Our view over the past several months has been that the US economy is slowing, just when the Fed started talking about Tapering their $85bln in monthly Treasury Bond and Mortgage Bond purchases. What a conundrum for the FOMC.
So what is the Fed watching? I think the same economic indicators we're watching. Not sure what some other talking heads are watching.
Employment Growth: YTD13 the US economy has created about 1.4mm Non-Farm jobs. Sounds reasonably impressive (but there are well over 200mm potential workers in the US) but about 75% of those jobs created are on a part-time basis signalling the "quality" of those jobs are not very good for overall consumer confidence (Thanks Obamacare). And even earlier this month when full-time jobs showed considerable improvement for Aug/13, the quality of those full-time jobs was poor as they were all in low-paying roles. Never mind the UE rate, look at the Employment levels and the quality inside.
Inflation: Look at any inflation indicator you like, but there is none to be seen. I still maintain that the Fed is scared spit less about deflation! Inflation is easily rectified through higher rates whereas disinflation/deflation are a much harder problem to solve. Just look at what has been done the past 5yrs!? US GDP PCE is hovering in the 1+% range...well-below the Fed's target of 2%.
Housing: A picture is worth a thousand words (see chart below). Basically, US Housing Starts have just hit the previous cycle lows over the past 60yrs or so. And that is after 5yrs of economic recovery, slightly aided by a small dose of central bank stimulus...the best we could do was hit the previous cycle lows?! Who says this is a strong recovery? So if the US housing market is in recovery mode, why is is that Sales are about 32% cash (read, Hedge Funds buying), OSB has gone from $430 to $220 and Lumber has gone from $400 to $278 in June (but back to $350 today)? Well the words out of Chairman Bernanke's mouth in mid-June had something to do with it as rates soared along with mortgage rates. Demographics are not very favourable for household formation either as younger people are strapped with student loans and forced to live with their parents.
Credit Formation: It would appear that US Bank Lending has begun to slow. From their Bank Assets, Credit, Loans and Leases, Commercial and Industrial and Real Estate all started to roll over a little bit this past summer. Who wants to borrow with 1% inflation? Anyway, certainly not good news as deleveraging continues.
The Good News? Well, all risk assets have a needle in their arm and that needle is the Fed. And the Fed told us yesterday that Fed Funds (very short end rates) are not going to go up till at least 2016 (which means that the time to buy floating rate debt may not upon us yet). So bad economic news is good market news...a Goldilocks environment once again.
I was on a 3-person Hedge Fund Panel last night on BNN. I spoke a bit about credit formation in the USA, or lack thereof, as well as one of our top credit picks in Canada, Alliance Grain Traders 9% 2018 2nd Lien Sr Secured bond.