By now the widely accepted groupthink on the collapsing labor force participation rate, which as we noted last Friday, cratered to a fresh 35 year low of 62.8% which was the main reason for the collapse in the unemployment rate to 6.7% from 7.3% two months ago, is that it was perfectly expected and is largely due to demographics. Sadly this is just another example of goalseeking a real-time variable to “fit” with a narrative of a recovery when in reality there is no recovery for the record 91.8 million Americans who have given up on work entirely and are now out of the labor force.  All of this is well-known. What may not be as well known is that every two years the BLS releases medium-term (10-year) projections for the participation rate. The projections include the demographic composition of the population and the LFP rates of different  demographic groups, among other statistics. And it is here that we see just how “made up” the narrative surrounding the demographic mea culpa truly is.

Presenting exhibit A: “Labor force projections to 2012: the graying of the U.S. workforce“, released by BLS’ Mitra Toossi in February 2004. Jumping to the punchline, here is what the BLS expected a decade ago:

• Total Civilian Labor Force forecast in 2012: 162,269
• Total civilian non-institutional population: 241,604

Or, a predicted labor force participation rate of 67.2%, or notably higher than the 66.0% as of the report’s publication in February 2004.

Where are we now?

• Total Civilian Labor Force at December 2012: 155,485, just under 7 million less than was expected (and this with the so-called recovery)
• Total Civilian non-institutional population at December 2012: 244,350, or 3 million more than expected.

Net: a 10 million worker delta! Does this mean that, gasp, America’s demographic crunch and “Baby Boomers are retiring” meme were unknown just ten short years ago? Apparently yes. Because somehow the 67.2% expected LFP at the end of 2012 ended up being 63.6% and sliding. And the punchline – if one were to use the expected 67.2% LFP rate, today’s unemployment rate would be higher than 12%!

Because here is what happened next in following BLS labor force participation forecasts:

In a nutshell: lower, lower, lower as the LFP entirely not in line with forecasts, cratered. But hey, what they know now, namely that Americans can’t wait to retire because they have so many 0% yielding savings, they didn’t know back then.

And there you have it: when it comes to the Labor Force Participation rate, one can best summarize it by the old maxim: “We’ll just make it up as we go along.”

Source, ironically, St. Louis Fed: A Closer Look at the Decline in the Labor Force Participation Rate

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The $VIX is at a level that has produced selling over the past year, but the indicator we use to capture that dynamic suggests higher prices. The Rydex indicators are starting to roll over from an extreme bullish level. On the other hand, the “smart money” is bullish at least on a relative basis. Maybe these mixed signals are just a sign of a market that needs to consolidate the gains from the past year.

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Yes, I wish I knew or had a crystal ball, but sometimes (maybe a lot of the time) the indicators don’t line up. Our default mode is to defer to our “dumb money” indicator (shown in figure 2). This is the indicator we use in our equity model, and the model remains bullish, and will likely remain so for another 2 weeks or more. We have been bullish for 18 weeks now when we became bullish during a period of extreme investor bearishness, and it is our expectation that this trade should last on average 15 weeks. So we are in the late stages of the rally. The best, most accelerated gains typically occur in the beginning of the trade. Just when investors typically get the all clear, the trend will flatten out. Maybe this is the message of all these mixed signals. Our plan is to become sellers of equities when investor sentiment unwinds, but we are not at that point. As a reminder, we have moved our stop loss up to SP500 1706.92.

Figure 3 (below) shows the “smart money” and this is currently at a level where buying has taken place over the past year. Mind you, the value is still negative suggesting that there is no real buying and that the pace of selling has just slowed. Nonetheless, in a market that only knows one direction — up! –, this is the kind of levels that are associated with a rise in asset prices. Once again, these aren’t absolute levels of buying but only relative to the past year.

Figure 4 (below) is the Rydex Total Bull to Total Bear ratio and this is rolling over. If there is one group of market timers who actually have timed this market well over the past 4 years, it has been (oddly enough) the Rydex market timers. As figure 4 shows, they have become less bullish.

Figure 6 is an indicator that looks at the $VIX and with the indicator pointing higher, we should expect higher prices. But hold on a second. Over the past year when the $VIX hit a level of 12, this produced selling. The $VIX closed the week at 12.14.

Folks, I wish I had the answers for you this week. I don’t. The signals are mixed. Don’t get mad at me. I just interpret the tea leaves. You should have been around 18 weeks ago when I made the bullish call. Now you are left wondering “should I jump in?”

