The title of this article come from a comment Saxo Bank CIO and chief economist Steen Jakobsen said in his latest email: “We have no growth, no reform, no productivity, no inflation, and low-to-lower policy rates from central banks across the board.”
Steen labeled this the “New Nothingness”
What follows is a guest post by Steen Jakobsen. His title is ….
Steen’s Chronicle: The Narrative is Changing: Steen Jakobsen
At the moment, it seems as if policymakers and political elites have begun to depart from the “new nothingness” consensus with the recent G20 summit in Shanghai seeing a promise not to manipulate exchange rates and the International Monetary Fund’s annual meeting in Washington even playing host to an attack on low interest rates.
What has scared such bodies away from their previous consensus?
Macro Overview: The Noise
Of course, this is hardly surprising considering that we have no growth, no reform, no productivity, no inflation, and low-to-lower policy rates from central banks across the board.
Over the weekend I read a considerable amount of “research” and most of it concludes, as per usual, that we will continue to climb the wall of worries. This may be so, but not for the reasons most people cite: inflation returning, central bank support, higher commodity prices, and more growth on its way.
One net consequence of no top line growth and soft earnings is that we pay more for every (US) dollar’s worth of falling earnings that we see.
Reported earnings have been flat-to-negative in the S&P 500 since mid-summer… and less earnings equals higher multiples (17.35, to be precise).
This means, of course, that investors believe that “in the future” there will come better corporate results; there exists a belief that we will eventually draw away from the earnings recession we see at present.
So how about that “future”?
Well, a look at the JP Morgan global PMI versus copper price chart does not indicate that any such change is coming. In fact, further downside is forecast. Here we see that copper leads the JP Morgan global PMI indicator by six months.
At least inflation is picking up, though – no?
Not really, as it turns out. What really matters for companies is the producer price reading.
The gap between the dark blue line (higher) and the light blue line (lower) represents a negative margin… right now, unit labour is rising higher than PPI, which is actually falling.
It also seems as if US industry is slowing down significantly. Here, we can see a sharp drop-off in inbound US container traffic to the port of Long Beach (the second-largest US container port, and the key gateway into the US economy from Asia).
This batch of data leaves much to interpretation; all momentum-based models are long risk here, but they remain on very thin ice. In the long term, let’s remind ourselves that S&P 500 returns simply correlate to earnings, and to increase earnings you need to increase margin.
As we can see above, of course, margin is under severe pressure as the PPI is negative and unit labour costs are slowly rising.
The most likely response from policymakers will be “more of the same”, but it seems as if the political class no longer fully stands behind “manipulation”.
The new agenda: not FX, not low rates, but… what, exactly?
First we had the Shanghai G20 summit where US Treasury secretary Jack Lew delivered a promise “not to manipulate the FX rates”. Now, when we look at the IMF’s annual meeting, we have the Financial Times reporting that low interest rates themselves are coming under attack.
More interesting, perhaps, than the headline issue of low rates is the list of key topics listed by the FT further down the page:
“In a series of potential obstacles, they cited weak productivity, the lack of further firepower from monetary policy, China’s difficulties in rebalancing its economy, strains in oil exporters, disorderly capital flows, a continued impasse in talks over lending conditions to Greece and Britain’s potential exit from the EU”
This means that in the fourth month of 2016, we have very nearly come full circle. The Federal Reserve has lowered the number of slated/planned rate hikes from four to zero(?), the Bank of Japan took a (very unsuccessful) shot at a zero interest rate policy, European Central Bank president Mario Draghi whipped out his “bazooka” and implemented yet another handout to the banking sector, and now we are being told from summits in Shanghai (G20) and Washington (IMF) that none of this even works!
Has the uncertainty of the world economy finally swayed the seemingly rock-solid certainty of elite policymakers like IMF head Christine Lagarde? Photo: Wikimedia Commons
The narrative, it would appear, has changed.
The world economy, as seen from the perspective of policymakers, is on the edge of a further slowdown. Yet another crack is developing (if not being discussed) in the banking sector, but we are now being led to understand that the panacea, according to G20 leaders, is not weaker currencies or low interest rates.
So what is it?
According to the IMF, the solution is to boost employment and productivity while continuing to maintain low interest rates and draw down austerity in those countries that can afford it. Ultimately, this is the usual “half-pregnant” approach – how can one give productivity and employment a shot in the arm under such conditions?
