Tag Archives: GDP

Prairie Dogs

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Illinois: Where Our Governors Make Our License Plates
— Bumper Sticker/T-Shirt Mostly Available West of Indiana and East of Iowa

I’m sorry (again), but I have developed an obsession with the Land of Lincoln, also known as the Prairie State, also known as Illinois, so I’m compelled to take you on a little journey to the heartland. And why not? I lived there during junior high, high school, and ten years of my adult life. I met my wife (a native) there, and my children were born there.

In many ways, Illinois, or Chicago in any event, is my home turf. The mayor is my old school chum. My mother lived there her whole life, and now spends her eternal rest in a memorial park near a busy intersection in suburban Arlington Heights.

Though it pains me to admit it, I still root for their professional sports teams.

I was born in California, got my undergrad degree in Wisconsin (after kicking it, Freshman year, in NOLA) and have spent the second half of my existence to date in New York, but when I speak of “home”, almost invariably, I’m referencing Chicago and its broader metropolitan area.

Illinois has been much in the news lately, mostly for a financial crisis so dire that it came within several hours of claiming the honor of being the first state to see ratings agencies downgrade its debentures to a status referred to in the academic financial nomenclature as “junk”. The ratings agencies’ beef? For the 3rd consecutive year, it faced the prospect of running its, er, operations without a budget. Heroically, and at the 11th hour, the State Legislature not only rammed through a budget: on the back of a $5B tax increase, but managed to gather itself sufficiently to override a veto of the bill — issuing forth from the office of its financially gifted, right minded but politically misanthropic Governor, one Bruce Rauner.

One can only react more in sorrow than in anger to these tidings. The state sports unpaid bills to the tune of $15B, and growing, unfunded pension liabilities of $150B. It is losing population at a more rapid rate than any star on the flag, and the 2016 census reveals that the population of once-mighty Chicago has now reached the lowest level since 1910. Based upon the latest estimates, the state will spend fully 35% of its now tax hike fattened revenue stream on a combination of debt service and pension distributions.

While you can certainly count me among those with undying respect for enterprises including Moody’s, Standard and Poors and Fitch (we’ll overlook that bad patch they went through last decade), one wonders how dropping an incremental $5B of levies on the already-beleaguered and fast-fleeing taxpayers of the state can possibly improve the credit quality of Illini debt. As events unfolded last week, Illinois also announced plans to issue $6B in new general obligation bonds, to which I respond: 1) anyone that goes anywhere near this paper needs his or her head examined; and 2) as I learned – at the University of Chicago of all places – borrowing more money is a dubious strategy for getting out of debt.

There’s blame aplenty to distribute for this sorry mess, but indisputably, the head of the dragon is longtime Illinois Strongman/Speaker of its House of Representatives: The Honorable Michael J. Madigan — a boss who wields power in his realms with an audacious force so inexorable as to give ideological forbears William Marcy (Boss) Tweed and Richard J. Daley a run for their money. When he’s not busy spending funds that the state he runs doesn’t have and cannot hope to obtain (mostly by applying the time-honored playbook of lighting up public employees and then directing them to vote in his minions), he runs a law firm that has a virtual monopoly on (you can’t make this stuff up) representing companies and individuals seeking to sue the government for tax relief. That he has made a maharajah’s fortune in this side endeavor is beyond dispute. But of course, in this great land of freedom, where the billionaire President of the United States can block the release of his tax returns, where the redistributionist House Minority Leader’s family can make (undisclosed) hundreds of millions in real estate development in the Congresswoman’s vagrancy-plagued home district, exact figures are not in the public domain.

So it was perhaps pre-ordained by the Gods that Familia Madigan would win this most recent showdown, pocketing a $5B tax increase in the U.S. jurisdiction that can perhaps least afford to take such a step, virtually ensuring a continued and perhaps accelerated exodos of individuals and businesses that must foot this bill – completely eschewing reform elements that, by everything that is economically holy, should’ve been part of any budget package, and placating the always pliant ratings agencies along the way. But this much is also certain: Illinois is as broke as broke can be, and will be defaulting on its debts in the very near future. This ought to be an interesting spectacle to observe – particularly given the reality that the U.S. bankruptcy code does not include provisions for a state to declare bankruptcy. More likely than not, these laws will have to change, so stay tuned.

