Topley’s Top Ten – November 25, 2019

Author

Matt Topley
November 25, 2019

1.M2 Money Supply Growing at 10.4% Clip Over Last 3 Months.

“JasonDeSana Trennert, who runs Strategas Securities, notes that the M2 moneymeasure—cash, checking, savings deposits, small certificates of deposit, andmoney-market funds—has been growing at a rapid 10.4% annual clip over thepast three months.

Supporting that growthhas been the rapid expansion of the Federal Reserve’s balancesheet, which has climbed at a 31% yearly rate over that span. While the Fedsays its monthly buying of $60 billion of Treasury bills doesn’t representquantitative easing—the central bank’s past rounds of securities purchases tostimulate the economy—Trennert calls it a “distinction without difference forowners of risk assets,” such as stocks. The expansion has been international,adds Evercore ISI, which points out that the balance sheets of the EuropeanCentral Bank and the Bank of Japan also are headedhigher.”

M2 money supply monthly chart

2.Bad News: Americans Are Saving Again

Savingmoney is good for individuals but bad for the economy as a whole. That isthe “paradox of thrift” mentioned everywhere from the Bible (Proverbs 11:24) toKeynes’ economic theories still in use today. Modern developed economies havegotten around some of the problem by insuring bank deposits and developingmoney markets, at least ensuring that “savings” circulate back into the system.Cash and gold, both still popular savings options, are two exceptions ofcourse.

Thatmakes a nation’s savings rate something to watch; here is the historical BEAdata for the United States back to 1959:

Andhere is what we see in that data:

  • From 1959 to 2007, US savings rates broadly followed interestrates.

  • During the period when rates rose (1959 – 1981) so did thepercentage of consumer’s disposable income that went into savings (i.e. notspent).

  • When rates declined (1982 – 2007), savings rates fell. From the10% – 15% of disposable income saved during the period of rising rates, thesavings rate fell to a trough of 2.2% in mid 2005.

  • The Great Recession-and-after period (2008 – present) breaks theconnection between interest rates and savings. Savings rates have generallyrisen, and now stand at 8.3% – the same level as the late 1980s when 2-year Treasuriesyielded over 5% rather than today’s 1.6%.

Takeaway:American savings rates are structurally higher right now than at any pointsince the early 1990s, and it’s not because interest rates are better (the oldrelationship) but likely due to a variety of new factors:

  • An aging population, with a higher propensity to save ratherthan spend.

  • A younger generation (millennials) that despite their reputationare actually saving what they can and deferring consumption.

  • Broad concern about the state of the US economy being late inthe current cycle.

  • While overall savings rates may be higher, the aggregate datamay simply reflect incremental propensity to save among higher incomehouseholds.

USretail money market fund balances support that final point – that much of theboost to savings rates post-Crisis originates from the balance sheets ofwealthier households:

Theincrease in MMF balances over the last 3 years totals $353 billion, a 55%increase. That is a much greater increase than what we see in UScommercial bank savings account deposits, which are only 11% higher over thesame period. To the degree that this crude comparison captures general savings(banks) versus that of wealthier, more financially savvy individuals (MMFs), itdoes help explain why US savings rates are on an upswing.

3.For Now Liquidity Trumps Uncertainty.

Today I would make the same argument: Liquidity is likely tobeat uncertainty, or at least until early 2020. I would cite three reasons infavor of this scenario: some easing of geopolitical risk, acceleratingliquidity on the back of expanding central bank balance sheets and thelikelihood that better liquidity will lead to economic stabilization.

  1. For now, geopolitical uncertainty is receding. Geopolitical risk appears to be fading, at least from the summer peak. The BlackRock Global Risk Index has fallen by around 20% since August.

  2. Global liquidity is improving. While the Federal Reserve may take a break from cutting rates, most measures of financial conditions are improving. In particular, central banks are once again buying assets. The European Central Bank (ECB) has resumed its quantitative easing program and the Fed, partly as a response to recent dislocations in the money markets, is once again expanding its balance sheet. As a result, the cumulative balance sheet of the Fed, ECB, Bank of Japan and Bank of England is rising for the first time since 2017.

