Saturday, October 22, 2016

MAD Weekly Review 10/22/2016

Economic news took a bit of a sideline this week as people focused on the last Presidential Debate. I took some time to watch it and wow was it entertaining.

While I can't support a candidate that should potentially be in prison, I can't see why people are adamantly against getting a business person into the White House. The Donald does say somethings that make you scratch your head. And of course every person has some type of flaw we all can't agree with.  But lawyers have been ruling Capitol Hill for decades. It's time to get someone from that evil job creating private sector in the White House that understands how the real economy functions, and not just the economy in Washington DC that only serves itself. That's evident by the surrounding area being one of the richest in the entire country. Yep you read that right. Washington D.C. and it's surrounding suburbs have the highest median incomes in the country.  I'll detail that in post next week.

Economic News

Still we received Industrial Production, CPI, Housings Starts, Existing Home Sales, and Initial Claims for Unemployment. Most came in line for the most part with no major surprises either negative or positive.

Industrial Production grew at a 0.1% pace up from a previous reading of -0.5%.  That's welcome considering how slow growth has been overall. It's funny how these low numbers are now good things. How things have changed since the 80's and 90's.

CPI showed an increase of 0.3%. A bit weak but just enough to keep the inflation embers barely glowing. If you haven't you should read my post on Why Isn't The Fed Getting Inflation.  There I detail some of the history behind longer term CPI & monetary trends. Very good read for someone that wants to be informed about the broader economy and it's underlying components. Here is the monthly percentage change in CPI for the last 5 years.

After that we received some more housing data. Existing Home Sales came in a bit better than expected with 5.47 million units up from 5.30 million. Also Housing Start Starts came in decent again too. Now while these numbers are encouraging remember it does not automatically mean your house is a good investment. See my Mid Year Real Estate Update for more information on that topic.

Unemployment Claims continue to come in at decade long lows with only 260k people filing in the latest report. Still new job additions are weak but that's been representative of this economic recovery overall. Remember a lot of the job market disconnect is structural.  Higher minimum wages and changes in technology are displacing workers. It's just like when tractors and engines began displacing farmers at a rapid pace during the Great Depression. Except this time around it's computers and software leading the charge in almost unimaginable ways just a decade ago.

We received news from the ECB with Draghi & Co. offering little details on future tapering, although they left rates unchanged. That coupled with remarks from the Fed's William Dudley about a rate hike helped the US Dollar Index register it's 3rd weekly gain.  I'll post more about that topic soon.

Was That A Bond Bubble?

Going virtually un-discussed is what appears to be a massive bond bubble that we witnessed this year.  A Bond Bubble? How is that possible?  A bubble is possible in either direction up/down when an asset reaches an extreme. In bonds we've reached absolute historical lows with their coupon rate. Not sure what that is then read up with my bond basics article.  Just take a look at the long term decline in US Treasury 10 Year Yield

Visit to see more great charts.

Hard to believe at one time these bonds yielded near 9%. The benchmark US Treasury 10 year note reached a low of 1.32% this July. That's an all time low!  Unless US bonds make another run lower and reach negative territory like German Bonds did earlier this year I'd say we just witnessed history. The trend has been up ever since as they now yield 1.73%. In other words there has been a 30% move up this year just in 10 Year Treasuries from the low.  You can see the move up in better detail with this graph.

That doesn't mean you should start lending all your money to the US Government. Unless of course you are satisfied with a 1.73% return on your money for the next 10 years. I'm working on a post detailing this subject a bit more. If only I had a helper monkey named Mojo like Homer I could get all these posts out ASAP!

Equity Markets Near Highs?

You bet they are! For nearly 80 days(79 to be EXACT) the S&P 500 has traded within 3% of it's all time high.  Astounding considering ya know, nobody wants to own stocks anymore. According to the AAII Investor Sentiment Survey only 23.7% of investors are Bullish on stocks right now compared to the historical 38.5% average. Meanwhile 37.8% of people are Bearish on their outlook for stocks compared to a 30.5% historical average.

Nonetheless Q3 earnings season is about to hit full throttle the next 2 weeks. We've already seen results from some big names including major banks, General Electric, American Express, McDonald's, and Microsoft which hit an all time high this week. Funny that some people actually think Microsoft's best days are behind it.

I mentioned the strong US Dollar above, and it seems market participants aren't too concerned about that affecting results this time around.  Earlier in the year currency swings were all that was talked about. That issue seems to have gone to the back of people's mind for right now.

IndexStarted WeekEnded WeekChange% ChangeYTD %
S&P 5002132.982141.
Russell 20001212.411218.115.700.57.2

Have a great weekend!

The MAD Consultant

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