felt inspired.  My thought was I’d just do another piece on how the market got it wrong @ 2.40 and calling for 3 by year’s end.  I mean how much of that can you really hear?  Here’s a quick refresher and those new to the blog, please go back and read the previous posts to catch up.   It figures I’d pick a day with no data and where it seems all of Wall Street is likely already sipping on gin and tonics in the Hamptons to post.  At worst, they fired up the helicopters by now, I mean nothing is happening.   My screen hasn’t blinked in what seems like 5 minutes.

Anyway, a slightly positive open reinforces the trend down.  As liquidity evaporates into the Long Island sun, the afternoon could go either way.  I wouldn’t read to much into it.  

Range intact?  Check.  

2.12-2.41 with stops in between.  Check.  

Data not correlating with central banks desire to tighten.  Check.  

For the 9,833,123rd time central banks realize there will be a tantrum if they try to get serious and consequently are forced to reel it back in.  Check.

I see little inspiration to break 2.12, so I’d continue to lock the range (always look out for geopolitical stuff, etc).  Our first run at a new direction comes at the end of next week.  Durables on Thursday (meh), but a pretty important Q2 GDP on Friday.  Here’s my thought:  Central bankers are already hellbent on further tightening.  I can only see this report as surprising them to the downside and thus giving reason for pause.  I mean, what sort of blockbuster would require them to redouble their current tightening efforts.   I’ll post a strategy around mid week around that.  Locks/floats ahead of that event are really predicated on current levels, so it’s not something I’d want to advise on today.

In the meantime, it makes sense to lock whatever July stragglers are left and you you feel froggy, early August closings could float, but I’d begin locking those up if we break 2.20.

-Philip Mancuso