From my perspective, we are seeing an increased awareness among world leaders that simply applying “more of the same” will take the political system down.
The “change” here is not that policymakers are acknowledging the mistakes of the past, but that they are displaying a near-desperate need to align themselves with the “broken social contract” argument, which is to stop “helping the 20% of the economy that produces 0% of the jobs and productivity” and to focus on jobs.
Whatever the “new paradigm”, it’s clear that politicians and key G20 policymakers are busy distancing themselves from their central banks (as seen, for example, in German finance minister Wolfgang Schäuble’s assertion that Mario Draghi is behind the rise of the right-wing Alternative für Deutschland party) .
This is bad news for markets. The “central banks to the rescue” model is fading – not disappearing, but fading – and if confirmed, this could the shock that wakes up the “long-only” crowd who are not only fully loaded again (the most overweight in years, actually) but who are also increasingly paying through the nose for stocks, as was demonstrated above.
Macro overview: A tactical view
I have long argued that there are three major catalysts to keep an eye on:
1. Banks’ performance relative to overall indices (US, Europe and Japan).
2. USDJPY as a proxy for risk-on/off and USD strength.
3. China/oil as proxies for global growth itself.
The noise remains omnipresent, of course, in the form of global risks from the Syrian refugee crisis to the downfall of Dilma Rousseff’s government in Brazil; from South Africa to the Brexit; and from the “central banks to the rescue” model to less central bank leverage…
…and all of this adds up to more uncertainty, not less.
I have moved to very defensive stance on allocation – I remain long mining and Gold, some HYG for carry, and now with 50% cash…. The price action/momentum makes market long, but for me too much doesn’t add up – the gap between perception and reality is about to be closed – hence defensive.
Short US$, long Gold, JPY and AUD – long HYG, GDX and GLD.
Edited by Michael McKenna
Steen Jakobsen is chief economist and CIO at Saxo Bank
End Steen – Begin Mish
This market has gone nowhere since late 2014. All the while, earnings have dropped while PEs have risen.
Things are a lot worse than Steen posted. His chart shows the S&P “reported” PE is about 17.5.
In actuality, the S&P 500 reported PE (trailing 12 months) is 24.15.
The forward estimate for the S&P is 18.50. The reported P/E a year ago was 20.87. The reported P/E is now a whopping 24.15.
I don’t know what “forward estimate” Birinyi pegged a year ago for today, but it was not 24.15.
Birinyi’s forward estimate of 18.50 is likely to be equally as ludicrous. This is one hell of an expensive market.
For my take on inflation, please see Diving Into the CPI: What’s in Your Basket?
Mike “Mish” Shedlock
Mish, We need a new word, stag-nation across the board , no growth, no reform , and right “no inflation”except at the grocery store
Sent from my iPhone
How about ‘New Failure’?
You’re gonna love it, or else.
“Nothingness”…nothing moves…nothing changes…nothing reacts…nothing matters.
It’s everywhere. Governments love this kind of managerial authoritarianism.
You only need to watch the “markets” today: they’re on autopilot again. It’s almost as if the pre-determined cruising altitude (S&P up +/- 12 points) was dictated just around opening bell and the rest of the trip is just relaxing…
My bet is this isn’t even a market. 98% of the “action” consists of either buybacks or the pushing-around-the-plate of a handful of shares by the few large funds and institutions that matter to the elites…
The “Policy Shift” I see here is, Main Street gets covered in Fed printing largess now, to keep the pitchforks from coming out.
Likely what that “Special Meeting” the Fed had last week was all about. Time to goose wages now, and get the Fed’s only pro banking favorite candidate elected.
In short, less “Stag” and more “Flation.”
Tony Bennett said:
“Time to goose wages now”
Businesses face tepid demand and margin compression … and you want to raise wages?
RE: “Main Street gets covered in Fed printing largess now, to keep the pitchforks from coming out.”
“Ain’t” gonna work!
Businesses face rapidly declining demand and negative growth in all areas.
There is no inflation,
only my money is worth less every day,
and everything I truly need is more expensive.
Thank God we have government economists and stock shills to tell us every day how well we are doing.
The stock market is UP, so that there is a good sign, right?
$50 minimum wage?
Why stop there?
