Posted in Newsclips, Samples

Real Yields Trapped by Languishing Productivity and Wage Growth


  • The Financial Times – The long wait for a productivity resurgence
    Improvement in living standards depends almost entirely on rising output per worker
    You can see the computer age everywhere but in the productivity statistics.” Today, we could repeat this celebrated 1987 statement by Robert Solow, Nobel laureate founder of modern growth theory, with the substitution of “technology” for “computer”. We live in an age judged to be one of exciting technological change, but our national accounts tell us that productivity is almost stagnant. Is the slowdown or the innovation an illusion? If not, what might explain the puzzle? The slowdown, if true, matters. As Paul Krugman, also a Nobel laureate, argued, “Productivity isn’t everything, but in the long run it is almost everything.” Improvements in standards of living depend almost entirely on rising output per worker.


Real yields, term premium, and implied volatility have little reason to appreciably rise until this conundrum of low productivity and wage growth is solved. U.S. 10-year real yields are up against range highs in place since September 2013, which we believe will hold. Stress and concern are still brewing for the less rosy conditions found outside tech-heavy metros.


Languishing productivity and wage growth remain the most confounding economic mysteries of the past decade. U.S. Treasury investors have become comfortably numb with little fear of rampant inflation or an upside surprise by productivity.

The chart below shows unit labor costs (orange) along with the U.S. 10-year note’s trading range in yield over the previous year (blue). Lower and lower wages have prompted tighter and tighter trading ranges. Term premium and implied volatility have little reason to rise.



The consumer has yet to fulfill exceptionally rosy surveys by spending at greater rates. The scatterplot below shows the NFIB’s small business hiring plans index (x-axis) versus personal savings year-over-year (y-axis). Larger red dots indicate declines in the rate of consumer spending over the ensuing three years, while larger blue pluses indicate improvements.

Strong hiring plans coupled with low savings rates have not been a good recipe for strong spending. Wage growth and inflation have become more synonymous with tech-heavy metros like Raleigh, Atlanta, DC, and San Francisco, leaving much of the country still wanting. 



Many metros away from these tech-heavy centers are housing unproductive companies subsisting due to low costs of funding. The next map shows the prevalence of so-called zombie companies unable to produce earnings over and beyond dollars paid on interest expenses. Darker orange shading indicates higher percentages of zombie companies.

U.S. Treasury yields are not swiftly rising because productivity and wage growth are not widespread. The more concentrated productivity becomes, the longer this phenomenon can likely persist. These zombie companies may have a longer life than anyone expected.



The prevalence of unproductive companies and a lack of opportunity for less-educated/trained employees are producing greater stress for consumers. The next map shows an average of the current Google search trends for stress, anxiety, headaches, nervous, and worried. Blue metros indicate below-average stress, while darker red indicate increasingly above-average stress.

The concentration of productivity and wage growth to tech-heavy metros is leaving the remainder in quite the pickle. 



U.S. 10-year real yields have been attempting to break above their range high of 91 bps in place since September 2013. But, our fair value (49 bps) suggests real yields will struggle to appreciably rise. Further range trading appears the most likely scenario.
Real yields will chase productivity and wage growth, but have struggled with no clear signals of lasting momentum.



The last chart shows the contributions to our fair value estimate by each set of variables. This model blends traditional economic measures with the more real-time assessment of the consumer via Google search trends for consumer spending behavior and concern over economic/government policies.

We have highlighted the downward contribution by slowing developed and emerging market growth, low U.S. Treasury implied volatility, and waning rental markets. 


Posted in Newsclips, Samples

U.S. Dollar Outlook Improving

  • Wall Street Journal – U.S. Dollar Rises Before Fed Rate Decision
    Investors watch whether the central bank plans to accelerate its pace of rate increases this year

    Most market participants expect the Fed to raise rates Wednesday. Investors also will be trying to determine whether the central bank plans to accelerate the pace of its rate increases this year. Expectations of higher rates tend to make the dollar more attractive to yield-seeking investors. Robust consumer-price data reported Tuesday argues for the Fed to signal an increasing risk of two more rate increases this year, analysts at Commonwealth Foreign Exchange wrote in a note to clients. “Such a scenario would likely keep the dollar broadly supported,” the note said.

  • Wall Street Journal – Powell Weighs Taking Questions After Every Fed Meeting
    Investors have come to expect little policy action from the Fed at meetings without a press conference

    Federal Reserve Chairman Jerome Powell is considering holding a press conference after every policy meeting rather than every other meeting, and his appearance Wednesday could help him decide whether it’s worth the trouble. At issue for the Fed: Since beginning press conferences in 2011, the central bank has fallen into the pattern of making major policy changes only at meetings followed by a news conference. The tactic has helped the Fed leader communicate its policy changes in more detail than its heavily scrutinized, jargon-filled postmeeting statement. But the practice has lulled markets into thinking the central bank won’t act between press conferences. “We’ve evolved to a place where the market only thinks we’ll move if there’s a press conference,” Atlanta Fed President Raphael Bostic said in an interview earlier this year. This is “a sign that what we’re doing right now isn’t working,” he said.

