Tuesday, November 3, 2020

The outlook for growth continues to improve

On the eve of our historic election, here's a collection of charts with the latest data and some brief commentary:

Chart #1

Chart #1 compares the US ISM manufacturing survey with that of the Europe. Conditions in both areas have improved dramatically in the past several months, but the US outlook is even brighter—almost as strong as it was a few years ago.

Chart #2

Chart #2 shows strong improvement in export orders for US manufacturers. This is a good sign that the global economic outlook is improving.

Chart #3

Chart #3 tells us there has been a much, much-needed improvement in manufacturers' outlook for new hiring. That also implies a new willingness to invest and expand operations.

Chart #4

Chart #4 shows that a majority of manufacturing firms are seeing price increases in the things they buy. This confirms that monetary policy is accommodative, and at the very least it means that liquidity is abundant. The Fed poses no threat to the outlook for improved growth.

Chart #5

Chart #5 compares the ratio of copper to gold prices (blue) to the level of 10-yr Treasury yields (red). Both appear to have bottomed out; that in turn is strongly suggestive of a nascent rebound in growth expectations both in the US and around the world. 10-yr Treasury yields today reached 0.9%, which is their highest post-Covid level. Yields are still extremely low from an historical perspective, which is consistent with their being still a lot of risk aversion priced into the market (i.e., people are still willing to pay extremely high prices for the safety of Treasuries). Optimism is returning, but only by a little.

Chart #6

As Chart #6 shows, the PE ratio of the S&P 500 Index is quite high (a bit over 26 as I write this). Does this mean the market is over-valued and primed for a crash? Not necessarily. The market understands that corporate profits have plenty of room to grow, being still depressed after the huge Covid-induced economic crash we are still recovering from, so an elevated PE ratio today only means that the market is pricing in an increase in future corporate profits. Today, the market expects profits (EPS) over the next year to grow by about 8% from current levels; that would leave next year's earnings per share about 12% higher than they were last year. 

Chart #7

Stocks don't exist in a vacuum, however. Investors have a choice between the expected returns on stocks or the guaranteed returns on Treasury bonds. The higher the price one pays for a security, the lower the expected return. Today, Treasuries (and their close cousin cash) are trading at very high prices historically, though they have dropped a bit of late. 

Cash is more "expensive" to own than every before: it yields either zero if held in the form of currency or in some savings deposits, and a minuscule 0.09% if held in the form of ultra-safe and extremely liquid T-bills. Meanwhile, inflation is running at least 1.5% per year. So the real return on cash is negative: holding cash implies losing about 1.5% of your purchasing power every year.

Holding cash is a losing strategy, and even holding 10-yr Treasuries (0.9% yield) is a loser in terms of purchasing power. But stocks have an earnings yield (the inverse of their PE ratio, which is the dividend yield an investor would receive if companies paid out all their earnings in the form of dividends) of about 3.8%. That represents a "risk premium" over 10-yr Treasuries of almost 2%. As Chart #7 shows, stocks today are not at all expensive relative to Treasuries (e.g., when the risk premium is negative, they are expensive). The reason stocks are "cheap" relative to Treasuries can be easily explained by the prevailing preference among investors to pay up for safety. Risk aversion is alive and well.

Chart #8

Chart #8 shows Credit Default Swap spreads, which is a measure of the cost of hedging oneself against the risk that corporate bonds default. That cost today is pretty low from an historical perspective, which means the market—despite the prevailing mood of risk aversion which makes stocks relative cheap—is fairly confident in the outlook for corporate profits and, by inference, for the health of the economy. It also indicates that liquidity is plentiful.

Chart #9

Chart #9 sums it all up. The Vix (fear) index is still quite elevated, and the stock market is trading today at about the same level as before the Covid crisis struck. The stock market is priced to some bad news (according to the Vix index), so it is not necessarily vulnerable to a negative news shock.

And with that I'm going to sit back and watch the election returns. Biden has been leading strongly in the polls until recently, and now it's possible Trump could snatch a victory from the impending jaws of defeat. It's going to be a wild ride no matter what. My fingers are crossed for Trump, mainly because I am sure his policies would be much more likely to deliver a prosperous economy than Biden's.