The Sentimeter

Figure 1 is our composite sentiment indicator. This is the data behind the “Sentimeter”. This is our most comprehensive equity market sentiment indicator, and it is constructed from 10 different variables that assess investor sentiment and behavior. It utilizes opinion data (i.e., Investors Intelligence) as well as asset data and money flows (i.e., Rydex and insider buying). The indicator goes back to 2004. (Editor’s note: Subscribers to the TacticalBeta Gold Service have this data available for download.) This composite sentiment indicator moved to its most extreme position 10 weeks ago, and prior extremes since the 2009 are noted with the pink vertical bars. The March, 2010, February, 2011, and February, 2012 signals were spot on — warning of a market top. The November, 2010 and December, 2012 signals were failures in the sense that prices continued significantly higher. The current reading is neutral but heading towards bearish (as in too many bullish investors).

Figure 1. The Sentimeter

 

Dumb Money/ Smart Money

 The “Dumb Money” indicator (see figure 24) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. The indicator shows that investors are extremely bullish.

Figure 2. The “Dumb Money”

Figure 3 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Market-wide sentiment continues to move further into Neutral territory, away from a Sell Bias, as transactional volume continues a seasonal decline. With earnings season beginning in two weeks, most companies have closed trading windows, limiting the ability of insiders to transact non-10b5-1 purchases and sales.”

Figure 3. InsiderScore “Entire Market” value/ weekly

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Rydex Asset Data

Figure 4 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 78.74%. The indicator is crossing below the signal line. Similar signals from this past year are highlighted on the chart. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 and 2012 with this indicator between 70% and 72%.

Figure 4. Rydex Total Bull v. Total Bear/ weekly

The Rydex Buying Power indicator assesses the amount of money on the sidelines. It is “fuel” available for buying. This indicator assesses both non – committed money (i.e., assets in the money market fund) and committed money (i.e., assets in all of the bearish funds that could potentially wind up in bullish funds) as available money on the sidelines. Low indicator values suggest little money on the sidelines and are consistent with excessive bullishness (i.e., bear signals). High indicator values are consistent with increased buying power and are consistent excessive bearishness (i.e., bull signals). The current value of the indicator is at 33.22%. Values less than 40% are consistent with market tops.

Figure 5. Rydex Buying Power/ weekly

$VIX

Figure 6 is a weekly chart of the SP500. The indicator in the lower panel looks at the current value of the $VIX relative to past pivot points in the $VIX and trend lines formed by those pivot points. The indicator is turning higher suggesting that price will follow soon follow lower as well.

Figure 6. $VIX/ weekly

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via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/RDzOVjCrvh8/story01.htm thetechnicaltake

With the Dow Transports pressing new record highs this morning (up 1% in 2014), the Dow Industrials are still lagging (down 0.8% year-todate). Despite a bid in Treasuries this morning (5Y and 7Y -2bps), stocks are jumping since the US open, helped by a lift in JPY crosses (USDJPY bounce off 103), dragging the NASDAQ into the green once again for 2014. Gold and silver have recovered the early losses but WTI crude continues to slide (back under $92).

 

 

Stocks are ‘correlated’ with the reversal off 103 in JPY – but it seems a little to high beta to be sustained for now…

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Worried that Starbucks is running out of real estate? Concerned that McDonalds will be unable to fill its quota of minimum-wage employees as urban sprawl caps out? Have no fear for as the following map shows, there is plenty of room left in the world for the chains to expand… and of course, where there is a Starbucks there is mass affluence, right? Of course, extremes of heat and cold will require a little adaptation but that’s what free easy money is for…

 

 

Source: @planetpics

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When it comes to forecasts and outlooks for 2014 (or 2013, or 2012, or 2011, etc), there is no way one can’t be tired of the endless Keynesian drivel which the sellside bombards its gullible client base, which can be summarized as follows: “this is the year when the central bank strategies, which have failed to boost the global economy for the past 5 years, will finally work and the economy picks up – yes, this time will be different, we promise. Oh, and ‘if’ we are wrong (again), well just blame it on cold weather in the winter, or warm weather in the summer and if need be, delay the ‘recovery” to the following year, while blaming the lack of insufficient stimulus – because $1 trillion in balance sheet expansion per year is obviously not enough.” Rinse. Repeat. One would think spinning the same yarn year after year, they would get it right purely by luck at this point. Alas, they haven’t. So for everyone tired of listening to the same old broken record, here is a completely different “Austrian” perspective, one shared by Scotiabank’s Guy Haselmann.