  • Summary

    Markets are tuned in to see whether the Fed will diminish its reliance on forward guidance and deliver any clues about a potential fourth rate hike in 2018. The outlook for the U.S. dollar against developed market peers is mixed, but we see upside against the euro and yen. 


    Reports yesterday that Chairman Powell was considering press conferences after every FOMC meeting helped send the U.S. dollar higher. Markets read this as a sign that every meeting would become “live” as the Fed allows for greater uncertainty in the path of policy. 

    The charts below show signs of uncertainty creeping into expectations for interest rates and FX markets. Swaption volatility, one measure of fears related to rising rates, remains elevated though well off recent highs seen when U.S. Treasury yields appeared to break higher in late May. 3-month implied volatility for major U.S. dollar pairs has been rising for all but USDJPY. 



    Fair value estimates for the U.S. dollar against developed market majors point to a mixed outlook. We estimate fair values using 65-day changes based on Google search trends, changes in economic data and surprises, global fund flows, implied volatilities and performance of other asset classes. The charts below show the residuals, the difference between fair value and actual, in standard deviations, for major pairs. 

    We see room for the U.S. dollar to strengthen against the euro, pound, and yen. Fair values suggest downside risks against the Australian and Canadian dollars. Our fair value estimate for the U.S. dollar index (click for chart) is about 1.7% above actual. 



    Improving search traffic related to construction, real estate, furniture and consumer finance have brightened the skies for the U.S. dollar. Economic data misses in BRIC economies and improving performance in defensive sectors of global equities have driven more recent increases in fair value for the dollar index. 



    A strengthening U.S. dollar would present modest tailwinds for U.S. equities. The next chart shows 60-day correlations for S&P 500 industry groups against the U.S. dollar index. Autos & components, energy, and materials have shown the strongest (negative) relationship. 




    Much depends on how the Fed will shape expectations for the path of monetary policy over the next year. Its plans will be measured in the context of looming ECB decisions. For now, the outlook leans in favor of continued dollar strength, especially against the euro and yen.

Posted in Featured, Inflation Watch, Newsclips, Samples

Wage Growth MIA, Blame Technology


  • The New York Times – E-Commerce Might Help Solve the Mystery of Low Inflation
    Unemployment is sinking and businesses are churning out more goods and services. Yet even with the economy standing on tippy toes, prices and wages are climbing a lot more slowly than anyone has expected. Now a growing body of research is putting the blame more pointedly on e-commerce. The spectacular growth in online shopping, it turns out, is not only tamping down inflation more than previously thought, but also distorting the way it is measured.
  • The Wall Street Journal – The Fed’s Biggest Dilemma: Is the Booming Job Market a Problem?
    Jerome Powell, the chairman of the Federal Reserve, has to figure out whether inflation is around the corner. The wrong choice could cripple the economy.

    Given the anchoring of inflation expectations, Mr. Kashkari said it is no surprise that inflation is unresponsive to low unemployment today. “The more credibility we have with the market and with employees and employers, the less responsive they are going to be to minor changes in the economy,” he said. In the late 1960s, when inflation began to accelerate just months after the unemployment rate dropped below 4%, the Fed cut interest rates, partly due to political pressure. “Nobody on this committee will allow that to happen,” said Mr. Kashkari. “I just don’t see any echoes of that today.”

  • The Financial Times – Citi issues stark warning on automation of bank jobs
    Investment banking leaders eye future in which machines take over ‘lower-value tasks’
    Citigroup’s investment bank has suggested that it will shed up to half of its 20,000 technology and operations staff in the next five years, as machines supplant humans at a faster pace. The forecast by Jamie Forese, president of Citi and chief executive of the bank’s institutional clients group, was the starkest among investment banking bosses in a series of FT interviews to mark the 10th anniversary of the financial crisis. Mr Forese said the operational positions, which make up almost two-fifths of investment bank employees at Citi, were “most fertile for machine processing”


Small business surveys for compensation are at all-time highs, but real wage growth has failed to follow through. Technology is the latent factor anchoring core inflation and wages. The more profit margin improvements are eaten up by technology, the heavier the anchor. In response, options markets have been very hesitant to price in headline inflation running above 2.5% for the foreseeable future. 


May’s inflation as measured by core (2.2%) and headline (2.8%) CPI is making little waves coming in as expected. A lack of real wage growth remains the dominant theme. On the flip side, the NFIB’s latest survey for compensation burst to an all-time high (orange line), while plans to raise prices over the next three months reached the highest since pre-crisis.

Oddly, lofty survey results have tended to mark tops in core inflation since the mid-1990s rather than fuel further gains. Core CPI year-over-year (bottom panel) has been locked in a tight range from 1.6% to 2.3% since mid-2011.



