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In a world of fragile economic growth where the risk of recession has increased, investors are now convinced that the central banks (CB), led by the Fed, have their backs because they are considered "buyers of last resort". "Note that the Fed, whose legislative mandates are low unemployment and stable prices, has turned into a savior role of the stock markets from the Greenspan era and that has evolved from continuously. & Nbsp;
The world is deflationary because technology and demographics have produced excess capacity. & Nbsp; Until recently, central banks, led by the Fed, had the task of "normalizing" interest rates and, in the case of the Fed, its balance sheet. & Nbsp; But now that this mission has been canceled and that the Fed and other OCs have opted for the "Easy" button. & Nbsp; Because equity investors believe that OCs will be successful and / or buy badets if prices fall, stocks prices continue to rise. & nbsp; In contrast, bond investors uncovered the problem of deflation and pushed bond yields down (higher prices), forcing central banks to follow them.
Because CBs are now the "last resort buyers", they can never sell, because if they do, everyone will sell. & Nbsp; What a disaster it would be! & Nbsp; It's hard to believe, but we're seemingly stuck with $ 13.5 billion in debt with negative returns. & nbsp; In this strange world, here are some examples of 10-year yields of high quality borrowers:
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Germany: -0.40%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; France: -0.14%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Sweden: -0.12%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Switzerland: -0.74%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Netherlands: -0.27%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Japan: -0.16%
Now, look at this anomaly – a debt of less than 10 years quality with lower returns than a higher quality:
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; US Treasury (AAA): 2.05%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Greece (B +): 1.96%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Spain (A-): 0.31%
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Portugal (BBB): 0.38%
If the CBs were in sales mode, which investor, in his mind, would have a negative return? & Nbsp; There would be no buyer! & Nbsp; And who, even on the current market, would like to possess Greek, Spanish or Portuguese debt, when a higher-quality yield offers a much higher return. & Nbsp; The only ones that are available are those that must legally or by regulation, as well as the European Central Bank. & Nbsp; (Note that the Bank of Japan, too, has a significant portion of the overall Japanese economy!)
In this confused landscape, the "intrinsic value" does not exist. & Nbsp; To play in the stock market today, we must keep up the momentum and hope that if there is even an exit signal, we will be smart enough and bold enough to follow it.
GDP
The real GDP growth rate for the second quarter (+ 2.1%) was slightly higher than market expectations and, at first glance, played on the theme "The economy is strong". & Nbsp; However, its disaggregation into components reveals another story:
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Public spending jumped 5% a year, the largest increase since the second quarter of 2009, when the economy was in crisis;
& Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Real consumer spending grew by 4.3% a year on average, but this is partly due to a savings rate reduction of -0.4%. points and by significant additions to outstanding credit;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; The rest of the economy, mostly on the corporate side (capital expenditures, construction, housing, inventory, net exports) is contracted at a rate of -12%. & Nbsp; In the normal course of business, contraction of trade is followed by rising unemployment and then by the withdrawal of consumers;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Finally, something that no one talks about, there have been significant downward revisions to GDP in 2018: Q2: 3.5% vs. 4.2%; Q3: 2.9% vs. 3.4%; Q4: 1.1% vs. 2.2%, and corporate earnings for 2017 and 2018. & nbsp;
Other information
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; This is the Wall Street game: lower expectations, most businesses "beat". & Nbsp; And that's what's happening right now. & Nbsp; Nevertheless, compared with the previous year, earnings growth in the second quarter will be lower by about -2.5%;
& Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Despite falling mortgage rates, the housing market remains disappointing. & Nbsp; New home sales increased slightly in June (646,000 in annualized value compared to 604 in May – the consensus was 658,000 in value). Purchases accounted for 34% of these sales. & nbsp; The specifications are the big buyers who want rental housing (millennium issue);
& Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; The Cbad Freight index was -3.8% in June compared to May and -5.3% from the previous year, with consecutive declines for seven consecutive months. & Nbsp; Until June 30, railway carloads are down -2.9%;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; German manufacturing PMI: 43.1; France: 49.9; the euro zone: 46.4 (negative for six consecutive months and the lowest since 12/12);
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; A real Brexit seems likely now that Boris Johnson is the British prime minister;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; U.S. Manufacturing PMI: 50.0 July (vs. 49.981 third decimal place indicating contraction) vs. 50.6 (consensus 51.0). & nbsp; This is the lowest impression since 9/09; production, employment and arrears are all in contraction;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; U.S. Imports decreased by -0.9% in June compared with May and exports decreased by -0.7%; import prices fell -2.0% from the previous year and export prices fell -1.6%;
& Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Average weekly earnings adjusted for real inflation fell at an annual rate of -1% in Q2, its first decline since Q2 / 11; this will have consequences for consumption in the third quarter and beyond;
· & Nbsp; & nbsp; & nbsp; & nbsp; & nbsp; Leading OECD indicators have been falling for 17 months.