His full report is attached below, but for those curious what an alternative take on 2014’s risk factors, here is the summary:

Market Factors and Risks in 2014:

• Market liquidity, especially during crisis periods, is the leading market attribute that all portfolio managers (PM’s) miscalculate.
• Central bank ‘put’ is weakened with tapering, so volatility will be higher.
• With the surge of equities (right-tail), the greater is the probability of a move down into the ‘left-tail’.
• Portfolios should increase the overall liquidity of their portfolios, as well as their ability to make tactical adjustments.
• With asset prices so elevated and distorted and with the initiation of the Fed ‘Taper’, preservation of capital must be a core investment strategy. (Long term wealth accumulation means not participating in the downside, because historically it takes approximately 10 years to return to your high-water mark.)
• Global capital markets will be more volatile due to capital flows triggered by changing central bank actions. Emerging market economies with current account deficits will have difficulty attracting foreign capital.
• Chinese growth is a key to the global economy. Chinese housing remains in a bubble. Non-performing loans are on the rise. Ecological challenges are growing. Policy pivot from export-led growth to one of domestic demand will have growing pains.
• Shale gas, leading to U.S. energy self-dependence, is a major positive for U.S. markets over the next 10 years and has positive implications for a revival of U.S. manufacturing.
• EU markets are too complacent but investors do not wish to fight the commitment of leaders who implement reactionary ad-hoc fixes to each new crisis.
• Abenomics will not yet achieve its 2% core inflation objective. There is a paradox: as inflation rises, the yield on the 10-year JGB will be unable to stay near 0.7%. (See strategy note from May 2013). Higher debt servicing will be a problem for a country that already spends 25% of revenues on debt servicing.
• Protectionism is a great potential risk to the global economy and must be monitored closely.
• Cyber-crime and cyber-terrorism are real and growing threats. Precautions must be taken where possible. A significant event that impacts markets is likely in
  2014.
• Other risks include: escalation of Middle East tensions, escalation of Asian tension over disputed islands, EU disunity, civil unrest, election(s) of extreme political parties, and extreme weather or electrical grid problems.

Full 2014 Outlook report (pdf)

via Zero Hedge http://ift.tt/1hiETRs Tyler Durden

When it comes to forecasts and outlooks for 2014 (or 2013, or 2012, or 2011, etc), there is no way one can’t be tired of the endless Keynesian drivel which the sellside bombards its gullible client base, which can be summarized as follows: “this is the year when the central bank strategies, which have failed to boost the global economy for the past 5 years, will finally work and the economy picks up – yes, this time will be different, we promise. Oh, and ‘if’ we are wrong (again), well just blame it on cold weather in the winter, or warm weather in the summer and if need be, delay the ‘recovery” to the following year, while blaming the lack of insufficient stimulus – because $1 trillion in balance sheet expansion per year is obviously not enough.” Rinse. Repeat. One would think spinning the same yarn year after year, they would get it right purely by luck at this point. Alas, they haven’t. So for everyone tired of listening to the same old broken record, here is a completely different “Austrian” perspective, one shared by Scotiabank’s Guy Haselmann.

His full report is attached below, but for those curious what an alternative take on 2014’s risk factors, here is the summary:

Market Factors and Risks in 2014:

• Market liquidity, especially during crisis periods, is the leading market attribute that all portfolio managers (PM’s) miscalculate.
• Central bank ‘put’ is weakened with tapering, so volatility will be higher.
• With the surge of equities (right-tail), the greater is the probability of a move down into the ‘left-tail’.
• Portfolios should increase the overall liquidity of their portfolios, as well as their ability to make tactical adjustments.
• With asset prices so elevated and distorted and with the initiation of the Fed ‘Taper’, preservation of capital must be a core investment strategy. (Long term wealth accumulation means not participating in the downside, because historically it takes approximately 10 years to return to your high-water mark.)
• Global capital markets will be more volatile due to capital flows triggered by changing central bank actions. Emerging market economies with current account deficits will have difficulty attracting foreign capital.
• Chinese growth is a key to the global economy. Chinese housing remains in a bubble. Non-performing loans are on the rise. Ecological challenges are growing. Policy pivot from export-led growth to one of domestic demand will have growing pains.
• Shale gas, leading to U.S. energy self-dependence, is a major positive for U.S. markets over the next 10 years and has positive implications for a revival of U.S. manufacturing.
• EU markets are too complacent but investors do not wish to fight the commitment of leaders who implement reactionary ad-hoc fixes to each new crisis.
• Abenomics will not yet achieve its 2% core inflation objective. There is a paradox: as inflation rises, the yield on the 10-year JGB will be unable to stay near 0.7%. (See strategy note from May 2013). Higher debt servicing will be a problem for a country that already spends 25% of revenues on debt servicing.
• Protectionism is a great potential risk to the global economy and must be monitored closely.
• Cyber-crime and cyber-terrorism are real and growing threats. Precautions must be taken where possible. A significant event that impacts markets is likely in
  2014.
• Other risks include: escalation of Middle East tensions, escalation of Asian tension over disputed islands, EU disunity, civil unrest, election(s) of extreme political parties, and extreme weather or electrical grid problems.