Inflation expectations remain anchored as Kashkari and others recently proclaimed. We prefer to watch the ratio between inflation swap caps and floors to gauge the odds inflation runs above specific hurdles. The chart below shows the odds headline CPI year-over-year runs above 2.5% for each defined period of time from the next two to 30 years. Again, headline CPI must run above 2.5% to allow for core to remain above 2.0%.

Options markets have yet to price in headline CPI running above 2.5%, but are again attempting to exceed the best levels of early 2017. Term premium and implied volatility (e.g. MOVE index) will remain low until markets internalize the risk of lasting inflation and wage growth.



Heightened inflation and improving wages remain focused on tech-heavy metros. The scatterplot below shows Google search trends by metro for words of recruitment (x-axis) versus rising salaries (y-axis). Rural and/or second-tier metros are struggling to show a need for workers or higher wages.



The technology sector has been a dominant force, but not when it comes to its share of employees. The red shaded area below shows technology’s full-time employees rising from 10% in 1999 to 12% in 2018.



But, technology companies are producing a larger and larger share of earnings (EBIT). The earnings of companies like Apple, Facebook, and Netflix have accelerated from 9% in 1999 to 17% in 2018.



Efficiencies have allowed technology to exude significantly higher profit margins. The chart below shows the profit margin by sector of the S&P 500. We have highlighted technology in red and the median of all other sectors in black.

The spread between technology and the median sectors’ profit margin jumped at the exit from the financial recession in 2010. Technology’s profit margin has averaged roughly three times the median over this recent time period.




We multiply technology’s excess profit margin (vs median) by its share of earnings to compare to core inflation. This measure of technology’s dominance (red line, reversed) has been met with lower and lower core inflation.

The more long-run story will have technology’s efficiencies and productivity bleeding into other sectors, eventually causing a return to equilibrium. Regulations may hasten this convergence. However, over the short run technology’s growing share of earnings using a smaller proportion of carbon, human bodies is an anchor for inflation.




For those who wish to dig deeper into this month’s inflation releases, the interactive visualization below offers charts on CPI, PPI, PCE, global inflation and inflation expectations. The time frames, subindices and annualization periods can all be changed for a customized view. This month we default the view to core CPI and core PCE versus the Fed’s 2% target rate of inflation.


Posted in Newsclips, Samples

Strong Balance Sheets Won’t Save You

  • Business Insider – GOLDMAN SACHS: There’s a danger lurking behind investing in hugely profitable companies loaded with cash
    Many of the strong companies are also growth stocks, putting them at risk of faltering if investors turn more defensive

    Companies with plenty of cash and not as much debt are crushing it. Goldman Sachs’ basket of stocks with strong balance sheets has outperformed its selection of cash-strapped companies by 8% this year, the bank’s equity strategists said in a note on Friday. That’s also a better performance than the S&P 500, which has gained 4.02% this year. The firm again recommended buying its basket of strong-balance-sheet stocks, but highlighted a risk that could work against them. Many of the companies with the strongest balance sheets also have the strongest earnings growth. They include big names like Facebook and Alphabet that led the market higher last year, as momentum-driven investors looked to profit from their upward trend.


Strong balance sheet stocks won’t save your portfolio if financial conditions in the U.S. continue to tighten. Past tightening in financial conditions has dented performance across equities and credit markets. 


The unique loosening of financial conditions in the U.S. as the Fed normalizes policy is beginning to reverse itself. The chart below shows the Goldman Sachs U.S. Financial Conditions Index with shaded bands reflecting Fed tightening campaigns. The index has risen after falling to multi-decade lows. The problem for borrowers and investors is that a return to historically normal conditions means further tightening ahead, nearly a full point to reach the average since 1990.



Despite the attractive theory that companies with lower debt ratios will outperform, we see very little evidence that this has been true over time. The Business Insider story above highlights one of the key reasons why this might be the case. Goldman notes that there is substantial overlap between low debt, strong earnings companies, and high growth (technology) stocks. A broad slowdown in the economy is likely to dent growth and momentum stocks. 

The charts below show the relationship between changes in Goldman’s U.S. Financial Conditions Index and the performance of strong (left) and weak (right) balance sheets. The x-axis shows changes in the financial conditions in 0.5 point bins. The marks are shaded to reflect tighter (orange) or looser (blue) changes in conditions. The y-axis shows standardized changes for the equity indices. 

If you’re thinking they look mostly the same, we agree. On average, the performance of the two indices is nearly equal. The distribution of returns for the weak balance sheet is wider, and it appears that the weak balance sheet index has underperformed when financial conditions tighten slowly. When conditions tighten at anything more than a crawl, there is no safe harbor in strong balance sheets. 