conclusions
Growth in the world and in trade has slowed considerably, to the point of being near recession in some parts of the world. & Nbsp; China, for example, has recorded its lowest growth rate in the second quarter (since 1992), and that is via "official" data. & nbsp; Singapore's GDP was very negative and So. Korea seems soft. & Nbsp; Forecasts of economic growth in Mexico and Brazil have been stifled considerably by the IMF. & Nbsp; Then there is the uncertainty of what a tough Brexit is going to do in the UK and the EU, some of which seems to be in recession. & nbsp; In the United States, second-quarter GDP was weaker than the first quarter, but above or below expectations.
Investors need to be worried about growth, as a further weakening is likely to drive the recession back, especially given the weakness of the global economy and downward revisions to US GDP. 2018, with overall growth more sluggish and profitability much lower than initially announced. & Nbsp; Simultaneous declines in exports, housing, and business spending rarely occur outside the context of a recession. & nbsp; Income is the determining factor, and on this point, the news is not good, because the average real wages of the houses do not increase much. & nbsp; Europe is currently in recession and it seems that American manufacturing is also in recession. & nbsp;
It should be worrying to see that if the American consumer stagnates, the recession will certainly follow. & Nbsp; In the meantime, investors continue to believe that CBs, who have badumed the role of last-resort buyers, have their backs.
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In a world of fragile economic growth where the risk of recession has increased, investors are now convinced that central banks (CB), led by the Fed, have their backs because they are considered "buyers of last resort". "Note that the Fed, whose legislative mandates are low unemployment and stable prices, has turned into a savior role of the stock markets from the Greenspan era.
The world is deflationary because technology and demographics have produced excess capacity. Until recently, the OCs, led by the Fed, had the mission to "normalize" interest rates and, in the case of the Fed, its balance sheet. But now, this mission has been abandoned and the Fed and other partner countries have moved to the "easy" button. Because equity investors believe that CBs will be successful and / or intervene to buy badets if prices fall, stock prices continue to rise. On the other hand, bond investors solved the problem of deflation and pushed bond yields down (prices up), forcing countries to follow suit.
Because BCs are now the "buyer of last resort," they can never sell because they're doing it, everyone will sell. What a disaster it would be! It's hard to believe, but we're apparently stuck with $ 13.5 trillion debt with negative returns. In this strange world, here are some examples of 10-year yields of high quality borrowers:
· Germany: -0.40%
· France: -0.14%
· Sweden: -0.12%
· Switzerland: -0.74%
· Netherlands: -0.27%
· Japan: -0.16%
Now, look at this anomaly – a debt of less than 10 years quality with lower returns than a higher quality:
· US Treasury (AAA): 2.05%
· Greece (B +): 1.96%
· Spain (A-): 0.31%
· Portugal (BBB): 0.38%
If the OCs were in sales mode, which investor, in his mind, would he have a negative return? There would be no buyer! And who, even on the current market, would like to hold Greek, Spanish or Portuguese debts while there is a much better quality choice with a much higher return? The only ones to do this are those who, by virtue of laws or regulations, must be the European Central Bank. (Note that the Bank of Japan also has a significant share of the overall Japanese economy!)
