Thursday, September 29, 2016

Global activity reviving

From the "where there's smoke there's likely fire" department: Non-energy commodity prices are up 30% year to date, Caterpillar stock is up over 50% from its January lows, and global equity prices—as well as the S&P 500—are up almost 20% from their February lows. Something's happening out there, and it looks promising. Most likely, global economic activity is picking up, and cheaper (and more stable recently) oil prices could be the reason. 

The chart above compares the CRB Metals index (copper scrap, lead scrap, steel scrap, zinc and tin) to the price of Caterpillar stock. Both have traditionally moved together, and the past year or so is no exception. Global mining activity looks to be picking up, and so it's a good bet that global activity in general is on the mend. This supports my forecast over the past six months that we are likely to see some stronger GDP numbers for the second half of this year. It's nothing to write home about yet, but any improvement from the 1.1% annualized growth rate of the first half (which includes today's modest upward revision to second quarter growth) is certainly welcome.

The chart above shows a longer-term view of metals prices. They do tend to soften during periods of economic weakness, and they do tend to rebound as activity recovers.

The chart above compares the level of US stock prices to the ratio of the 10-yr Treasury yield to the Vix index (which ends up being a proxy for the market's nervousness and confidence in the outlook for growth—a higher number reflecting more nerves and less confidence, and a lower number reflecting less nerves and more confidence). In the past year the market has overcome fears related to collapsing oil prices and the British decision to exit the European Union. It now feels like we're in a holding period, in which activity has recovered somewhat from a fear-induced slump, but nothing is going gangbusters yet. 

If there is to be any meaningful surge in activity on the horizon, it will likely require a satisfying and confidence-building resolution to the US elections which are coming up in just over 5 weeks. I think that, in turn, would require a Trump victory, since he would almost certainly work with Congress to reduce tax and regulatory burdens. If nothing else, a significant reduction in the corporate income tax rate could unleash a tidal wave of profits repatriation and a subsequent surge in corporate investment.

At the very least, there is reason to remain optimistic.


PerformanceSpeaksForItself said...

Scott, for those of us that don't have a Bloomberg Terminal, would you mind giving an update on EUR swap spreads? And what do you make of Bloomberg's report on Deutsche Bank's clients beginning to withdraw funds?

marcusbalbus said...

we demand more qe

Scott Grannis said...

Re: DB. 2-yr Euro swap spreads are up a bit from "normal" levels (currently 46 bps vs 25-35)), suggesting a modest risk of a possible DB failure creating havoc in European markets. But spreads are still far below levels that we've seen in prior crises. DB credit default swap spreads are elevated, but not at panic levels. As in the US, bank liquidity conditions are generally good, thanks to plenty of QE and excess reserves. It's impossible to rule out a big DB-related problem, but so far key indicators are only modestly into worrisome territory. I don't hold myself out as an expert on European market conditions, however.

Benjamin Cole said...

Seems to me the Fed is holding interest rates artificially...high.

Short-term Treasuries are yielding less than the Fed-dictated interest on excess reserves of 0.50%

The Fed is too tight and the de facto central bank for about 40% of the global economy.

I loath the political leadership of mainland China. But they have their own central bank and have been growing at 6% to 8% annually since 2008 while the Western world inched along.

Structural impediments? China is worse than the US in that regard.

But they have a better central bank.

Grechster said...

Benjamin, you are right! The very fact that the Fed has to pay IOER in order to maintain the low-end boundary of the targeting FF rate is proof positive that they're too tight. It also greatly reduces the risk that inflation will spike to the upside.

Much work has been done that suggests the Fed has been and continues to be chronically too tight by a little bit. This viewpoint also has added credibility in that it would make virtually everybody wrong in their assessment of the Fed.

Fun times!

Benjamin Cole said...

Matt: if you went long on bonds starting in the early 1980s, you have made piles and piles of money. For 30 years we have heard talk about impending doom from higher inflation and higher interest rates. Instead we hit zero lower bound---sorry we did not hit zero lower bound we went to negative interest rates, and deflation over much of the developed world.

The Fed is too loose!

Unknown said...

If Trump wins I hope you've dumped all of your AAPL shares. And for the sake of peace, not effing up the environment more and women's rights I hope the piece of sh!t gets destroyed come election time

steve said...

Tyler, I don't think you have anything to worry about. DT is imploding. I have never and still don't think he wants the job. He wants the LIMELIGHT. If nothing else, this election should emphasize how deeply flawed our selection process is. Truly, is this the BEST of America? I was going to vote for GJ but he can't even answer simple foreign policy questions! I guess I'll just abstain on the POTUS and vote GOP across the board for all others. That way, Hillary can't get her way on her liberal bigger government failed policy.