The scene is much the same for U.S. credit markets. The last chart shows average 3-month changes for Bloomberg Barclays total return indices for U.S. Treasuries and a range of U.S. credit markets. Performance across both safe and risky assets, and across industries within investment grade credits, uniformly deteriorates as financial conditions tighten. Utilities tend to outperform their industrial and financial peers. Both high yield and leveraged loans are especially exposed if financial conditions tighten quickly. U.S. Treasuries offer the only source of positive performance as the pace of tightening increases. 




The lure of investing in equities with strong balance sheets is simple enough, but the prevalence of growth and momentum stocks in Goldman’s Strong Balance Sheet Index is a hidden risk. On average, strong balance sheet equities have not outperformed their weaker peers when financial conditions tighten. U.S. Treasuries have been the only safe harbor when financial conditions tighten quickly.

Posted in Newsclips, Samples

Jim’s View: The Stock Market’s Message x-FAANMG

  • – Apple Is the Favorite to Reach $1 Trillion Market Cap First, but Rivals Loom
    As Apple gets within striking distance of the whopping valuation, here’s what share price each of its top rivals needs to reach to keep pace.

    The race to a trillion is on and Apple Inc. remains the odds-on favorite. Despite Friday’s dip, Apple’s gains since reporting stronger-than-expected earnings and a big share buyback program in May have put it within a stone’s throw of becoming the first company to ever post a $1 trillion market cap. As of Wednesday’s close, Apple shares only needed to increase about 5% to reach the astonishing 13-figure mark.


The six FAANMG stocks account for virtually all the gains in the S&P 500 this year. The returns of the other 494 stocks are consistent with signs of a moderating economy.


The five stocks in the table and chart above are the five largest U.S. stocks by market capitalization. The FAANMG (Facebook, Amazon, Apple, Netflix, Microsoft and Google/Alphabet) acronym also includes Netflix. Currently, Netflix is the 27th largest stock. But, as the next chart shows, Netflix recently passed Comcast and Disney and is now the most valuable media property.



The growth of these stocks has been nothing short of astounding. The chart below shows their combined market capitalization over the last three years has more than doubled, adding over $2 trillion in value.



How big an impact did the FAANMG stocks have in 2017? The next chart shows the changes in market capitalization of the S&P 500 in blue, FAANMG stocks in red and the S&P 500 less FAANMG in orange.

In 2017 the S&P 500’s market capitalization grew 18.48%. The six FAANMG stocks accounted for 3.34% of the total and the other 494 stocks accounted for 15.14%.

So by the end of the year, the “legacy” companies accounted for the vast majority of the gain.



2018 has proven to be a different story. As the next chart shows, the S&P 500’s market capitalization has grown by 3.34%. The vast majority of this gain is due to the six FAANMG stocks. Their market cap has grown by 2.53%. The market capitalization of the remaining 494 stocks has barely grown, up just 0.82%.




The fact that the FAANMG stocks are a major contributor to the overall index may not come as a huge surprise to most. However, when quantifying their contribution to the overall index as we have in the manner above, it shows a weakness among the other 494 stocks that is much more consistent with a moderating global economy.

Posted in Newsclips, Samples

What We’re Reading

The Fed Decides Tomorrow


  • – Powell’s Fed Could Clear Up a Few Mysteries Puzzling Investors
    Labor market hotness, neutral rate, global risks on agenda
    Balance sheet and communications could also get some attention

    Any details on the coming shift from easy to tight monetary policy will definitely draw attention. Officials in March expected to cross that threshold in 2020 when their median estimate saw rates reaching 3.4 percent. That lies two quarter-point hikes above the 2.9 percent they estimate as the longer-run neutral level — the one that will neither support nor slow growth. Powell acknowledged back in March that such a policy path would be modestly restrictive, but added that out-year estimates are “highly uncertain.”

  • CNBC – Jeff Cox: The Fed has a surprise in store that could mean an early end to interest rate hikes
    * The Fed at its meeting this week is expected to announce a quarter-point interest rate hike, and a 0.2 percent increase in interest on excess reserves.
    * The maneuver is targeted at holding back the target rate and could signal that the Fed is nearing the end of its balance sheet rolloff.
    * A preliminary end to the reduction in the bond portfolio also could signal a quicker end to the rate-hiking cycle than the market anticipates.

    The mechanics are a little complicated. Yet it suggests that what once appeared to be an operation to shrink the amount of bonds the Fed owns that would have run well into the next decade could be wrapped up next year, or early 2020 at the latest. Instead of reducing the balance sheet from its peak of $4.5 trillion to $2.5 trillion or so as some Fed officials indicated, the impact could be far less — perhaps, some suggest, to $3.5 trillion or even a little more.


