Category: Chart of the Week (Page 4 of 18)

WCM Chart of the Week for August 9, 2021

August 9, 2021 / Doug Wilde

Investment Grade and High Yield bond spreads have been edging higher since reaching their tightest levels ever at the end of last quarter. Admittedly, the spread widening may have more to do with the decline in Treasury yields since June 30^th than an indication of any deterioration in the credit markets. What is interesting to us is that this has been occurring while broad stock market indices in the US and Europe are hitting all-time highs. Equity market valuations are full, particularly in the US, but according to Bloomberg consensus earnings are expected to grow by 11.8% over the next 12 months, putting the forward PE ratio of the S&P 500 at 20.3x, lofty yet not extreme. Our sense is that, barring a major surprise or a misstep by the US Fed, the positive tone in equities in the Western world will continue. The outcome of the Fed’s September meeting will be highly scrutinized but the likelihood that they will surprise markets is low. [chart courtesy Bloomberg LP © 2021]

WCM Bonus Chart for July 23, 2021

July 23, 2021 / Doug Wilde

Because we took a hiatus for the holidays, we have extra thoughts to share. The US Bureau of Labor reported that consumer and producer prices came in higher than the consensus last week and that may have been part of the reason why stocks retreated. We view the consolidation in US stocks as healthy at this point, especially considering strong corporate earnings momentum and analysts increasing their earnings forecasts rather than the opposite, which oftentimes occurs at this point in the year. Forecasters usually have a difficult job but given the condition of the world during the pandemic and the incongruent economic recovery so far, it makes now even more challenging. Global bond markets are suggesting a different read on inflation and the near-term outlook for monetary policy, both benign for risk assets. The benchmark 10-year US Treasury bond yield continues its decent after the near-term peak of 1.74% on March 31^st and now at 1.28%. Interestingly, government bond yields in the developed world have also fallen with equivalent US interest rates suggesting that current inflation readings are more of a temporary condition rather than a long-term concern. Disinflationary trends are starting to emerge including declining commodity prices, benign capacity utilization rates and strong productivity levels. If bond yields were trending higher along with stronger inflation readings we would be more concerned about risk assets. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for July 20, 2021

July 20, 2021 / Mark Sloss

And we’re back. Everyone here is hoping everyone out there has taken some time to breathe a little of the relatively COVID-free air and begin to think about what a return to (the new) normal looks like. In that spirit, this week’s chart is from data provided by Redfin, a national real estate brokerage, on Q1 2021 relocation searches. One of the consequential impacts of COVID and the shutdown was an acceleration of outward migration from major urban centers. We are at a point in the generational cycle where it was to be expected with Millennials anyway, but the urgency was ramped up considerably. With companies reimagining what a workforce and a workplace look like, many people with knowledge economy jobs are able to quite literally work from anywhere. Residential real estate in less urban, less expensive and more desirable areas like Denver, CO (this week’s chart) have seen a crush of interest from urban economic centers and a rapid rise in prices as a result. We envision some of this will reverse, but much of the population movement is likely permanent, changing the economics of numerous communities across the country.

WCM Chart of the Week for June 28, 2021

June 29, 2021 / Doug Wilde

Since 2013, the NY Federal Reserve has been conducting a consumer survey focused on expectations for rental housing costs in the year ahead. The survey participants expect housing rental costs to soar a record 9.7% in the next 12 months, which is a major increase from the average of about 5.6% since the survey began nearly eight years ago. Survey data and other “soft” indicators, while useful, tend to lag hard data. Granted, there are also widespread reports of labor shortages and lack of transportation, but that is most likely a temporary condition. Taking this and other signals into account, we would be more concerned about inflation becoming a more permanent problem if the bond market was behaving as if the economy was moving towards that. But, the benchmark 10-year US Treasury bond yield, now standing at 1.47%, has descended from its peak of 1.74% on March 31^st. Also, some key commodity prices are declining — the lumber crack spread (cited by WCM on June 14^th) has fallen over 30% in two weeks. For now, we view these pockets of inflation as more of an adjustment from pandemic-created economic readings rather than a permanent progression towards higher consumer price levels. [chart courtesy NY Fed and Bloomberg LP © 2021]

WCM Chart of the Week for June 22, 2021

June 23, 2021 / Doug Wilde

Those participating in the frenzy in crypto-related investing may be in for some more downside pain in the months ahead as a bellwether, Bitcoin, has formed the notorious “death cross”, which is when the 50-day moving average falls below the 200-day. So far it is approaching nearly a 50% drop since its peak in mid-April. Technical analysis may be more useful in evaluating the merit of such investments that have no or little fundamental data on which to base a decision. Part of the rationale for investors to acquire positions in Bitcoin and other related investments lies in the idea of using them as a means of exchange and potentially as a store of value. The latter dimension has been gaining credibility as major central banks continue to pursue aggressive quantitative easing, effectively debasing their currencies to one degree or another. We cannot divine where the trend in cryto investing is headed in the intermediate term, but there is no denying that interest is growing. If recent history is any guide, investors who chose to hold these investments need to be prepared for further losses. The previous two times when death crosses were formed in 2018 and late 2019, losses surpassed 64% and 30%. Not for the faint of heart. [chart courtesy Bloomberg LP (c) 2021]

WCM Chart of the Week for June 14, 2021

June 14, 2021 / Doug Wilde

Consumers of lumber products may finally see an end to soaring prices. Lumber crack spreads (the difference in prices of finished lumber and raw timber) have been rapidly falling since peaking in early May. Specifically, the measure on this week’s chart uses the CME futures spot rate of random length softwood 2x4s used in construction minus the Timber Mart-South US Louisiana Pine Sawtimber spot rate. Both indices are falling with finished board prices falling at a faster pace.