We can, however, exercise this small bit of incremental clairvoyance: when Illinois stiffs its lenders and goes through a bankruptcy process upon which the overseers will probably bestow some other benign name, note holders will not only be lucky to receive pennies on their dollars, but will be publicly excoriated for having the temerity to seek repayment of funds lent in good faith, at the expense of all of those dedicated public servants who the system will place ahead of them in line.

It strikes me that these events may have more of a direct bearing on market fortunes than is currently reflected in valuation consensuses. If nothing else, the unfolding tragedy of Illinois should serve as a morality tale for both the nation and the world. To wit: when the $100 Trillion and growing unfunded Social Security and Medicaid obligations are added to the more widely disseminated budget deficit of ~$20 Trillion, one could argue that the entire country is teetering on the brink of insolvency. We could take a lesson from the rapidly unfolding Illinois tragedy in all of this, but we probably won’t because we never do.

But enough of all of this; the 2nd half of 2017 now begins in earnest, and it ought to be an interesting ride. During a holiday disrupted week, perhaps the symbolic launch of H2 began at 8:30 Eastern on Friday, with the release of the June Jobs Report, a document that on balance served to please the investment masses. The Big Engine that Could called the United States generated a “deuces wild” 222K private sector jobs. The Unemployment Rate ticked up by a rounding error, but, encouragingly, this appears to be mostly due and owing to a much-needed increase in the long-moribund Labor Participation Rate.

The Glass-Half Empty crowd did complain a bit about the lack of traction on Hourly Earnings, and they may have a point. (more about this below). But equity investors liked what they saw, and managed to bid the SPX into positive weekly territory by Friday’s close.
Bond investors weren’t as constructive, bidding up U.S. 10 year rates by about 1/4%. The deeply suppressed German Bund’s rate has doubled over the last couple of weeks, somehow British Gilts yields are also ascendant, and even JGB rates climbed to the indisputably usurious rate of 0.09%. The USD bounced around a bit, as did most Commodity markets.

Next week marks the beginning of the Q2 earnings season in earnest, and the projections are encouraging. Consensus is calling for a 6-7% year over year bump and a nearly 5% increase in revenues. But the banks are already partially in and the results there are decidedly mixed. Investors in that sector appear to be resting a good deal of their hopes on a continued normalization of the yield curve, and can take encouragement not only from the strong jobs report, but also from the contents of the latest FOMC minutes, released Wednesday, and suggesting a commitment to follow through on their promises (threats?) to begin trimming the Fed’s bloated $4.5T balance sheet around the time that the Autumn leaves begin to fall in Lincoln Park.

Well, maybe, but having found myself in pitched battle with the bond bears for most of the last 6 years I’m unable to reverse field now. Yes, rates have drifted up and this trend could indeed continue, but I firmly believe that this is a finite phenomenon, and that when it runs its course, yields are as likely as not – both here and abroad – to drift downward.

In particular, I continue to foresee a mixed muddle of macro data, under which for every boffo jobs report, there’s an offsetting flop. Consider, if you will, Q2 GDP (anticipating the real deal set for release on 7/28), which according to my crew in Atlanta, is now showing some gravitational pull.

 

Note that the latest results came after, and therefore incorporate, the big June jobs number.

As matters unfold, I see a domestic and global economy in transition, still feeling the effects of the now decade old credit disaster, featuring a great deal of risk aversion among primary deployers of capital, and still more cost conscious than would be ideal for either rate normalization or open field running in the Equity Complex. My biggest concern reverts back to the sluggish wage growth: embedded, among other places, in Friday’s Jobs Numbers. This metric and others corroborates an economic paradigm under which the combination of above-mentioned risk aversion, automation and other technological innovations are impeding the flow of economic bennies to the masses, who, like their paymasters, foresee an opaque financial future, and as such are being very parsimonious in their financial outlays.