Emerging Markets


  • The Financial Times – Mexico’s Peso remains the bellwether for Emerging Markets
    Likely runaway election victory election for ‘Amlo’ could hit the currency hard

    In the turmoil that has struck emerging market currencies over the past six weeks, the headlines have been grabbed by the Turkish lira, the Argentine peso and in the past week, the Brazilian real. But what of the Mexican peso, traditionally seen as a bellwether of sentiment towards emerging markets  as a whole? It crashed to an all-time low against the US dollar after the election of Donald Trump to the US presidency in November 2016. After staging a comeback, it is heading back in that direction, shedding 12 per cent of its dollar value since mid-April. Worse may lie ahead. Analysts say the Trump administration’s renewed abrasive attitude to trade and a likely runaway victory in Mexico’s July 1 election for the leftist Andrés Manuel López Obrador, known to all as Amlo, could send the peso into uncharted territory.

  • The Guardian (UK) – Kenneth Rogoff: Are debt crises in Argentina and Turkey a global warning sign?
    We should not be complacent about the risks a recession could pose to advanced economies
    Economists who assure us that advanced-economy debt is completely “safe” sound eerily like those who touted the “great moderation” – the supposedly permanent reduction in cyclical volatility – a generation ago. In many cases, they are the same people. But, as we saw a decade ago, and will inevitably see again, we are not at the “end of history” when it comes to global debt and financial crises.


Politics & The Markets


  • The Wall Street Journal – The Return of the Political-Risk Trade
    Confluence of major political events comes as global growth shows signs of slowing

    After a long period where investors mostly shrugged them off, political risks are once again taking a front seat in moving markets. For investors, that promises to bring further uncertainty during one of the market’s most volatile stretches in years. In recent years, global economic growth and central bank stimulus have drowned concerns over political risk. Now it’s back. On Monday, markets mainly climbed as Mr. Trump prepared to meet with Kim Jong Un and Italian media reported Rome’s antiestablishment government had ruled out leaving the euro. But a bad-tempered meeting of the Group of Seven major economies reignited some investors’ worries about trade tensions.


The Costs Of Indexing


  • The Wall Street Journal – Acclaimed Fund Manager’s Latest Target: Hidden Costs of Indexing
    Rob Arnott says index managers should wait to trade until prices snap back to normal levels after index providers announce which companies will be added or deleted

    Rob Arnott thinks fund managers should move more slowly. The founder of the investing firm Research Affiliates says some of the world’s cheapest index funds track their benchmarks too closely, a “self-inflicted wound” that ends up costing investors billions of dollars. When index providers announce which companies will be added or deleted—typically days or weeks ahead of time—newly added stocks get a boost while those cut from the index tend to fall. Fund managers who move quickly to mimic the index end up buying high and selling low, Mr. Arnott said. “Most index fund managers are far more interested in reducing tracking error than in adding value,” Mr. Arnott wrote in a paper due out later this month titled “Buy High and Sell Low with Index Funds!”


Chinese Bond Defaults Are Rare


  • The Wall Street Journal – China’s Bond-Market Mystery: Why Aren’t There More Defaults?
    Beijing is working to maintain stability, even as it tries to tackle its key economic problem, analysts say

    “The reason why the bond default rate remains quite low in China is still because of government intervention,” said Zhu Chaoping, a Shanghai-based economist at J.P. Morgan Asset Management. “The government is focused on maintaining stability, financially and socially.” In the past, Beijing has often leaned on banks and local governments to extend a lifeline to struggling state-owned enterprises, and even private companies if they are large employers, Mr. Zhu said. The authorities have also stepped in with more sweeping action when there are broader signs of market stress, as in January when Chinese government-bond prices fell to a three-year low. The central bank cut the amount of cash it requires banks to hold with it in reserve, unleashing around 450 billion yuan of liquidity into the market.


Interest Rate Spreads


  • The Wall Street Journal – Diverging Fortunes in U.S. and Europe Signal Widening Interest-Rate Gap
    The Federal Reserve is likely to raise short-term interest rates this week while the ECB could signal it won’t start raising rates for some time

    Central banks in the U.S. and Europe are both expected to move this week to unwind stimulus policies adopted since the global financial crisis a decade ago. But the likely steps mask a recent divergence in the fortunes of the world’s top two economic blocs, which looks set to keep the central banks on different interest-rate tracks for many months to come. The Federal Reserve is likely to raise short-term interest rates Wednesday and pencil in more increases in coming years, to keep the U.S. economy from over-heating. The ECB could signal on Thursday it won’t start raising rates for some time even as it moves to phase out its €2.5 trillion ($2.95 trillion) bond-buying program. ECB officials are pondering the causes of a recent slowdown in eurozone growth that appears to have continued through the spring, as well as the risks posed by international trade spats, higher oil prices and political turbulence in the bloc’s number-three economy, Italy.