Oh and btw, Obama's claim to fame, the ACA is literally imploding with health insurance companies bailing out left and right OR raising premiums egregious amounts to stay profitable. Clearly, it is untenable. Seriously, WTF?

honestcreditguy said...

Obama's ACA pet project is a joke....I paid less as a sole proprietor LLC 8 years ago than I pay now at 200 plus employee company.....Middle class inflation....

Bill said...

From a sole proprietor to a 200+ employee company in 8 years that The Bg O has been POTUS....and you're still whining? Shame on you!

Bill said...

It took reading only 1 post to confirm what I assumed...your support of Trump no matter what. You're nothing if not sadly predictable and are now supporting a crazy man who'll harm your financial interests and those of your followers, to say nothing of the havoc he'll wreak on the nation. Fortunately, he's melting down and soon will be a mere footnote in our nation's history, beaten by a superior candidate with superior ideas.

J said...

Tyler. So fiery yet wrong on every point. Actually if trump wins you best be Long apple soick as that will be the biggest beneficiary of his repatriation plan..which is long overdue. Cutting the rate from 35% to anything lower will be a boon for all companies with massive cash hoards overseas. . The market hasn't factored that in yet as well as cutting income taxes and regulation that has impeded confidence. Next up .. For the sAke of peace....hmm interesting when you look at the middle east which couldn't get any worse then it is today. Blood shed, Isis, vacuums, cubic wars. All horrible policy blunders from o & h. And when it comes to Russia that reset button might have been the off switch instead. We couldn't be more at odds with Russia and the world has become a far less safer place under Obama and Hillary. Russia invaded Ukraine and we do nothing, they invade Syria and the civil war gets worse. You need to get real What you write. Lastly, woman rights much of it has been pushed by the media as Hillary herself talks out of both sides of her mouth as she Impugnes lewinskyy, flowers, Wiley and others. Stand with woman who gave been sexually assaulted unless it was with my husband. Let's be clear they both have negative issues....I just happen to think his policies are better and it's time for a major change to business as usual.

Hans said...

Bill, really, it is time to stop watching the Cartoon Network.

Your candidate has been a government unit employee all of her life,
producing little of nothing.

Those whom support Rotham care little about morals or any sense of
decency. Her and her husband are only devoted to their lust for power
and women.

The FBI is now the CBI.

Hans said...

"At the very least, there is reason to remain optimistic."

All too many of the charts shown hear simply miss the point
as they are in the main temporal.

Examine this long-term chart from Bloombag. Is there a frightful
trend which has lasted over some FIVE DECADES and not few trivial

I have mentioned this before with no comments from the peanut gallery.

If Rotham is elected look for this trend to accelerate.

2 percent growth will become the new poverty norm.

amritsari said...

You are willing to throw all principal's over board for the sake of a tax cut ?? Trump is really your poster boy for a good presidential candidate ? Amazing. You realize your written support will be preserved in internet history forever ?

Even the tax cut is debatable since in the same sentence he promises to spend lavishly on the military and all sorts of government programs. I guess you don't notice the logical inconsistencies.

J said...

Amritsari...lim assuming you are voting for Hillary and therefore she is your poster girl for a good presidential candidate ? Is she of high moral standing? Worthy of your vote! You think her policies of higher taxes and more regulation on businesses will help grow the economy and unleash the animal spirits? I guess you sir don't notice your own logical inconsistencies. Policies do

Benjamin Cole said...


Here is a comment from the peanut gallery: I worry about declining economic growth too!

amritsari said...

J - Trump just killed his candidacy so it doesn't matter who I vote for. But Hilllary is better than Trump. At least you know what she plans to do. With Trump you wouldn't have known. As you know markets hate uncertainty. And don't worry, America did wonderfully under much higher tax rates in the 50's and 60's. Isn't that when Buffet started out to build his forture ? A little more tax than now is not going to hurt me or the economy. Buffet says he cares zero about taxes when deciding about investments.

As for regulations, the wells fargo case shows that regulations are very necessary. I'm sick and tired of zero accountability in the c-suite.

amritsari said...

People supporting Trump should have thought of the old saying - "if you lie down with the devil, you will wake up in hell". Good luck un-pretzeling your support !

Ros said...

Scott, will appreciate your comments on this:

J said...