If we really want justice and equality for all, why don’t they simply enact a wage that everybody gets, regardless of skills or occupation?
A wage that everyone gets – they call it taxation, you cannot avoid it and so your pride justifies it.
Speaking as an applied mathematian, how could it be otherwise? The scaling for time in economics is interest rates. Time invariably appears as interest rate times dimensional time in all economic models. No exceptions. Right now interest rates are zero and thus economic time is stopped. Unfortunately our planet still orbits the sun. The earth turns on its axis. Life goes on, and tensions grow between our stopped economic clock and all other clocks.
Stopped clock theory – they are completely right twice a day, when the market opens, and when it closes.
Every time I hear “no inflation”, I want to aim and shoot the fool saying it. This is total BS in every sense of the word. It’s just not food, medical, school tuition, health insurance, business insurance, travel, car prices, etc etc, but the cost of doing business has exploded.
I was filling some orders this weekend and immediately noticed that my FedEx costs on the system jumped about $3.00 a package from $18 to $21. I went to my UPS account and saw the same thing so I emailed them to see if rates went up again.
I got a no from UPS and haven’t heard anything yet from FedEx. When you are spending $3000 a month on shipping costs , a 10% increase really hurts. In the past 4 years, we have watched our costs climb over 40%! The recent USPS priority increase came close to 20%. Since we have to ship most of our product FREE so that everyone thinks we are Amazon, it comes straight from the bottom line.
Add in the fact that we have to compete with Amazon and the margins are shrinking like crazy. This is where the deflation comes in. MARGINS! Not actual costs.
Trump has it right. The Chinese are shipping product into the U.S. almost tariff free and keeping pressure on pricing. They have set up warehouses and now can fill orders fast including on Amazon. Trump is correct in that something needs to get fixed in order for a lot of small businesses to survive.
The Fed needs to claim no inflation in order to keep rates down so that the governments borrowing costs don’t go up. We have watched them doctor every economic number under the sun to justify zero rates and now we are coming to a head. Instead, they are killing jobs, business and profitability. They simply don’t care.
Jon Sellers said:
FedEx/UPS represents a duopoly that needs to be broken up into about 5 different companies that will actually be forced to compete on price. Monopoly kills capitalism.
Efficiency evidently kills capitalism as the first thing we want to do is punish those most efficient and productive. Standard oil was a monopoly and in the process lowered the cost of oil to consumers hugely. As a reward they were sued and broken up into smaller companies.
UPS and Fed Express have used technology and hard work to gain market share in a market that didn’t really exist before they started. USPS has decades of a head start, plus the bottomless pockets of government…and still can’t compete. I’m not sure of the answer but I believe laws against monopolies should not be enforced by their market share but how they hold it, what they do to prevent competition. There is a difference between earning market share and using force to obtain and retain it. Government, regardless of their responsibility to protect competition, is the primary farce that is used to retain it through their selective enforcement and specific laws and tax schemes designed to specifically benefit most favored companies.
I don’t ship much, but when I do I am constantly confused and amazed. I bought a pump for one of our machines and they shipped it three day priority from Italy for $17. I had to ship a small item two states away, which weighed less than this pump and it was twice that amount. There is some real hanky panky going on in pricing. I bought a laptop battery off eBay and it cost $20…FREE shipping from China. I know they are just giving away stuff, but $20? And it has worked flawlessly so far. Like with so many other things these days it seems like some get a free ride while others must pay double.
There is a treaty that our government signed with China years ago that allows them to ship to the US and the USPS finishes the shipment at no cost to the shipper. That is how they can dump their product here with free shipping. Both Alibaba and Dhgate have expanded this business that is destroying American small business. No way to compete.
” stop “helping the 20% of the economy that produces 0% of the jobs and productivity” and to focus on jobs.”
Jobs must be profitable for the employer. Minimum wage must not exceed the value of the least capable. Workfare can supplement low wages, but welfare must cease. Put every oar in the water.
That’s not true….
our government can print and/or loan us all enough to make up the difference. Besides, the economics of Bernie suggests that profits are a purely fictional concept that is used to deliberately deprive and impoverish the American worker.
Tony Bennett said:
Your funeral, Steen
The year and half I’ve been here I think every Steen post has been short usd … all the while powering its way to cycle high. DXY about off 5% from cycle high. I’d wager we’ll see DXY > 100 before < 90.