  3. Better liquidity suggests stabilizing growth. The improvement in global liquidity should lead to improving, or at least more stable, growth. Looking at the BlackRock Financial Conditions Index suggests growth estimates are likely to accelerate during the next quarter (see Chart 1).

4.40,000 Investable Stocks Worldwide

World Market Capitalization Broke Out in 2017

5.No Bull Market Has Ever Started With Case Shiller Above 30

What of stocks? The S&P 500Shiller Price-to-Earnings Ratio is 30.2 which implies a -2% compound annualreturn over the coming 8yrs to return the ratio to its 17.0 mean. But not allthings return to mean.

If the Shiller P/E is 50% above mean in 8yrs, it implies anearly +3% annualized S&P 500 return. And if it falls 50% below mean,stocks annualize at roughly -10% for the coming 8yrs.

There is no mathematical equation using even the most optimisticof those returns which produces +7.5%, even playing the leveraged privateequity game.

Of course, it’s possible a new bull market has begun. But in 150yrs, only secular bear markets have started with theShiller P/E above 30 (secular bulls all began with the Shiller P/E between5-10).

The thoughtful guys at GMO estimate the following 7yr forwardannualized real returns: US large cap equity -3.9%, US small caps -1.0%, Int’llarge caps -0.1%, Int’l small caps +1.7%, EM equity +4.7%, EM value equity+9.3%, US bonds -2.2%, Int’l bonds (hedged) -3.9%, EM debt -0.1%, US TIPS-1.7%, US cash +0.1%.

Zerohedge

Hedge Fund CIO: “We ArePlaying The Game Called Institutional Investor”

6.S&P Moving Higher Without Increased Earnings.

8.S&P500 rebound leaving earnings behind, but then markets are supposed to beforward looking not backward looking… h/t @jmanfreddi

7.Pickup Truck Sales Generating 70% of Profit for North American Carmakers.

Large trucks accounted for 36% of Ford’s North America unit saleslast year, while those trucks generated 70% of the region’s profit, Barclays PLC said. That is, in part, because auto makers are able to charge so much more for these vehicles,with customers paying for performance features and creature comforts.

8.Personal loans are ‘growing like a weed,’ a potential warning sign for the U.S. economy

Heather Long, The Washington Post

A monitor displays Equifax Inc.signage on the floor of the New York Stock Exchange (NYSE) in New York, U.S.,on Friday, Sept. 15.

Americansare hungry for personal loans that they can use as quick cash to pay foranything from vacations to credit card debt, a potential red flag for theeconomy.

Personalloans are up more than 10% from a year ago, according to data from Equifax, arapid pace of growth that has not been seen on a sustained basis since shortlybefore the Great Recession. All three of the major consumer credit agencies —Equifax, Experian and TransUnion — report double-digit growth in this marketin recent months.

Expertsare surprised to see millions of Americans taking on so much personal loan debtat a time when the economy looks healthy and paychecks are growing for manyworkers, raising questions about why so many people are seeking an extrainfusion of cash.

“Definitelyyellow flares should be starting to go off,” said Mark Zandi, chiefeconomist at Moody’s Analytics, which monitors consumer credit. “There’san old adage in banking: if it’s growing like a weed, it probably is aweed.”

Personalloans are unsecured debt, meaning there is no underlying asset like a home orcar that backs the loan if someone cannot repay. The average personal loanbalance is now $16,259, according to Experian, a level that is similar tocredit card debt.

Personalloan balances over $30,000 have jumped 15% in the past five years, Experianfound. The trend comes as U.S. consumer debt has reached record levels, accordingto the Federal Reserve Bank of New York.

Therapid growth in personal loans in recent years has coincided with a FinTechexplosion of apps and websites that have made obtaining these loans an easyprocess that can be done from the comfort of the living room couch. FinTechcompanies now account for nearly 40% of personal loan balances, up from just 5%in 2013, according to TransUnion.

