The U.S. Economic Situation – February 23, 2018 Update

Perhaps the main reason that I write of our economic situation is that I continue to believe, based upon various analyses, that our economic situation is in many ways misunderstood.  While no one likes to contemplate a future rife with economic adversity, current and future economic problems must be properly recognized and rectified if high-quality, sustainable long-term economic vitality is to be realized.

There are an array of indications and other “warning signs” – many readily apparent – that current economic activity and financial market performance is accompanied by exceedingly perilous dynamics.

I have written extensively about this peril, including in the following:

Building Financial Danger” (ongoing updates)

A Special Note On Our Economic Situation

Forewarning Pronounced Economic Weakness

Thoughts Concerning The Next Financial Crisis

Was A Depression Successfully Avoided?

Has the Financial System Strengthened Since the Financial Crisis?

The Next Crash And Its Significance

My analyses continues to indicate that the growing level of financial danger will lead to the next stock market crash that will also involve (as seen in 2008) various other markets as well.  Key attributes of this next crash is its outsized magnitude (when viewed from an ultra-long term historical perspective) and the resulting economic impact.  This next financial crash is of tremendous concern, as my analyses indicate it will lead to a Super Depression – i.e. an economy characterized by deeply embedded, highly complex, and difficult-to-solve problems.

For long-term reference purposes, here is a chart of the Dow Jones Industrial Average since 1900, depicted on a monthly basis using a LOG scale (updated through February 21, 2018, with a last value of 24797.78):

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

DJIA since 1900

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2703.96 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the February 22, 2018 update (reflecting data through February 16, 2018) is -1.146.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on February 22, 2018 incorporating data from January 8, 1971 through February 16, 2018, on a weekly basis.  The February 16, 2018 value is -.80:

NFCI

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 22, 2018:

http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on February 22, 2018 incorporating data from January 8,1971 through February 16, 2018, on a weekly basis.  The February 16 value is -.57:

ANFCI

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 22, 2018:

http://research.stlouisfed.org/fred2/series/ANFCI

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2717.66 as this post is written

Money Supply Charts Through January 2018

For reference purposes, below are two sets of charts depicting growth in the money supply.

The first shows the MZM (Money Zero Maturity), defined in FRED as the following:

M2 less small-denomination time deposits plus institutional money funds.
Money Zero Maturity is calculated by the Federal Reserve Bank of St. Louis.

Here is the “MZM Money Stock” (seasonally adjusted) chart, updated on February 16, 2018 depicting data through January 2018, with a value of $15,256.9 Billion:

MZMSL chart

Here is the “MZM Money Stock” chart on a “Percent Change From Year Ago” basis, with a current value of 4.3%:

MZMSL Percent Change From Year Ago

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 22, 2018:

https://research.stlouisfed.org/fred2/series/MZMSL

The second set shows M2, defined in FRED as the following:

M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs). Seasonally adjusted M2 is computed by summing savings deposits, small-denomination time deposits, and retail MMMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Here is the “M2 Money Stock” (seasonally adjusted) chart, updated on February 15, 2018, depicting data through January 2018, with a value of $13,838.3 Billion:

M2SL chart

Here is the “M2 Money Stock” chart on a “Percent Change From Year Ago” basis, with a current value of 4.2%:

M2SL Percent Change From Year Ago

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 22, 2018:

https://research.stlouisfed.org/fred2/series/M2SL

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2701.33 as this post is written

Zillow Q1 2018 Home Price Expectations Survey – Summary & Comments

On February 20, 2018, the Zillow Q1 2018 Home Price Expectations Survey results were released.  This survey is done on a quarterly basis.

An excerpt from the press release:

The quarterly survey, sponsored by Zillow and conducted by Pulsenomics LLC, asked more than 100 housing experts and economists about their expectations for home price growth, and whether tax reform affected these predictions.

When asked how the new tax law impacted their five-year forecast for home values in the U.S., 41 percent of respondents said their overall housing outlook is now more pessimistic, while 31 percent of the panelists had a more optimistic view as a result of the tax reform. The remaining 28 percent of respondents said that tax reform did not change their outlook.

Various Q1 2018 Zillow Home Price Expectations Survey charts are available, including that seen below:

Zillow U.S. Home Price Expectations

As one can see from the above chart, the average expectation is that the residential real estate market, as depicted by the U.S. Zillow Home Value Index, will continually climb.

The detail of the Q1 2018 Home Price Expectations Survey (pdf) is interesting.  Of the 105 survey respondents, only three (of the displayed responses) forecasts a cumulative price decrease through 2022, and none of those forecasts is for a double-digit percentage decline.   The largest decline is seen as a 4.5% cumulative price decrease through 2022.

The Median Cumulative Home Price Appreciation for years 2018-2022 is seen as 5.00%, 9.10%, 12.49%, 15.85%, and 19.33%, respectively.

For a variety of reasons, I continue to believe that even the most “bearish” of these forecasts (as seen in the above-referenced forecast) will prove far too optimistic in hindsight.  From a longer-term historical perspective, such a decline is very mild in light of the wild excesses that occurred over the “bubble” years.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people continue to have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Furthermore, from these price levels there exists outsized potential for a price decline of severe magnitude, unfortunately.  I discussed this downside, based upon historical price activity, in the October 24, 2010 post titled “What’s Ahead For The Housing Market – A Look At The Charts.”

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2701.33 as this post is written

Trends Of S&P500 Earnings Forecasts

S&P500 earnings trends and estimates are a notably important topic, for a variety of reasons, at this point in time.

FactSet publishes a report titled “Earnings Insight” that contains a variety of information including the trends and expectations of S&P500 earnings.