Massive yuan devaluation in the cards.
Tony Bennett said:
“This is bad news for markets.”
All along I’ve preached the stock market is a cattle prod on legislative bodies. Stratospheric markets allow politicians sit on hands while the real economy disintegrates. Only by allowing to markets to fall (crash) will politicians have the political cover to make drastic changes (cut entitlements, shoot zombies, etc) as 401Kers scream DO SOMETHING.
Jon Sellers said:
401Kers will scream “PROP UP THE MARKET!!!!” They’ll also scream “DON’T CUT ENTITLEMENTS, I JUST LOST MY 401k!!!”.
Zombies will scream “SHOOT ME AND NO CAMPAIGN CONTRIBUTIONS FOR YOU!!!”.
There’s a reason politicians do what they do.
Tony Bennett said:
Sure, but current situation unsustainable.
Entitlements going through the rough with aging demographics dead ahead.
Propping up markets is not a free lunch. At the expense of the bottom 80% leading to the growing income disparity.
If they keep pushing the same, risk ripping social fabric.
Michael Gravel said:
The E of P/E is not GAAP but adjusted to within a tinge of the 3rd rail. Oh and what about them stock buy backs and shares outstanding too!?!
Jon Sellers said:
People don’t spend it they aren’t confident about their future. Without people spending, businesses won’t invest. Without investment, productivity growth dies. Without productivity growth, the economy can’t grow. Without a growing economy, people won’t be confident about their future.
The only point in that cycle to make a fix is to get people confident about the future. If you can’t figure a way to do that, then this nothingness is what you get.
But government economists believe that rather than creating conditions that foster growth, they can instead force it by scaring money out of our pockets, either using inflation which threatens our saving’s value or creating low to negative rates which does the same thing.
When you concentrate so much wealth in the hands of a few individuals and put 50% of the people on government assistance, what can you expect but zero growth. The ultimate goal is to make us all dependent on the government. We are rapidly moving toward fascist state with few complaints.
Sharon Jarvis said:
Where did you get the figure that 50% of people are on gov’t assistance? Do you mean the 47% who don’t earn enough to pay Federal income tax? Or are you just pulling ridiculous numbers out of your nether region?
As far as I am concerned, zero growth is the result of lousy trade deals and corporate politicians. Didn’t we lose something like 60,000 factories and millions of jobs? Aren’t most of the new jobs created minimum wage? If you can’t find a decent job, or can earn barely enough to exist, there won’t be any discretionary money to spend to prop up business growth.
I do agree that we are moving towards a fascist oligarchy but there are more than a few complaints, which explains the rise of Sanders and Trump.
Thomas Malthus said:
This is what the End of Growth looks like.
As expected absolutely desperate measures have been rolled out to fight the unwinnable battle – they held the fort for some years – but as expected – we will lose.
This is a very good book – although I don’t think there will be much in the way of adapting to what is headed our way.
The End of Growth: Adapting to Our New Economic Reality
Economists insist that recovery is at hand, yet unemployment remains high, real estate values continue to sink, and governments stagger under record deficits. The End of Growth proposes a startling diagnosis: humanity has reached a fundamental turning point in its economic history. The expansionary trajectory of industrial civilization is colliding with non-negotiable natural limits.
Richard Heinberg’s latest landmark work goes to the heart of the ongoing financial crisis, explaining how and why it occurred, and what we must do to avert the worst potential outcomes. Written in an engaging, highly readable style, it shows why growth is being blocked by three factors:
Resource depletion Environmental impacts Crushing levels of debt
These converging limits will force us to re-evaluate cherished economic theories and to reinvent money and commerce.
The End of Growth describes what policy makers, communities, and families can do to build a new economy that operates within Earth’s budget of energy and resources. We can thrive during the transition if we set goals that promote human and environmental well-being, rather than continuing to pursue the now-unattainable prize of ever-expanding GDP.
Stuki Moi said:
“This means, of course, that investors believe that “in the future” there will come better corporate results”
“Investors” have long, long ago learned that the worse the corporate results, the more money the Fed will print and hand to those who will drive up the “value” of their “investments.”
“Net present value of future income streams”, has literally less than zero to do with it anymore.
Bankers tricked the private sector into misallocating capital by printing. That’s why the west has no productivity. The longer banks print, the less productive capital capitalism has left to work with.