Posted in Featured, Newsclips, Samples

ECB Holds All the Cards

  • Bloomberg – Fed to Stick With Gradual Hiking as Risks Balance Out
    Upside risks fade and trade seen as dominant threat to outlook
    The Federal Reserve won’t steepen the path of interest-rate increases this year in the face of accelerating U.S. growth, according to economists surveyed by Bloomberg. In a poll conducted June 5-7, the proportion of respondents who expect at least three additional rate hikes in 2018 dropped slightly, compared with the survey in March. The median estimate from economists now sees two more increases this year, which matches the Fed’s own projections back in March. All 37 respondents predicted a quarter-percentage-point rate hike when policy makers conclude their two-day meeting in Washington on Wednesday.
  • Bloomberg – What to Expect From the Fed and ECB This Week
    Both central banks will continue to unwind their extraordinary measures, but at different paces.
    This week will confirm that two systemically important central banks are continuing their gradual shift to a policy approach that is more normal and less unconditionally supportive for markets. The two meetings will also highlight continued divergences in the speed of monetary-policy normalization that, along with a widening difference in prospects for economic performance, may have a more important impact on market valuations in the months ahead.
  • Summary

    The favorable beta provided by an expanding global central bank balance sheet may very well hinge on the timing of the ECB’s exit from QE.


    The chart below shows changes in headline and core inflation relative to one-year averages for U.S. (blue) and developed ex-US (red).

    U.S. inflation is building momentum in 2018, while other developed economies’ inflation has moderated versus one-year averages. The U.S. has historically shown a pattern of reverting to the more global average.



    The concerted global growth of 2017 coupled with rebounding inflation in the U.S. has shifted outlooks to tightening from easing. The chart below shows three-month changes in major central bank balance sheets. The global balance sheet (denominated in USD) is again turning lower, but much can be attributed to a strengthening U.S. dollar.  So, the ECB’s decision to end purchases will be a more material event as it will turn this measure lower regardless of the currency it is measured in.



    We run a model explaining the MSCI World Index’s rolling yearly return using economic and inflation data from prior to the financial crisis (shaded area, 2000-2007). The model is applied to out-of-sample data from 2008 to current.

    The residuals in the bottom panel indicate the degree by which the model is missing actual returns. The post-crisis environment has clearly been very different.



    We have contended balance sheet expansion across the globe has offered a beta or multiplier to economic data post crisis.

    The chart below shows the model’s residual (actual minus estimate) in the top panel along with the three-month change in the global central bank balance sheet in the bottom panel. Periods of balance sheet contraction have not been kind to global equities. Conversely, expansion has helped exacerbate positive returns.

    The meetings this week may offer bigger clues as to the direction of the global balance sheet in the event the ECB makes bold comments. The continued retreat in the Fed’s balance sheet will likely be counteracted by the BoJ in the months ahead, leaving the ECB as the key linchpin. A decision to finally retreat would ensure a removal of this favorable beta for global equities. On the other hand, stalling an exit will keep the ‘good times rolling.’ 


Posted in Newsclips, Samples

Crypto Washout

  • Wall Street Journal – Bitcoin Falls Sharply After Another Cryptocurrency Exchange Is Hacked
    The largest cryptocurrency has lost more than half its value this year

    A South Korean cryptocurrency exchange said it suffered a “cyberintrusion,” prompting bitcoin prices to fall sharply toward year lows. Bitcoin dropped more than 10% over the weekend, falling below $6,700, according to research site CoinDesk. The largest cryptocurrency has lost more than half its value this year, falling by nearly two thirds from its record high near $20,000 in December. Its low for the year came in February at less than $6,000. Other large cryptocurrencies like Ethereum, ripple and bitcoin cash have all fallen more than 11% over the past 24 hours. EOS, the token backed by startup which has raised more than $4 billion, is down 20%, according to research site

  • Ars Technica – Bitcoin has lost more than half its value since last year’s all-time high
    Amid fall, mining energy demand remains so high that Quebec utility halts new orders.

    On Sunday, the price of Bitcoin continued to fall, losing 5 to 6 percent of its value.
    According to CoinMarketCap, since an all-time high of near $20,000 per bitcoin on December 17, 2017, the cryptocurrency has lost more than half of its value, currently trading at around $7,200. Overall, Bitcoin’s price is up by about 150 percent compared with this same time last year, when it was trading around $2,800. Such fluctuations don’t seem to have stopped demand for setting up new mining operations, particularly in areas where electrical power is relatively inexpensive. Demand is so high in one part of Canada that Hydro-Québec, the province’s energy utility, recently said that it would “temporarily” stop accepting energy requests from cryptocurrency mining companies “so that the company can continue to fulfill its obligations to supply electricity to all of Québec.”

  • FT Alphaville — Who really owns bitcoin now?
    Long-term holders cashed out to short-term speculators, data show

    The Chainalysis data quantifies this distinct shift in the make-up of bitcoin owners from longer-term investors — those who held the asset for more than a year — to short-term investors who have traded more recently, by analysing how regularly coins have changed hands. Last November — before December’s pricing peak — the amount of bitcoin held for investment was roughly three times that held by traders. However, by April 2018, the data show the amount held by investors — about 6m bitcoin — was much closer to the amount held by short-term speculators, with 5.1m bitcoin. Indeed, Chainalysis estimates that longer-term holders sold at least $30bn worth of bitcoin to new speculators over the December to April period, with half of this movement taking place in December alone.