In this confused landscape, the "intrinsic value" does not exist. To play on the current stock market, we have to keep up the momentum and hope that, if there is even an exit signal, we will be smart enough and bold enough to follow it.
GDP
The real GDP growth rate for the second quarter (+ 2.1%) was slightly above market expectations and apparently played on the theme "The economy is strong". Decomposing it into components, however, tells a different story:
· Public spending jumped at an annual rate of 5%, the largest increase since the second quarter of 2009, when the economy was in crisis;
· Real consumer spending has increased at an annual rate of 4.3%, but this is due in part to a savings rate reduction of -0.4%. points and by significant additions to outstanding credit;
· The rest of the economy, essentially the business sector (capital expenditures, construction, housing, stocks, net exports) is contracted at a rate of -12%. In normal times, the contraction of commercial activity is followed by a rise in unemployment and then a decline in consumers.
· Finally, something that nobody talks about, there have been significant downward revisions to GDP in 2018: Q2: 3.5% vs. 4.2%; Q3: 2.9% vs. 3.4%; Q4: 1.1% vs. 2.2%, and corporate earnings for 2017 and 2018.
Other information
· It's the Wall Street game – lower expectations, so most businesses "beat". And that's what's happening right now. Nevertheless, compared with the previous year, earnings growth in the second quarter will be lower by about -2.5%;
· Despite falling mortgage rates, the housing market remains disappointing. Sales of new homes rose slightly in June (646,000 in annual value against 604 in May – the consensus was 658,000), but purchases of advertising material accounted for 34% of these sales. The specifications are large buyers who want rental housing (millennium issue);
· The Cbad Freight Index was -3.8% in June compared to May and -5.3% from the previous year, with declines for seven consecutive months. Until June 30, railcar loadings are down -2.9%;
· German manufacturing PMI: 43.1; France: 49.9; the euro zone: 46.4 (negative for six consecutive months and the lowest since 12/12);
· A tough Brexit seems likely now that Boris Johnson is the British prime minister.
· US manufacturing PMI: 50.0 July (49.981 to the third decimal place indicating a contraction) against 50.6 (consensus 51.0). It's the lowest print since 9/09; production, employment and arrears are all in contraction;
· US imports fell -0.9% in June from May and exports fell -0.7%. import prices fell -2.0% from the previous year and export prices fell -1.6%;
· Average weekly earnings adjusted for real inflation fell at an annual rate of -1% in the second quarter, its first decline since the second quarter of 2011; this will have consequences for consumption in the third quarter and beyond;
· Leading OECD indicators have been falling for 17 months.
conclusions
Growth in the world and in trade has slowed down considerably, to the point of becoming a recession or almost in some parts of the world. China, for example, recorded its lowest growth rate in the second quarter (dating back to 1992), thanks to "official" data. Singapore's GDP was an important negative and So. Korea looks sweet. Forecasts of economic growth in Mexico and Brazil have been stifled considerably by the IMF. Then there is uncertainty as to what a hard Brexit is going to do in the UK and the EU, some of whose parts already seem to be in recession. In the United States, second-quarter GDP was weaker than the first quarter, but above or below expectations.
Investors need to be concerned about growth, as further weakening is likely to drive the recession back, especially given the weak global economy and downward revisions to US GDP in 2018, which show more overall growth. anemic and a much lower profitability than originally announced. Simultaneous declines in exports, housing and corporate spending rarely occur outside the context of a recession. Income is the ultimate driver and, on this point, the news is not good, because the average real wages of the houses do not progress much. Europe is now in recession and it seems that American manufacturing is also present.
It should be worrying that if the US consumer stagnates, the recession will surely follow. Meanwhile, investors continue to believe that OCs, who have badumed the role of last resort buyers, have their backs.