Over 20million Americans now have these unsecured loans, TransUnion found, double thenumber of people that had this type of debt in 2012.

“Youcan get these loans very quickly and with a very smooth, sleek experienceonline,” said Liz Pagel, senior vice president of consumer lending atTransUnion. “We haven’t seen major changes like this in the financialservices landscape very often.”

Totaloutstanding personal loan debt stood at $115 billion in October, according toEquifax, far smaller than the auto loan market ($1.3 trillion) or credit cards($880 billion). Economists who watch this debt closely say personal loans arestill too small to rock the entire financial system in the way that $10trillion worth of home loans did during the 2008-09 financial crisis.

Butpersonal loan debt is now back at levels not far from the January 2008 peak,and most of the FinTech companies issuing this debt were not around during thelast crisis, meaning they have not been tested in a downturn.

“Thefinance industry is always trying to convince us that there are few risks toborrowing and overleveraging is not a problem,” said Christopher Peterson,a University of Utah law professor and former special adviser to the ConsumerFinancial Protection Bureau. “Overleveraging yourself is risky forindividuals and for our country.”

TheU.S. economy is powered by consumer spending, and debt helps to fuel some ofthe purchases. Economists are watching closely for signs that Americans arestruggling to pay their bills, and personal loans could be one of them.

Themost common recipient of a personal loan is someone with a “nearprime” credit score of 620 to 699, a level that indicates they have hadsome difficulty making payments in the past.

“Thebulk of the industry is really in your mid-600s to high 600s. That’s kind of asweet spot for FinTech lenders,” said Michael Funderburk, general managerof personal loans at LendingTree. “We see a lot of consumers that havebeen doing perfectly fine in their financial life. They are gainfully employed.They have a family. They have a mortgage, but something happened. They lost ajob. Or a medical emergency…the net result of that is they missed a bill orended up with a little bit more credit card debt than they wanted.”

Thevast majority of customers go to FinTech providers like SoFi, Lending True,Lending Club and Marcus by Goldman Sachs for debt consolidation, the lenderssay. People run up debt on multiple credit cards or have a medical bill andcredit card debt and they are trying to make the payments more manageable. Someseek a lower monthly payment, similar to refinancing a mortgage. Others want topay off the debt in three years to clean up their credit score.

FinTechssay they are helping people make smarter financial choices. While a credit cardallows people to keep borrowing as long as they are under the credit limit, apersonal loan is for a fix amount and must be paid off over a fixed amount oftime, generally three or five years. Some online lenders allow people to shoparound for the best rate, and most of the main players cap the interest rate at36% to ensure they are not offering any payday loan products.

Butthere is concern that some Americans get personal loans to tide them over andthen continue to take on more credit card or other debt.

Creditcard debt has continued to rise alongside personal loans, according to thelatest data from the Federal Reserve Bank of New York. TransUnion has recentlynoticed an uptick in retailers offering personal loans when someone comes tothe cashier to buy furniture or holiday toys.

“Ihave fixed feelings about personal loans. They are superior to credit cardsbecause the payments are fixed,” said Lauren Saunders, associate directorof the National Consumer Law Center. “The problem is many people stillhave their credit card and end up running up their credit card again, so theyend up in a worse situation with credit card debt and installment loans on topof it.”

Saundersalso notes that these loans are mainly regulated by state law, and the rulesand watchdog capabilities vary widely by state.

FinTechssay they are trying to help people make better choices. One of their biginnovations is giving people who take out personal loans a discount if theytransfer the cash they get from the loan directly to pay off their billsinstead of sending it to their bank account first.

“Thishas been one of the most successful products we have ever launched. People aretrying to do the right thing and they’re getting offered a lower rate if theydo balance transfer and direct deposit,” said Anuj Nayar, financial healthofficer at LendingClub, a peer-to-peer lender that offers personal loans up to$40,000.