Full 2014 Outlook report (pdf)

via Zero Hedge http://ift.tt/1hiETRs Tyler Durden

Just when you thought bizarro world couldn’t get any, er, bizarrer, here comes – who else – Dennis Gartman, who is now long gold…. in crude oil terms.

Further, we shall recommend owning gold in terms of crude oil, buying the former and selling the latter in equal dollar sums. Further, to eliminate the impact fo the Brent/WTI spread from this trade, we’ll do half of the oil trade in WTI and half in Brent.

Uhm, #Ref!

The New idea…

 

as the old faithful has been ‘killing it’

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Submitted by Charles Hugh-Smith of OfTwoMinds blog,

"Prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable.

Longtime readers know I have been covering residential housing since mid-2005. In those 8+ years, housing has proceeded through a cycle of bubble-bust-echo-bubble: now the echo bubble is crumbling, for all the same reasons the 2006-7 bubble burst: a prosperity based on asset bubbles and low interest rates is a phantom prosperity that cannot last.

Correspondent Mark G. has written a three-part series on the current state of the residential and commercial real estate (CRE) markets. Part 1 addresses residential real estate.

The broad context of this analysis is straightforward: an economy based on ever-rising consumption falters when real household incomes stagnate or decline. Real income for the bottom 90% has been stagnant for forty years, and has declined since 1999.

The only way to keep consumption rising when incomes are stagnant is to boost the borrowing power (i.e. collateral and creditworthiness) of households by inflating asset bubbles that create temporary (i.e. phantom) collateral and by lowering interest rates so the stagnant income can support more debt.

This is why the Federal Reserve and the other agencies of the Central State have been reduced to blowing serial assets bubbles: there is no other way to keep a consumption-based economy from imploding.

But "prosperity" based on serial asset bubbles and near-zero interest rates is neither real nor sustainable: real prosperity is based on rising real incomes, not debt leveraged on phantom collateral.

Here is Part 1 of Mark's series on U.S. real estate.

 

PCE = Personal Consumption Expenditures. GDP = Gross Domestic Product. The ratio of these numbers times 100 produces the percentage figure.

PCE includes food, entertainment, residential housing, automobiles, clothes and iPads. The consumer broadly has two ways to obtain the money needed to support this spending. The first method is to earn it and the second method is to borrow it.

Since 1999 average real household income in the USA has declined by 10%. This real decline was only temporarily reversed during the peak bubble years. From 2000 to 2008 the full effects of this decline were masked by a vast expansion of household debts of all kinds, a collapse in mortgage and consumer lending standards and a concurrent decline in household net worth.

Exactly which 90% of the population is bearing the brunt of this collapse, and why it is occurring, is beyond the scope of this overview.

This trend culminated in the financial crisis of 2007 – 2009. This began in the subprime mortgage sector, spread to the entire residential real estate market and progressively engulfed commercial real estate, banking, the stock markets, commodity markets and finally all of international trade.

In response the Federal Reserve multiplied its balance sheet five times from $800 billion to $4 trillion dollars. And the US Government concurrently ran peak fiscal deficits up to $1.8 trillion. The US Government also extended many trillions more in direct guarantees of minimum prices of financial assets of all kinds.

US Residential Real Estate

The observed result of all this monetary and fiscal stimulus, combined with the lowest mortgage interest rates in the post World War II era, was to only slow the rate of decline of median US household income. In the combined residential US real estate market this set of policies had the following results:

Existing Home Sales

The rate of existing home sales has yet to recover to the levels of the mid-1990s. Since the most recent decline in sales rate is paralleling the upward spike in mortgage rates it is reasonable to believe they probably will not recover.