If I’m right about this, then we may be in a 3 steps forward/2 ½ steps back trudge for the markets and the economy in general. This is of course a less-than-ideal construct, but I hasten to remind you that things could be a whole lot worse.

For example, we could all be living in Illinois, plagued with higher expenses, dwindling revenues, disappearing population, and a leadership that wants to squeeze the populous dry, while lining its pockets along the way. Four of its last seven governors (Otto Kerner, Dan Walker, George Ryan and the magnificent Rod Blagojevich – in the slammer for being caught in a scam to sell Obama’s Senate Seat) are convicted felons. I don’t think they have the goods on Rauner, but he may have the honor of presiding over the first disintegration of a state since the War of Independence.

The Land of Lincoln was granted Statehood in 1818, some 9 years after Abe was born, and 12 years before he set foot in the Prairie State. If my math is correct, next year will mark its Bicentennial, but I don’t anticipate much to celebrate out there – that is, if they make it at all: an outcome, which, at the point of this correspondence, is very much in doubt.

TIMSHEL

Success Story

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“We got the greatest country in the world here. The highest standard of living. The grossest national product.”
— Archie Bunker

For want of superior alternatives, I’m dedicating this edition to Archie Bunker, erstwhile “everyman” hero of the seminal 1970s CBS series “All in the Family”. Many of you may be too young to remember Archie, a hard-working, family loving, WWII vet, spewing out politically incorrect bon mots from his Queens enclave, but much is to be learned from him, that is, if one takes the trouble to pay attention. Improbably (at least to me), I’m now older than he was purported to have been during the run of the series, and, while I always liked him, I believe, with the passage of time, I have come to understand him better. He is a product of his environment and times, working hard, fighting for his country, supporting his family, and, in his off hours, coming home to arguments with his left wing graduate student son-in-law (whom he is supporting) who seeks to tame his ignorance even as he eats his food. He tries is best to cope with the world, rapidly changing before his eyes, but often, it becomes too many for him.

As time goes by, I increasingly know how he feels.

I felt particularly sorry for him when his best buddy, Stretch Cunningham, his doltish, wisecracking comrade on the loading dock, drops dead of a heart attack. Archie is asked by the family to speak at the funeral, and in the process, finds out that, unbeknownst to him and all his peers, Stretch was actually Jewish. This being a problem at the time for a middle aged, working class, high school grad, he struggles to understand, particularly given his fallen buddy’s decidedly Anglican surname. His family offers up the possibility that perhaps he changed his name, but Archie rejects this out of hand, for perhaps the best reason imaginable. If Stretch had indeed changed his name but retained his Jewish identity, one thing was certain:

“There ain’t supposed to be no ham in there”.

Apart from his devotion to his wife, daughter and (eventually) grandson, Archie is above all, a patriot. And, responding to one of his meathead son-in-law’s endless stream of criticism of the country that spawned him, reared him, and provided him all is comforts, he did indeed point out, in a first season episode called “Success Story”, that we have the greatest country in the world, the highest standard of living and “the grossest national product”.

A reading of Friday’s action would seem to corroborate, yet again, Archie’s clairvoyance. Though pointy-headed economists (a tribe to which I belong), for reasons that I have long ago forgotten, decided a couple of decades ago to switch the benchmark metric for nationwide output from Gross National Product to Gross Domestic Product, the introductory first quarter estimates can aptly be described as gross.

The Atlanta Fed’s GDPNow model, often referenced in this space, saw it coming, and, as the hours trickled down to the Friday/8:30 print, private economists started to catch on, with the final consensus coming in at 1.0%. But we missed even this diluted number by a full thirty percent, as, as everyone knows, the actual figure clocked in at 0.7%, annualized: the worst such showing in three years:

The results failed to jolt market participants over-much, and the rationalizations (crazy weather, seasonality, etc.) had been working their way into valuation for weeks. But the consumer spending print of 0.3% (vs. consensus estimate of 0.7%) is somewhat worrying, as is the unmistakable gravitational pull evidenced in the graph supplied immediately above.