Benjamin Cole said...

A refreshing breath of objectivity, and yes, some optimism courtesy of Scott Grannis. All good, I say.

One minor observation: the recent Ant IPO in Shanghai attracted more than $2 trillion of bids, and that was only from retail investors. That's trillion with a "t."

"Yields are still extremely low from an historical perspective, which is consistent with their being still a lot of risk aversion priced into the market (i.e., people are still willing to pay extremely high prices for the safety of Treasuries)."--Scott Grannis.

Well, I suppose everything is relative, but on the other hand it strikes me there is a global capital glut. Negative yields on bunds and the Ant IPO....

The world has gotten richer in the last 50 years, meaning many more (billions) people are not living hand-to-mouth but can set aside some portion of income as savings. In other countries, such as communist China, there is repressed consumption or forced savings.

On some levels this is positive---I know of no good idea that cannot attract lots of venture capital enroute to an IPO or other exit. Every industry is surfeited with capacity.

Could be some dicey moments for investors out there. Perhaps some assets become overpriced, and capital is no longer scarce. He who has the gold rules....but there's a lot of people with gold right now.

Good luck everybody.

Frozen in the North said...


The Ant IPO has been shelved!

Politics seems trumps economics in China (no surprise there). Apparently, the Chinese banks are starting to realize the Fintech are eating their lunch

Tom L said...

Thanks again Scott for your objective analysis - much appreciated.

Johnny Bee Dawg said...

Well, the threatened "Blue Wave" fizzled out and Checks & Balances prevailed.

With PUBs keeping the Senate & gaining seats in the House, President Harris' threatened tax hikes and other loony Green New Deals will not occur in this cycle. Polls were wrong. Profits are safe. With a Biden win, the DEM Governors will magically end their virus clamp-downs, and open up their states. The fastest recovery in US history will continue, but at a more tepid pace, and Joe will take all the credit.

Last night's crash in the yuan as Biden was losing calmed down after DEM swing states found thousands of ballots in the middle of the night. Wisconsin ended up with 130,000 more votes than registered voters. Michigan found a cache of 128,000 votes overnight...ALL for China Joe. The Swamp rejoiced. When Trump spoke at 2am, main stream media cut off the POTUS. Andrea Mitchell announced that viewers would not be "allowed" to hear the President of the United States speak, because he was spreading false news about voter fraud and ballot harvesting. Twitter and Facebook censored him.

With Trump out of the way, the crashing yuan recovered, and China stocks soared today. China will likely be the biggest winner of a Biden/Harris Presidency. Materials and Industrial stocks plummeted, since China will go back to eating our lunch there. Vulcan, Martin Marietta, US Steel, Caterpillar all plummeted 6%-9% today as Big Tech soared. Biden will take the USA back to business as usual with China. S&P 500 stocks surged as jobs & manufacturing can once again be offshored for cheaper wages. Health Care soared as the return of lucrative government mandates await.

Big Tech proved they really CAN control the narrative thru data mining, censorship, shadow banning, etc. They showed their power in boldly censoring the President of the United States with impunity. The election proved the benefits of using powerful Tech companies to control messaging, and spread propaganda. Google employees pledged in 2016 they would use their company resources to make sure we never have another Trump. And they did! Bravo! They demonstrated their ability to deliver one set of news to one group, while delivering a different set of news to a different group...and keep them all separate. They censored speech during this election just like they do under contract for the Chinese Communist government. There will be no Big Tech reforms under Biden/Harris. Up, up, up!

There are millions of voters who never even heard about Hunter's laptop or about the Biden family millions of payments from China, Russia, Ukraine, Iraq, Luxembourg, etc. Mission accomplished. The 2020 election put Big Tech's full capabilities on full display. Imagine what a powerful tool they can be for governments, corporations, and candidates to control and manipulate their constituencies for the next several generations. God Bless the Narrative. It was like a showcase demonstration of totalitarian tools.

This afternoon, election officials in Detroit kicked out the PUB observers during the vote count, and covered the windows as they found enough votes to push Uncle Joe on through. Seems legit. PUB Swampers went on TV, one by one, to encourage the President to give up, ignore the election violations, and "lose with dignity."