There are a variety of reasons why finished lumber prices surged, ranging from a beetle infestation in western Canada and the US Pacific Northwest, strong pandemic-stimulated single family housing demand, glue shortages related to the storm-induced petrochemical plant shutdowns in Texas earlier in the year, and a lack of truckers and workers for sawmills. This confluence of events may be playing out in other industries and be part of why the Fed considers rising key consumer and producer prices transitory and not permanent. Nonetheless, inflationary concerns that recently unnerved the capital markets will likely continue to arise for some time to come. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for June 1, 2021

June 2, 2021 / Doug Wilde

On Monday, China’s Politburo, the CCP’s top decision-making body, announced that all married couples could have up to three children along with expanded government support for child rearing and education. It is widely speculated that this is driven by deteriorating demographics in China. In this week’s chart we observe the continued and accelerating upward trend in the 65+ age group versus China’s total population. The Wall Street Journal reported that the prime working age population (citizens between the ages of 15 and 59) has declined from 70.1% in 2010 to 63.35% in 2020. Age distribution is critical to economic vitality and notoriously difficult to alter and in China, the one child policy that was lifted in 2016 may have created a new norm because it lasted so long. The effect may be a permanently lowered replacement rate. We can’t help but find it ironic that the directive comes from the Politburo which is dominated by 60+ year old men (we could only find one female on its current roster). Another significant point that Peter Orszag, a widely respected former Washington budget official, notes in his Bloomberg opinion piece of May 11th, a declining Chinese population could mean lower carbon emissions, which is material since China’s total carbon footprint exceeds that of the entire OECD combined (27% of global GhGs). [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for May 25, 2021

May 26, 2021 / Doug Wilde

The US Fed and European Central Bank (ECB) continue to pursue aggressive quantitative easing while the two dominant Asian central banks, the Bank of Japan and the People’s Bank of China, have slowed their securities purchases so far this year. The ECB’s activity is of particular interest, not only because of the size of the balance sheet ($9.2T, €7.6T), but the pace that it has expanded over the course of the past year. The ECB’s monetary support continues at a critical time as the EU economy appears to be emerging from the pandemic-induced slump. Lock downs are slowly being lifted and infection rates are plunging from the March and April spikes. Another promising (gradual) trend emerging is in sovereign interest rates in the region, which appears to be an indication of stronger economic activity in the months ahead. [chart courtesy Bloomberg LP (c) 2021]

WCM Chart of the Week for May 17, 2021

May 17, 2021 / Doug Wilde

According to the US Federal Reserve, growth in the money supply, widely described as M2, peaked at nearly 27% at February’s month end reading and as of March it registered a 24% annual clip. To place those figures in context, the pre-pandemic average annual growth rate of M2 over the preceding 20 years [February 2000 – February 2020] was 6.1% according to Fed data. The previous peaks in M2 growth never surpassed 10.3%. Put another way, the entire US money supply, from the birth of our nation to now, expanded by around 25% in the past year alone.

This tremendous amount of additional liquidity is tied to quantitative easing and the numerous fiscal stimulus plans that have delivered direct payments to individuals and families that, for the most part, landed in bank deposit accounts. Commercial Bank Liabilities, the equivalent of consumer deposits, have swelled some 26% since the beginning of the pandemic, indicating that stimulus recipients have fortified savings as opposed to increasing spending. The good news is that consumers are in better shape than they have been in several years. The bad news, if it can be considered that way, is that there is likely pent-up demand that could ultimately fuel inflationary concerns.

The most recent annual headline inflation figure (CPI) reported by the US Bureau of Labor Statistics for April was 4.2%, well above the consensus of 3.6% and over two times the Fed’s target rate. Our main concern is whether the recent upward trend in prices is reflationary or a more enduring inflationary trend. The Fed has stated that it considers current price conditions to be “transitory” and thus falling into the reflationary category. [chart courtesy Bloomberg LP © 2021]

WCM Chart of the Week for May 11, 2021

May 11, 2021 / Doug Wilde

The US Census Bureau’s latest survey of retail sales will be reported on May 14^th. The Bloomberg survey of economists’ average forecast is for a 1.0% monthly gain, adding to March’s torrid 27.9% annual pace. March’s level of over $614 billion in purchases is nearly 17% higher than the pre-pandemic level of $525.8 billion of February 2020. Consumption, the most dominant portion of the US economy, is clearly rebounding and could further stoke inflationary concerns. This is occurring as hundreds of billions of US fiscal stimulus dollars have yet to be fully deployed with potentially more on the way on top of elevated commodity prices, shortages in building materials and the labor force far from full employment levels. The Fed remains committed to QE, in effect managing the entire yield curve, and has publicly stated that it will tolerate higher inflation. But for how long? Market pressures may force the Fed to act sooner than they currently plan and that could be a major shock to the system. [chart courtesy Bloomberg LP © 2021]