Bitcoin is back in the news for the wrong reasons. Where rising prices used to fuel positive media coverage in a positive feedback loop, both prices and interest in cryptocurrencies are falling in 2018. 


Cryptocurrencies have had a challenged year. Bitcoin is now -57% on the year, in the middle of the pack of top 6 cryptocurrencies by market cap. Ripple (XRP) has fared the worst, now down over 73% for the year. EOS, a platform for developing blockchain related applications, is the only cryptocurrency still in positive territory for the year. Even still, the relative new arrival fell over 22% in this downdraft. 



The broad decline in prices has seen the number of cryptocurrencies with market caps over $1 billion fall from 26 to 20 since March 1



A trend we noted on February 15th has persisted since then. The Japanese yen’s share of global Bitcoin volume continues to grow, reaching 80% of daily trading volume. This has happened primarily at the expense of the U.S. dollar which has seen its share of daily trading volume fall to just 13%. 



Search interest in cryptocurrencies has been falling along with prices. The last chart shows the percentage change in search interest for a handful of crypto related terms since the start of the year. The phenomenon that took Thanksgiving dinner conversations by storm likely wasn’t brought up at Memorial Day gatherings. 




News of another breach at a cryptocurrency exchange has Bitcoin retesting key April lows. The positive feedback loop where greater publicity fueled higher prices has reversed. Falling prices and negative news have seen search interest evaporate. The question is whether institutional interest from firms like Goldman Sachs and DRW will start to wane too. 

Posted in Samples

Wage Growth Forecasts are Tempering

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Wage growth expectations are tempering toward 2.8% year-over-year by the end of 2018. Slowing consumer search trends (Google) and difficulty for employers to find quality labor are helping keep a lid on improving wages.


Wage growth in the U.S. has been stuck in a trading range from 2.3% to 2.8% since the summer of 2016. Recent slowing in search trends (Google) for spending and credit are signaling wage growth will remain stuck near the upper end of this range through year-end. 

The chart below shows the six-month forecast for average hourly earnings (AHE) year-over-year in red at 2.83% by December 2018. We use search trends for 180 categories ranging from durables to music choices to determine the likely path of wages.



The percentage of metros with 3.0+% year-over-year wage growth exceeded 50% for the first time post-crisis in late 2016. But, this rebound was short-lived with the percentage pulling back to 44% through April 2018.



The map below shows wage growth year-over-year by metro represented as dots. Large blue dots indicate larger wage gains. The gray shading indicates expected population growth through 2023.

Many metros seeing wages losses to only modest gains reside in rural areas not expected to grow in population. Tech-heavy and energy dominant metros are more apt to see rising salaries and hourly wages.



The next map shows the popularity of job postings via Google search trends. We include major websites like ‘’ and ‘,’ along with general searches about how to make job postings. 

The larger orange dots indicate greater frequency of postings, which appear more prevalent in areas of stagnant to diminishing populations. 

The NFIB’s survey reveals 23% of small businesses are marking ‘quality of labor’ as the single most important issue. The all-time high was reached in May 2000 at 24%. Shifting population growth and changing needs by employers may be a major reason for depressed wage growth.


Posted in Charts of the Week, Samples

Another Run at Global Tightening

Central banks are making another abrupt run at tightening. The chart below shows rolling one-year changes in target rates across 50+ central banks (stacked). The thick black line indicates the total sum.


Posted in Charts of the Week, Samples

Fixed Income Returns Off To Bad Start In 2018

With U.S. yields on the rise in 2018, it should come as no surprise that much of the fixed income world has suffered on a return basis. The charts below compare current year-to-date returns to returns of previous years. The blue line in each chart denotes 2018 returns, while the gray lines show returns for previous years.

The Barclays Corporate Index is down 3.10% YTD, making 2018 the fourth worst year since the index began in 1974. Only 1984, 1994 and 1996 saw worst returns at this point in previous years.



The Barclays Financial Corporate Index is down 2.81% YTD. Only 1994 saw lower returns at this point in previous years.


The Barclays Baa Aggregate Index, the lowest level of investment grade, is down 3.17% YTD. Only 1994 and 1996 saw worst returns at this point in previous years.


The Barclays TIPS Index is down 0.79% YTD, making 2018 the third worst year on record. Only 2006 and 2013 posted bigger losses at this point in previous years.


Posted in Charts of the Week, Samples

Tough Road Back for Volatility Focused Funds

Even the stars of the volatility space have had a hard time coming back from the early February volatility spike that wiped some popular short volatility ETFs off the map. The chart below shows total assets in volatility focused ETFs have been roughly flat near $3 billion. Recent growth in leveraged long volatility ETF assets has been offset by steady net outflows from short volatility funds throughout May. 