The time of Governing by Hate is over, Uncle Joe told us this afternoon. Joe explained what a "remarkable achievement" he engineered to win over this nation. It was remarkable, indeed, as he used all the forces of the media, social media, Hollywood, government bureaucracies, FBI, and Vote Counters to his full advantage to climb to power.

President Kamala will truly make us free now that the Orange Tyrant is gone, and he can no longer oppress us with his wicked tax cuts and reductions of government power. I feel like I just marched thru Selma. Free at last. Brave New World.

Benjamin Cole said...

Frozen: The Ant Group IPO situation is a shocker.

On many levels, Beijing has grown increasingly repressive and truculent for decades.

Making predictions is hard, especially about the future.

How markets, US capitalists and Beijing will coexist in the future will be an interesting story to watch.

The elites have "Beijing Joe" Biden at bat. Stay tuned.

Fred said...

Wife and two daughters voted for Biden because they couldn’t stand Trump notwithstanding my best advocacy for why that was a bad choice. Maybe this will be a repeat of 1976 and we will have a resurgence in 2024.

Regina said...

Bravo Johnny Bee Dawg.
You have provided a really fantastic summation.
It's a big win for GlobalFascism and Klaus' dream come true.

The Cliff Claven of Finance said...

"Wisconsin ended up with 130,000 more votes than registered voters."N
MOT TRUE, Deputy Dawg.

About 87% of registered Wisconsin voters, as of November 1, voted on November 3.

That percentage is suspiciously high ... but ... additional people registered on November 2 and November 3, and voted on November 3.

So the actual percentage of Wisconsin registered voters who voted, including those registered by November 3, would be less than 87%.

I blame what appears to be Trump's loss on the COVID recession, which should have derailed any incumbent President.

Trump added to that problem with his frequent interruptions in the first debate, which turned off a large percentage of women watching. The much better performance in the second debate was too late to reverse the losses.

Of course the five years of the mainstream media demonizing Trump, and 2020 election fraud, would have sunk any other Republican candidate -- it's amazing how close the election was (I assume Biden winning, since it's almost impossible to prove fraud with mail in ballots, unless you have huge teams of handwriting expert working for months).

I tried to inform people about the Biden Crime Family with about six articles in my politics blog, starting summer 2019. But with the mainstream media acting like PRAVDA, claiming that real Biden family criminal activity was just a made up political smear, it was a losing battle to educate people.

My articles about the Bidens,and the election circus, are here:


XXXXXXX Wait a minute XXXXX
I just found 125,000 ballots here in Michigan, at a garbage dump, all for Trump -- I better get them to the MI officials right away !

wkevinw said...

Johnny B and Fred- I think you are correct.

I am hoping that Biden ends up being like Carter. However, that means a lot of pain over the next four years. Maybe that is what is needed.

As I have said: about 80% of the innovation in the fields of "technology" and medicine come from the US. I have close family who have better lives and have been saved by this. If we go the way of Europe (also a rich region, but very different from the USA), those advances will basically cease.

I was born into a vigorous, free-market USA. I fear I am handing over a stagnating, socialized/Europeanized version.

Fred said...

Hopefully Georgia holds its two Republican senators. I am surprised that Biden will win here and also that Perdue didn’t beat Ossoff be more than 50% an empty suit trust fund baby who’s never had to work a day in his life vs a smart businessman who’s created thousands of jobs over his lifetime. How in the world did Biden outperform Barack Obama who lost to Romney in 2012 in Georgia? Lots of anomalies but maybe it’s just demographic changes that explain where we are in this previously reliable Red state.

Adam said...

JBD, plse continue your musings. They are very insightfull and clear. Good luck.

fatcat said...

Re: The p/e on the S&P500 at 26 is skewed up because of the famous fangs. There are still many cheap stocks under the surface in financials, cyclicals and the most hated energy sector. The rotation here depends on a stimulus package to get over the hump and an effective vaccine booster. Time will tell.

Adam said...

Vaccine should ease the fear factor, money demand should ease, and rates should go up. At the same time the economy should gradually recover pushing up EPS's and indices.