Despitethe rapid growth in personal loans lately, borrowers appear to be able to payback the debt. The delinquency rate for personal loans is 4.5%, according toEquifax, a low level by historical standards and well below the 8.4%delinquency rate in January 2008.

But asthe number of Americans with one of these loans grows, so does the potentialfor pain if the unemployment rate ticks up and more people find themselvesstrapped for short-term cash.

9.Global Market Share of Art….U.S. UK and China Dominate.

The Global Art Market Reached $67.4 Billion in 2018, up 6%

BenjaminSutton

10.Make These 10 Commitments to Live a Truly Accountable Life

By SamSilverstein | November 19, 2019 | 0 

Accountabilitymeans being accountable to ourselves first—and that requires a special kind ofcommitment. There are certain elements of mindfulness and presence that makethe kind of commitment I am talking about possible. We can think of this interms of what I call choice points.

All daylong, you and I make choices. What is the choice we make when someone cuts usoff in traffic, or says something mean to us, or steps in front of us in line?What is the choice we make when we see someone drop a bag of groceries, or whenwe get a text from a friend or loved one who needs emotional support? Whetherwe realize it at the time or not, these choices we make define us.

Are we onautopilot? Or are we being purposeful as we respond to the situation in frontof us? Are we really PRESENT? Are we truly aware of what we are doing? Are wemaking conscious choices, based on the specific commitments we have made toourselves about the kind of person we are choosing to be?

Autopilot iseasy. Maintaining conscious presence at each and every one of these moments asour day moves forward is sometimes a struggle.

Respondingin accordance with our own commitments can be a struggle. Stepping away fromour own force of habit is a struggle. The struggle is good. The struggle isnecessary. If it is not a struggle, it is not a choice point!

The kind ofcommitment that delivers the best possible response to each and every choicepoint does not just happen. It is the work of a lifetime, and it takes steadypractice. That may sound intimidating. What I want you to notice now, though,is that the long-term practice we are discussing always involves presence inthe moment that you are experiencing right now.

The verybest personal accountability practice involves your present-tense awareness of10 specific, personal commitments to yourself and others:

COMMITMENT #1: COMMIT TO DISCOVER AND REALIZEYOUR POTENTIAL…AND TO HELP OTHERS REACH THEIRS

COMMITMENT #2: COMMIT TO THE TRUTH

COMMITMENT #3: COMMIT TO THE VALUES

COMMITMENT #4: COMMIT TO “IT’S ALL OF US”

COMMITMENT #5: COMMIT TO EMBRACE FAULTS ANDFAILURES AS WELL AS OPPORTUNITIES AND SUCCESSES

COMMITMENT #6: COMMIT TO SOUND FINANCIALPRINCIPLES

COMMITMENT #7: COMMIT TO A SAFE SPACE

COMMITMENT #8: COMMIT TO “MY WORD IS MY BOND”

COMMITMENT #9: COMMIT TO STAND STRONG WHENALL HELL BREAKS LOOSE

COMMITMENT #10: COMMIT TO A GOOD REPUTATION

I believethese 10 INTERRELATED commitments can help us notice and respond effectively tothe most critical choice points at the moment they arise. They can help uspause, become fully engaged in the moment, and make the choice that is truestto our best selves. It is only in the choice points that we make the decisionto live out the commitments that define us. Only in that moment can we exerciseour free will and live out those commitments.

These 10specific commitments are the commitments that people who live truly accountablelives make to themselves… resolve to take on in their relationships withothers… and renew constantly during the day as they encounter their own choicepoints.

Making these10 commitments to yourself is the first, essential step in building anaccountable life and an accountable world—the step without which nothinghappens. Action always follows belief. If you develop a strong personal beliefin the importance of these commitments, and if you begin acting on thosebeliefs, you will benefit from them. If you do not, you will not. It is thatsimple. If you do not believe it, you will never do it.

From thebook: I Am AccountableCopyright © 2019 by Sam SilversteinPublished by Sound Wisdom