Posted in Charts of the Week, Samples

Corporate Insiders Know When To Go Public

For anyone who has ever considered investing in an IPO, the data from Jay Ritter at the University of Florida may give reason for pause. The blue bars show how much the average IPO goes up from its offering price to its close after the first day of trading. The orange line shows how much those same stocks outperform/underperform the market in the ensuing 3 years (excluding the first day’s return).

IPOs are good if you can get in on the initial offering, but don’t expect outperformance in the years afterwards. The cynic may look at this chart and determine corporate insiders know exactly when to offload a company to the public.


Posted in Charts of the Week, Samples

High Yield ETF Volume and Flows Update

The blue line in the chart below shows the 50-day moving average of high yield bond volume currently stands at $7.44 billion.

The green line shows the 50-day value of all high-yield ETF trading. This totals about 30 ETFs with BlackRock’s iShares iBoxx High Yield Corporate Bond ETF (HYG) and Bloomberg Barclay’s High Yield Bond ETF (JNK) accounting for roughly two-thirds of this total.

The red line shows high yield ETF dollar volume as a percentage of underlying cash volume. ETFs now account for 25% of the volume of the cash market. This metric was essentially zero in 2008.



The chart below shows year-to-date flows into high yield ETFs.

  • The top panel (black) shows the Bloomberg high yield option-adjusted spread (OAS). It is plotted inversely to mimic price.
  • The second panel (blue) shows the cumulative flows into high yield ETFs.
  • The third panel (red) shows the change in assets since January 1 in all high yield ETFs.
  • The bottom panel (green) subtracts the cumulative flows (blue) from total assets (red) to show a running P&L for the year-to-date flows.

Posted in Charts of the Week, Samples

Investment Grade ETF Volume and Flows Update

The blue line in the chart below shows the 50-day moving average of investment grade bond volume. The green line shows investment grade bond ETF volume. The red line shows investment grade ETF volume as a percentage of the underlying cash market.



The chart below shows the year-to-date flows into investment grade ETFs.

  • The top panel (black) shows the Bloomberg investment grade option-adjusted spread (OAS). It is plotted inversely to mimic price.
  • The second panel (blue) shows the cumulative flows into investment grade ETFs.
  • The third panel (red) shows the change in assets since January 1 in all investment grade ETFs.
  • The bottom panel (green) subtracts the cumulative flows (blue) from total assets (red) to show a running P&L for the year-to-date flows.


Posted in Charts of the Week, Samples

Midterm Election Update

The following charts support the idea that the midterms are going to be a lot closer than conventional wisdom suggests.

Earlier this year, Nate Silver’s FiveThirtyEight blog looked at the generic Congressional ballot, in which voters are asked if they were more likely to vote for the Democrat or Republican candidate, without attaching a specific name to the question. Silver’s analysis concluded the Democrats need a 6% to 7% lead in this poll to win the majority in the House, a net pickup of 24 seats. To this end, FiveThirtyEight tracks these polls by weighting them and adjusting them for accuracy. The results of these adjustments are shown below.

The top panel of the chart below shows FiveThirtyEight’s adjusted generic ballot results. The green line in the bottom panel shows the difference (Democrat less Republican). Currently, this spread is at a 6.7% Democrat advantage. 

If FiveThirtyEight’s analysis is correct, it is going to be a late election night for those waiting on returns for a definitive answer on who controls the House.



This has not gone unnoticed by the bettors at While the Democrats (blue) are still trading above 50% odds to control the House, their lead over the Republicans (red) is narrowing and at its lowest level since early March.

We view betting markets as an aggregation of consensus opinion into one statistic. While bettors might not get it right (see Brexit and Trump in 2016), they tell us what is expected. For now, bettors think the Democrats will win the House, although their odds of doing so are dwindling.


The Senate is a different game. Of the 35 seats to be contested this fall, 26 are held by the Democrats while only nine are held by the Republican. This makes it difficult for the Democrats to become the majority as they have to hold 26 Senate seats and have just nine opportunities to pick up a Republican seat.
This is reflected in the betting at The red line in the chart below shows the odds Republicans hold the Senate according to bettors are at 74% and have been rising over the past month.


Finally, the chart below shows the 5-day average of Trump’s approval rating taken from all available reputable polls. It has been rallying since mid-December before pulling back slightly in the past week or two. Mid-December is when the tax bill passed.


Finding a relationship between politics and financial markets has been difficult since Trump’s inauguration. Instead, financial markets are justifiably more concerned with interest rates, earnings, inflation, monetary policy and real growth. If politics have played into markets, it has been the large rollback in regulations that have been seen as a positive.

There are several reasons markets may have put the November midterms on the back burner. One is that the election is still roughly 5 months away. Another is that they have largely been expected to fall to the Democrats. If the trends shown above continue to a meaningful degree, perhaps the markets will begin to take notice.