For reference purposes, here are two charts as seen in the “Earnings Insight” (pdf) report of February 16, 2018:

from page 24:

(click on charts to enlarge images)

S&P500 EPS forecasts

from page 25:

S&P500 EPS

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2716.26 as this post is written

S&P500 “Bottom Up” EPS Forecasts Years 2017, 2018 And 2019

As many are aware, Thomson Reuters publishes earnings estimates for the S&P500.  (My other posts concerning S&P earnings estimates can be found under the S&P500 Earnings tag)

The following estimates are from Exhibit 23 of the “S&P500 Earnings Scorecard” (pdf) of February 20, 2018, and represent an aggregation of individual S&P500 component “bottom up” analyst forecasts.  For reference, the Year 2014 value is $118.78/share, the Year 2015 value is $117.46, and the Year 2016 value is $118.10/share:

Year 2017 estimate:

$132.55/share

Year 2018 estimate:

$157.67/share

Year 2019 estimate:

$173.52/share

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2716.26 as this post is written

Standard & Poor’s S&P500 Earnings Estimates For 2018 And 2019 – As Of February 16, 2018

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings tag)

For reference purposes, the most current estimates are reflected below, and are as of February 16, 2018:

Year 2018 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $156.25/share

-From a “top down” perspective, operating earnings of N/A

-From a “bottom up” perspective, “as reported” earnings of $145.67/share

Year 2019 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $172.10/share

-From a “top down” perspective, operating earnings of N/A

-From a “bottom up” perspective, “as reported” earnings of $156.40/share

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2734.89 as this post is written

Walmart’s Q4 2018 Results – Comments

I found various notable items in Walmart’s Q4 2018 management call transcript (pdf) dated February 20, 2018.  (as well, there is Walmart’s press release of the Q4 results (pdf) and related presentation materials)

I view Walmart’s results and comments as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented on their quarterly management call comments; these previous posts are found under the “paycheck to paycheck” tag.

Here are various excerpts that I find most notable:

comments from Doug McMillon, President and CEO, page 1, wrt Walmart U.S.: 

For the quarter, Walmart U.S. delivered strong comp sales growth of
2.6 percent due primarily to improved comp traffic growth in stores of 1.6
percent. Strength was broad-based across merchandise categories,
formats, and regions, and holiday sales were solid. In addition, comp store
inventory declined again for the eleventh consecutive quarter, so we’re
well-positioned as we begin the year. Sam’s Club comps improved 2.4
percent and in International, nine of eleven markets posted positive comp
sales. So overall, we were pleased with most aspects of the quarter and
confident in the foundational aspects of the business as we enter this new
fiscal year.

comments from Doug McMillon, President and CEO, page 2, wrt Walmart U.S.: 

Looking ahead, we expect eCommerce growth to increase from the
fourth quarter level as we enter the new year with about 40 percent growth
for the year.

comments from Doug McMillon, President and CEO, page 5:

Moving to Sam’s Club, you will remember that we made a decision
to close 63 Sam’s Club locations in the U.S. We’ve talked about
transforming the Sam’s business, and part of this transformation means
managing the club portfolio to include clubs that are both financially viable
and that fit within the strategic framework for the future. Closing stores and
clubs is difficult. It’s obviously difficult for our impacted associates and there
is never a good time to do it. John and the Sam’s team are working to place
as many of them as possible at nearby locations. These closures will help
us run a healthier business.

comments from Brett Biggs, EVP & CFO, page 8:

Before we get to the results, I’d like to highlight some
accomplishments for the full year.
 Total revenue surpassed $500 billion for the first time and increased
$15.1 billion, or 3.1 percent in constant currency.
 Walmart U.S. comp sales grew 2.1 percent – the highest growth rate
since fiscal 2009 – led by traffic growth of 1.4 percent.
 Walmart U.S. eCommerce sales grew 44 percent, reaching $11.5
billion.
 We made good progress on expenses, especially in Walmart U.S.
stores and International. Without the discrete items mentioned in
arriving at adjusted EPS, we would have leveraged expenses.
 Adjusted EPS increased 2 percent.
 Operating cash flow was $28.3 billion.
 The company returned $14.4 billion to shareholders through
dividends and share repurchases, and
 Strong working capital improvements continued.

comments from Brett Biggs, EVP & CFO, page 9:

Consolidated gross profit margin declined 61 basis points.
Approximately two-thirds of the decline was driven by price investments in
certain markets and the mix effect from our growing eCommerce business.
The remaining one-third was driven by Sam’s Club inventory markdowns
associated with closures, and other international items, including the winddown
of our Brazil first-party eCommerce business. Looking ahead to fiscal
2019, we’ll continue to make investments that will pressure the rate some,
but not to the extent of this quarter.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2727.56 as this post is written

“Taylor Rule” Chart – February 14, 2018 Update

On January 9, 2017 I wrote a post (“Low Interest Rates And The Formation Of Asset Bubbles“) that mentioned the “Taylor Rule.”  As discussed in that post – and for other reasons – the level of the Fed Funds rate – and whether its level is appropriate – has vast importance and far-reaching consequences with regard to many aspects of the economy and financial system.

For reference, below is an updated chart depicting the “Taylor Rule” prescription and the actual Fed Funds rate, provided by the Federal Reserve Bank of Atlanta, updated as of February 14, 2018:

Taylor Rule chart

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2698.63 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the February 8, 2018 update (reflecting data through February 2, 2018) is -1.353.

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on February 14, 2018 incorporating data from January 8, 1971 through February 9, 2018, on a weekly basis.  The February 9, 2018 value is -.82:

NFCI

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 14, 2018:

http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on February 14, 2018 incorporating data from January 8,1971 through February 9, 2018, on a weekly basis.  The February 9 value is -.61:

ANFCI

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed February 14, 2018:

http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 2675.31 as this post is written