Be that as it may, we all knew that the totality of the data coming our way was ambiguous, as evidenced in part by some boffo earnings results released in advance of the Archie Bunker GDP print. Names like Alphabet (OK; Google), Amazon, and sentimental favorite CAT were all astonishingly good. And, while there were some embarrassing misses (Airline Companies, Auto Companies, Starbucks), on balance, with nearly 60% of income precincts reporting, the overall tally is anticipated to come in at a 12 ½ % year-over-year gain – the best showing since the wretched year of 2011.

Moreover, the earnings picture has gained encouraging momentum in recent days:

Perhaps the other most salient dynamic is that Team Trump (never a group to let recent failures and/or humiliations slow them down in their headline grabbing frenzy) released its tax plan last week, a document which fell considerably short, in terms of volume, of the Manhattan telephone book benchmark for quantity of content. In fact, it is precisely one-page long. Scanning its voluminous details, I find it to be a bullish blueprint, and one that investors should embrace. But there’s a lot of caveats here, kids. First, as of right now, there’s no indication that anything of this nature can pass through Congress, and tax reform, an exercise not even attempted in 30 years, is a particularly sticky wicket. It may in fact be even stickier now, especially insofar as the Democrats seem determined to cast not a single vote (other than irrelevant salves to politically threatened seat holders of their own party) in favor of any bill produced by their opposite numbers, and that there is a core group of Republicans who are unlikely to support any tax plan that doesn’t provide offsetting revenues to match any relief provided therein. On offsetting revenues, the, er, tome is silent.

If, however, something of this nature goes through (and it says here that, best case, we’re looking at the end of the ’17 Congressional Calendar or beyond), there will be winners and losers. Perhaps in a dose of poetic justice, the plan calls for the elimination of the deduction of state and local taxes (a dubious and unfair proposition from the get-go) from the Washington-bound levies, thereby forcing us coastal denizens to pay the full freight already imposed upon residents of zero state tax jurisdictions such as Texas and Nevada. In addition, the banks will take a short-term hit – particularly (and you can’t make this stuff up) given the fact that significant portions of the left side of their balance sheets take the form of deferred tax credits, the value of which will be diluted by any reduction in the base rate itself.

I reckon they’ll survive this blow.

And, on the whole, I can’t say there’s an awful lot of which to complain, as the first trimester of ’17 melts into the second. There appears to be earnings momentum, and the dubious consensus may be right this time that: a) Q1 GDP is ripe for an upward revision; and b) the force of this metric may very well gain traction as the year unfolds. In the meantime, mixed macro numbers are likely to keep a lid on domestic rates, and, oh by the way, mid-week, ECB Chair (Super) Mario Draghi took to the podium to announce that he’s in no particular hurry to stop, or even downshift, the Brussels money printing machine.

Perhaps this is why the SPX, though nominally and patriotically selling off on Friday, is 13 puny index points from breaking out of this increasingly tiresome 23 handle, and 10 punier points from all-time highs. It also bears mention that the NASDAQ Composite, with minimal fanfare, crashed through the heretofore un-breached 6,000 threshold, and held this territory even through Friday’s Gross Domestic Product print.

So, on the whole, I am getting a bit more constructive. Next week features a continued onslaught of earnings releases, and, in macro-land, Friday’s potentially important April Jobs number. But this sets up to me as a bad and good news is good news paradigm, with a strong number corroborating happier days, and a weak one likely to be interpreted as being accretive to bonds and catalyzing to constructive fiscal (e.g. tax reform) and monetary policy.

But, global citizens that we are, it bears remembering that the week begins slowly, given Monday’s traditional celebration of International Workers Day. So I’ll conclude by giving a shout out to all of those wielders of shovels and welding equipment. It’s your day, and, as always, you’ve earned it. We don’t pay too much attention here in the States, but what do we know?

And as for Archie, he went from union man to entrepreneur, eventually taking ownership of his favorite local watering hole. Some of his simpatico was perhaps sacrificed in the transition, but at the end of the day, he was indeed a Success Story, and, were he with us today, I doubt he’d be taking May Day off. More likely than not, he’d be pouring drinks and ringing the cash register like always. As Archie knew in his bones, the path to Success, for all of us, makes very little allowance for virtues that run in conflict with diligence and perseverance.

TIMSHEL.