Slow and steady may win the race, let someone else set the pace.
By Marc L. Flaster
NEW YORK, New York (Texas Insider Report) – We are now over half way into the fateful First 100 Days of President Trump’s leadership. Plans promised have been slow to initiate. The proposals may turn out to be just a sketch of what is promised, not the result.
The markets are running on the expectation that change is not only to come, but it will be radical.
- The stock market is up 10% since the election, and has breached a new beach-head at 21,000 more than once, but no further.
- U.S. Treasury Bonds are up in yield, as investors anticipate a reflation trade.
- The White House has offered a new proposal to undo an Obama executive action every few days.
- Congress does not have enough time to process it all, especially with the Democrats dragging their feet on cabinet appointee confirmations.
- Only 43 of the 550 positions in the Executive Committee have been chosen so far.
The unsuccessful attempt to repeal and replace Obama-care may have given the White House a bloody nose. A chance to regroup may not be the best tactic. There can be no tax plan, however, without knowing what healthcare costs. A different approach may be in the offing.
But in the meantime, the wheels of the economy wait for no man, and continue to drag along making due with the way things are, with hopes of how it might be.
- Consumer confidence reports are at the highest level since 2000.
- Business confidence levels are right behind.
- Average monthly employment gains are the best in years.
- Even our missle attack on Syria cannot muffle this steady beat. Everything must be coming up roses!!
The nation was not prepared for the remedial education of our political novice president in full view on the nightly news. His inexperience on the Beltway battlefield is exaggerated by his bravado. Someone should have warned The Donald that the Congress is not on his payroll. In the end, they are beholden to districts that are outside the White House fencing,
NAFTA is moving quickly into the slow lane
A tweak here, a tweak there, but not more. Trade with Mexico exceeds $550 billion and continues to blossom below the Taco Border. Carrier exchanged $23/ hour low skill labor that has a poor attendance record for $3/hour labor that works a full day. It did keep the Indiana plant open (last home of Mike Pence), but the back-office jobs were never at risk and those remaining were skills that were not easy to replace.
Industrial production in the U.S. has been on the rise since 1999. 50-90% of job losses are attributed to productivity gains linked to automation. Caterpillar is high on self driving trucks, not on the highways, but in the coal and iron ore mines; fewer workers, more production and no overtime. While on the subject, coal may have one lasting purpose – at the bottom of a Christmas stocking as a holiday bad joke.
Without getting into socially responsible fuels, natural gas is usurping the rights of coal for power production. And with fracking for oil now at full tilt, natural gas is almost a free by-product. Automation alone is reducing the employment needs in coal mining.
Since 1980 employment has fallen by two-thirds, 250k to 100k, while production has increased. The effects are beyond the mines. Towns lose business as workers leave, school population falls, the local tax base withers; and then, as the demand for the product continues to weaken, the plant closes altogether. No sound bite from the Oval Office can reverse this.
Unemployment rates are at a low, but so is the labor participation rate
80% of all jobs created are in the healthcare, leisure and hospitality fields. Just the place to attract our recent debt-laden college grads. The data bank of economic reports show unemployment at lower levels. At the same time, however, layoff announcements are increasing, especially where the rubber meets the road. In February and again in March, retail dismissed over 30,000 job holders.
Federal Reserve Chair Janet Yellen (right,) and her Choir Boys have been out on the tuna melt circuit since the March 15 meeting. The rate trajectory sponsorship is uniformly higher, but the regional representations cannot agree on timing or amount. Third quarter GDP growth was reported at 3.9%, the fourth quarter has been confirmed at 2.1% The estimates for first quarter 2017 are 1.0%, at best. The Trumping pied piper promises 3.0% by year end. (The 3.9% third quarter report was dismissed as bad data.) The consumer must be on a beer crawl for they are not helping the Fed. Consumer credit applications are down for the ninth consecutive month and retail sales are poor.
Online shopping is not replacing the sales volume lost at the mall. Mortgage applications continue to fall and housing sales are slow. Auto sales are really slow. Discounts are driving the only sales in both sectors. Soft used car prices now attract more buyers. The Basel International Watch festival was flooded with champagne, accompanied by lower price point wrist bands. The millennials don’t need a watch since they are enveloped in a 24-hour time warp. Everything they want to do is on line 24/7!!
- Housing has been influenced by the run-up in bond yields.
- The home mortgage rate increased from 3.50 to 4.65%.
- Refinancing activity has moved to a snail’s pace and home sales have slowed. The latter appears to be more from seller’s reluctance to move because of higher mortgage costs coupled with the uncertain outcome of the new administration’s promises.
- Home ownership has been on the decline since the 2008 financial meltdown.
- Of course, a positive result of tighter credit scoring has been lower default rates. Current reports are that we have a nation of renters again.
- Three out of four millennials would rather rent than buy.
Energy Availability, Discovery & Production has become very important in world politics, and as a price component of inflation
The Japanese Fukushima nuclear disaster quickly shortened the lifespan of nuclear production. Westinghouse has filed for bankruptcy, as there is no forward book for new nuclear plants. Coal is in temporary replacement cycle, but the move to wind and solar production has accelerated. Development of wind and solar alternatives are dependent on government incentives. At the same time, the costs of production of fossil fuels, along with the discovery of new resources, has derailed the emerging shift to non-polluting energy sources. Oil has found a new level at which it is profitable to produce at less than half of its recent peaks. Chevron reports with its new development tracking technology it makes money in the Premium Basin at $20/ bbl.
In 18 months, the price of oil fell from $100/bbl. to $30. In the next year it rebounded to $55. The CPI reflected the drop and now the recovery. The Fed has been slow to acknowledge the energy influence on the CPI, but when the index did reach its 2.0% trip wire, it used the report to bump up the target rate rather than acknowledge that energy was, or may be, the biggest influence on bringing the rate to the 2.0% beachhead.
The latest report on CPI is 2.7%. Care to guess which way the next report is headed?? As mentioned, the reflation trade may have more to do with expectations than fact. Weather drives consumer spending reports. Just keep this in mind; utility usage and electric consumption have a big influence on both. If Mary and her Little Lamb stayed home all winter and kept the thermostat on “high”, industrial production would be up and consumer spending would also be up. If she took a drive around the block to escape cabin fever, her gasoline purchase registered on the report of retail sales. Americans are replacing cars with SUV’s which burn more fuel per mile. Miles driven remains the same but retail sales register an improvement. Market reaction to headline news from the BLS needs to be taken with more than a grain of salt.
It is too early to understand all that is going on in this economy with a new leader in the White House struggling to learn how to get his agenda rolling through the Congress. Suffice it to say that interest rates and Fed Policy are in a state of suspended animation.
Let me know what you think, and feel free to share this email with anyone you believe might have an interest. It is written from my point of view, about topics that I find interesting, and I don’t expect readers to agree with me even half the time.
Marc L. Flaster has advised financial institutions across Texas in balance sheet management for over 35 years. The views expressed in this article do not necessarily reflect the opinions of any client or organization with which Marc L. Flaster might be affiliated. Readers are advised to complete their own due diligence and analysis prior to taking any actions based upon my economic and political views.