"at least you know what she plans to do". Actually that isn't true....Maybe u didn't read the wiki leaks files came out where she said many Things about policies u say in public and what you say in private...among many other things that will also play very negative for her. I guess you only read what you like to read... Maybe thee things don't affect you. But they should be. Clearly his comments are not acceptable and will damage things for him as they should. He should apologize. But what is amazing is the free pass you give Hilary, her husband and others around her. When bill left the office thy had to get a loan from the now governor of va to buy a 2mm home. No they are worth 150mm access...self dealing. I mean I won't list all cause I don't have time. But as far as regulations, do you think thatyou are going to regulate out bad characters or events? Is too much regulation ever a bad thing.? In fact on a % basis there are more flawed characters in our government then business and the c suite. On the grilling of stumpf there was bob Menendez who was indicted on 15 counts of bribery, David vittner from lousiana was involved In a prostitution bust. ... The list goes on. cutting back regulation doesn't mean getting rid of it.....unshackling businesses, cutting red tape, making it easier to business, that is the meaning of cutting back regulation

William said...

1987, Ronald Reagan on Gary Hart:

"Boys will be boys. But boys will not be President."

Unknown said...
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Unknown said...
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Hans said...

Well said, Dr J!!

If Rotham is elected, it tells me that moral
depravity has reached a new high; just like the
markets and the Crank Bank.

Yes, sir, for the left it is nothing more than
dogma verse the truth.

The Donald should have mentioned the latest Illary leak
that she has little in common with the MC. Whom would have

Ben Jamin, be assured that if Mrs MaoSuit becomes the
prez, the growth rate will be worse than under Barrocko.

There will also be another million Muslame votes for the

Goodbye to this ONCE great republic; soon to be just another
Socialist cesspool.

Scott Grannis said...

Ros: Demographics certainly plays a role in today's weak recovery, but it doesn't explain more than a small part of the problem. The main problem is a lack of business investment, which results in very feeble gains in worker productivity. Economic progress and rising living standards depend crucially on meaningful gains in productivity. The past 7-8 years have suffered from very weak growth in productivity, as I have pointed out in several posts.

I'll stipulate that demographics has resulted in an unusually tepid growth in the workforce (i.e., 1% instead of 2% per year). But if productivity had been running at historically average rates (2-3%), we would have seen economic growth rates of 3% or more.

Productivity is the problem, and it's because of weak business investment, which in turn owes much to the prevalence of risk aversion, high tax and regulatory burdens, and uncertainty over the future.

steve said...

"If Rotham is elected, it tells me that moral
depravity has reached a new high; just like the
markets and the Crank Bank".

I am no Hillary fan but to suggest that Trump is morally superior to Hillary is really pushing credulity to its limits. What we HAVE reached is a new low in presidential candidate timber or "fitness" to use the preferred buzzword. Neither is fit but then was (is) Obama when elected?

amritsari said...

Need for regulations and anti-trust. You CANNOT trust the titans of industry. e.g.

"Indeed, government investigators had uncovered documents showing airline executives crowing about how mergers allow them to charge travelers more. “Three successful fare increases – [we were] able to pass along to customers because of consolidation,” wrote Scott Kirby, who became the president of the new American Airlines, in a 2010 internal company presentation."

Hans said...

Steve, neither of the two were my first nor second choice.

How many times in our lives are we face with an option to
choose only between bad or worse (badder).

Rotham, would represent moral bankruptcy at it's fine's hour;
even worse than the current ruler.

America will survive a single term or even two but it will bring
us closer to 2035 or less and impending economic disaster.

The latest and to join the crisis roster are unfunded public
"employees" retirement pensions, now exceeding $1.2 TRILLION!

Hear are twenty-seven economic charts dat matter.

steve said...

I know I'm stuck on this political bent and it's technically NOT financial BUT there is a damn good chance that the dark side (left) could take control of congress now that DT has predictably not only imploded but is hell bent on taking the GOP down with him. I cannot fathom a worse case of impending economic and market doom. Much higher taxes, government spending and intervention would be dreadful. Think regulation is high now? Just wait until these whack jobs start spending money on "climate control".
Rates are creeping higher and the market looks vulnerable. To quote my wife, "it's mattress time"!

(I'm talking about money here guys).

randy said...

Steve, I agree with you. Douthat on NYT has a pretty good take on GOPs choices on Trump today - basically they tried to manage it to avoid larger pain, but it was unavoidable and they should have just made a principled stand from the beginning. What he doesn't say (but has in other columns) is that the GOP created the framework for this mess by making it's pillars the religious right and the financial elite, and giving only a whiff of lip service to valid anxieties of the middle class. I'm optimistic the GOP will retain control of the legislature. I'm now less optimistic that a more positive governing mission will come out of this mess though.

Hans said...

"Real" GDI and especially GPDI (since 1984)
are collapsing.

Excellent series of charts.

marcusbalbus said...

we demand more qe