Since the financial markets are closed today, I thought we could get a jump on the Easter weekend reading list.
As I discussed earlier this week, the deterioration in both economic data and profitability data leave a good bit of cause for near-term concern. To wit:
"ROE is the amount of net income returned as a percentage of shareholders equity and measures a corporation's underlying health by revealing how much profit a company generates with the money shareholders have invested.
In other words, looking just at "profits" does not tell us much. However, ROE tells us much more about the underlying usage of those profits from reinvestment to the recycling of capital into dividends and share buybacks. The following chart shows the metric from 1949 through 2014."
"Historically, when there has been a plunge in corporate ROE, a recession has been on the horizon. This makes complete sense as, due to a continued slow growth economy, the expected return from invested capital has fallen to a level that deters corporate appetites.
It is worth noting that the reversion in ROE is occurring from the send highest level in post-WWII history."
I spilled a good bit of digital ink over the past week discussing various warning signs from economic data, to price momentum, to corporate profits.
However, the question the question that needs to be correctly answered is whether the current spate of slow growth is just an "ice patch," or did the economy "just lay an egg."(Okay, just a bit of an Easter pun intended.)
So, with that being said, let's get to our weekend reading list.
1) Is The U.S. Economy Coming Out Of An Ice Patch by Dr. Ed Yardeni via Dr. Ed's Blog
"I argued that the economy’s weakness during the first two months of the year reflected an ice patch rather than a soft patch. There are still grounds for optimism as the ground thaws. However, the latest data suggest that it could be a cold spring."
Read Also: U.S. Economy Contracts 4th Month In A Row by Ironman via Political Calculations
2) Recessionary Level In Credit Conditions by Alexander Giryavets via Advisor Perspectives
"'The CMI is created from a monthly survey of U.S. credit and collections professionals. The survey asks participants to rate whether factors in their monthly business cycle — such as sales, new credit applications, accounts placed for collections, dollar amount beyond terms — are higher than, lower than, or same as the previous month. The results reflect the entire cycle of commercial business transactions, providing an accurate, predictive benchmarking tool.'
It is indeed an excellent leading indicator which is not revised and which predicted both the start of the GFC at the end of 2007 and subsequently early recovery exactly at the end of February 2009. Below is the combined (Manufacturing + Service) index."
"
Read Also: U.S. Economy Slows To Stall Speed by Charles Hugh Smith via OfTwoMinds
3) Stealthy Government Debt Liquidation! by Wesley R. Gray, Ph.D. via Alpha Architect
"How governments liquidate their debt is the central topic of this paper, and one that promises to be very relevant to investors and society as a whole going forward. Check out the graph below and focus on 2011--certainly looks like some debt needs to be liquidated based on historical precedent...fast forward 4 years and the situation is even worse!
If we know we are facing a debt liquidation episode, it would make sense to understand how the government will address the issue, and position our portfolios to maximize profit (or in this case, minimize damage!)
To tackle this macroeconomic question, the authors outline the methods that governments have historically used to monetize debt (we are focusing on domestically-held debt here):
- Grow out of the problem--Economic growth
- Tough love--fiscal adjustment/austerity
- Give up--default or restructuring
- Inflate away--sudden surprise burst of inflation
- Stealth liquidation--steady financial repression (impose regulations and incentives that make debt artificially attractive) and steady inflation"
But Also Read: The Fed's Big Problem: "Derisking A Bull Market by Ben Hunt of Salient Partners via ZeroHedge
4) Why Are Interest Rates So Low (Part 3) - The Global Savings Glut by Dr. Ben Bernanke via Brookings Institute
"There is some similarity between the global saving glut and secular stagnation ideas: Both posit an excess of desired saving over desired capital investment at “normal” interest rates, implying substantial downward pressure on market rates. Both can account for slower US growth: Secular stagnation works through reduced domestic investment and consumption, the global savings glut through weaker exports and a larger trade deficit. However, there are important differences as well. As I’ve mentioned, the savings glut hypothesis takes a global perspective while the secular stagnation approach is usually applied to individual countries or regions. A second difference is that stagnationists tend to attribute weakness in capital investment to fundamental factors, like slow population growth, the low capital needs of many new industries, and the declining relative price of capital. In contrast, with a few exceptions, the savings glut hypothesis attributes the excess of desired saving over desired investment to government policy decisions, such as the concerted efforts of the Asian EMEs to reduce borrowing and build international reserves after the Asian financial crisis of the late 1990s."
Read Also: Bernanke's Misguided Global Savings Glut Hypothesis by Cullen Roche via Pragmatic Capitalist
5) This Stock Market Is An Enigma by Anora Mahmudova via MarketWatch
"'This stock market is an enigma. Short-run forecasts are very difficult. But analyzing historical data taking into account cyclical adjustment, we can calculate long-term returns," Shiller said, referring to the Cyclically Adjusted Price-to-Earnings ratio. The CAPE ratio is the ratio of the S&P 500 index to trailing 10-year average earnings, and to some, including Shiller, it has been signaling that stocks are overvalued.
And even despite these lofty levels in stocks, Shiller sees reasons why the market could still stumble higher.
"When CAPE was this high (at nearly 28), 10-year returns on the S&P 500 are nearly flat, because inevitably there is a major correction."
Read Also: Martin Feldstein's Sadistic Monetary Mysticism by Louis Woodhill via Real Clear Markets
MUST READ: The Causes Of Economic Stagnation And The Way Forward
by Dr. John Hussman via Hussman Funds
"What raises both real wages and employment simultaneously is economic policy that focuses on productive investment – both public and private; on education; on incentivizing local investment and employment and discouraging outsourcing that hollows out middle class jobs in preference for cheap foreign labor; on international economic accords that harmonize corporate taxes, discourage corporate tax dodging and beggar-thy-neighbor monetary policies, and provide for offsetting penalties, import tariffs and export subsidies when those accords are violated. What our nation needs most is to adopt fiscal policies that direct our seed corn to productive soil, and to reject increasingly arbitrary monetary policies that encourage the nation to focus on what is paper instead of what is real."