The average sales price of existing homes has recovered to approximately 2003 levels.

(Note: Whether increasing average home prices for a population still experiencing declining real average household incomes is an intelligent public policy goal is a second question. This question deserves far more critical discussion than it currently receives.)

New Home Sales: (This time it really is different)

Those interested in detailed numbers for single and multifamily housing construction can find them here:

New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places(Census Bureau)

New-Home Production Tops 1 Million in November (NAHB)

The National Association of Homebuilders (NAHB) announced in mid-December 2013 that new starts in single and multi-family housing had finally exceeded an annualized rate of 1 million units. In other words, the actual 2013 new construction number will be approximately 935k.

Prior to 2008 these sub 1 million total new build numbers were only seen in the six years of 1991,1981, 1980, 1975, 1966 and 1960. They have subsequently occurred six straight years in a row from 2008-2013. It will not be known for another year whether new builds will finally exceed 1 million in 2014.

Note that US population has been continuously increasing over the entire time period. Therefore the present era represents the lowest per capita rate of new construction on record for six decades.

Near Term Prospects

There are two primary reasons that residential real estate has not recovered more that it has. These are very straightforward:

1. Real US household incomes continue to decline.

2. Residential mortgage lending standards have been significantly tightened since 2007.

These charts represent averages and sums across most of a continent. Within this expanse some areas are already experiencing new record bubbles while many others continue to fall deeper into local depressions.

There are several other factors that have affected and will continue to affect the residential real estate recovery.

Factor One: Habitable Vacant Dwellings

AMERICA’S 14.2 MILLION VACANT HOMES: A NATIONAL CRISIS (RealtyTrac)
“As of the first quarter of 2013, there are just over 133 million housing units in America and 10.7 percent of them — more than 14. 2 million — are vacant all year round for some reason or another, according to the Census Bureau."
To this 14.2 million empty dwellings we can add several million additional vacation homes that are only occupied for a few months a year.

Factor Two: Cultural Shift To Multigenerational Households

At least one person is required to create a household and occupy a dwelling. A related question is, what is the average number of empty bedrooms per occupied dwelling in the US? It is at least 1.0 and very probably much higher.

During recent years there has been an increase in average household size and a corresponding drop in the total number of households. This is the result of adult children and grandchildren moving back in with the “folks” to weather the economic storm. Whenever this occurs, two households become one household and residential housing demand is sensibly reduced.

A related trend is adult children who are economically unable to ever leave their parents household. To the extent these shifts are permanent trends rather than temporary expedients this will permanently reduce the per capita demand for residential housing.

Based on results the decline in real household incomes has proven insensitive to a variety of economic theories and policies. Neither the Republican-Bush era tax rate cuts nor the Democratic-Obama Keynesian pump priming at fire hydrant pressures has succeeded in reversing this long term trend. Nor has anything appeared recently to suggest an abrupt reversal is at hand in this key trend of average household income.

In these circumstances the only other possibility for further residential real estate “recovery” would be for government regulators to foster another bubble by effectively relaxing residential mortgage lending standards again.

Three Possible Future Outcomes For U.S. Residential Real Estate

In order, these are: go up further, stay the same or resume declining.

1. Up. The Federal Reserve has already begun withdrawing from its bond buying program, albeit at a slow rate of ‘taper’. This has accordingly led to mortgage rate increases which were accompanied by a prompt decline in existing home sales. It is mathematically impossible for a population with declining real household incomes to propel residential real estate markets higher in the face of higher interest costs.

2. Steady State. At a minimum, this outcome requires that average household income cease declining and that mortgage rates not rise significantly. Neither of these outcomes is likely. The following review of commercial real estate will examine clearly visible economic trends that make further household income declines a certainty.

If we cannot go up and even staying the same becomes doubtful this leaves:

3. Down Again.

 

via Zero Hedge http://ift.tt/1j3uc8B Tyler Durden

Over the weekend, the entertaining @HistoryInPix twitter account posted this distrubing photo of the cemetery where all the radioactive vehicles that were used in the Chernobyl cleanup went to die.

One can’t help but wonder: where is the comparable “cemetery” for the Fukushima disaster cleanup, and does the above photo have anything to do with the recently passed secrecy bill that was “designed by Kafka and inspired by Hitler“…

For those curious to see more of the Chernobyl cemetery, the following documentary should satisfy some of the pent up curiosity.

via Zero Hedge http://ift.tt/1j3u9cN Tyler Durden