Wayne Wile: US Jobs Data Beginning to Buckle?

The one thing the Federal Reserve keeps pointing to as its justification for normalizing interest rates is the improvement in the jobs market and especially the declining unemployment rate. Readers will be familiar with the fact that I am sceptical of the data. But leaving that issue aside, it looks like the data may be heading down.

Weekly initial jobless claims are starting to rise. The last three weekly reports show a 9.1% surge in jobless claims. Here is today’s:

Released On 3/31/2016 8:30:00 AM For wk3/26, 2016

Prior Consensus Consensus Range Actual
New Claims – Level 265 K 266 K 260 K to 275 K 276 K
4-week Moving Average – Level 259.75 K 263.25 K
New Claims – Change 6 K 11 K

This data is important because it is used to adjust the calculation of the monthly employment report. The March report will be released tomorrow. In the past, when the trend of lower initial jobless claims has reversed, it has been a good leading indicator of a slowing economy and job market.

There is more. Challenger, Gray & Christmas, Inc. the Chicago-based global “outplacement and career transitioning firm” (they fire people for big companies) also reported today a significant jump in layoffs for the first quarter of this year. In Q1, employers announced 184,920 job cuts, up 31.8% from Q1 of 2015, the worst start to a year since 2009. The trend seems to be accelerating as Q1 2016 cuts were up 75.9% from Q4 2015 when ‘only’ 105,079 layoffs were announced.

The bad news is not confined to the oil industry. The Challenger, Gray & Christmas report says that “announcements have increased significantly” in retail and computers. Tomorrow’s much watched monthly employment report could turn out to be a big negative surprise.

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Wayne Wile, Business Sales and Inventories Predict a Big Flush

You may remember, dear reader, that I have called a bear market for equities. How am I doing so far? Well, the S&P 500 is up 13% from its February 11th intra-day low (1812). That sure doesn’t look good, does it? But I’m still convinced I’m right. I haven’t shorted the market yet, and won’t until the S&Ps break that February low. So this rally hasn’t hurt me, it’s just annoying to have to wait.

Maybe Wall Street still has inventory to unload, as David Stockman says.

The signs of an impending flush are now everywhere. The March 15 release of business sales for January, for example, showed another down month. The critical inventory-to-sales ratio for the entire economy is now at 1.40—–a ratio last recorded in May 2009.

Here’s the chart from Zero Hedge:

Business Inventories

Once upon a time, when I was a young lad, investors used to watch the real economy, not the latest Fed head jabbering on CNBC. One of the things we paid keen attention to was the inventory-to-sales ratio because we knew that’s where recessions came from, and recessions were not good for the stock market.

When sales slow down, inventories build up. The build in inventories actually continues to boost GDP because the supply chain hasn’t got the message yet. When they do, they stop producing as much, inventories fall faster than sales and the GDP falls, giving us an official recession…ALWAYS after the fact. Those who watch GDP, like most economists, totally miss the boat. They never call the recession before it starts because they follow their models and not the real economy. Only highly intelligent and educated people can be this stupid, as I am fond of saying.

Business sales as reported on March 15 were down by 5.1% from their July 2014 peak. Declines of this magnitude have occurred only twice since 1992 and both times they signalled a recession.

Here is the chart of total business sales for all levels of the economy. Is this hard to understand?

FRED

The shaded areas mark recessions.

If you haven’t sold your stocks yet, the gods of the markets are giving you another chance, just an eyelash below the all-time highs. Accept the gift, dear reader, accept the gift.

Wayne Wile, No Recession? Explain this.

The US Fed and all the conventional economists say the chance of a US recession is in single digits. Then why is foreign trade imploding?

Newly-released data shows Chinese exports fell 25.4 percent during the month of February compared to a year ago while Chinese imports fell 13.8 percent compared to a year ago.  For Chinese exports, that was the worst decline that we have seen since 2009 while Chinese imports have now fallen for 16 months in a row on a year-over-year basis. 

China accounts for more global trade than any other nation (including the United States), so this is a major red flag.  Anyone saying the global economy is in “good shape” is clearly not paying attention.

China Exports

What does this have to do with a US recession, you might ask? The US is China’s largest export market. Exports to the US fell 23.1% year-over-year in February compared to -9.9% in January. Does this tell you something about the health of the US consumer? I think so. Anyone here own Walmart?

I don’t know how anyone can dismiss the importance of these numbers.  As you can see above, this is not just a one month aberration.  Chinese trade numbers have been declining for months and that decline appears to be accelerating. Donald Trump will tell you that China is manipulating its currency to increase its exports and take American jobs. Really? They don’t seem to be doing a very good job of it.

Wayne Wile, The Earnings GAAP

Readers will be familiar with my view that we are now in an earnings recession—year-over-year S&P500 earnings are now down three quarters in a row and I’m confident we are headed for more.

But there is a second earnings issue besides the slope of the trend that bothers me just as much. The accounting profession has something called GAAP—Generally Accepted Accounting Principles–which set the standards for how earnings are calculated. GAAP has rules about recognizing revenue, what is expensed, depreciation, tax reporting and so on. The result is a final number that can be compared against the past and against other companies.

At the end of every boom (like now), these standards are increasingly ignored in favor of reporting non-GAAP earnings. What are non-GAAP earnings? The short answer is just about anything you want. Or as one accountant friend puts it, “earnings without the bad stuff”. And at the end of every bust, companies get religion and go back to GAAP to try to win back the confidence of investors. But in the meantime, Wall Street analysts go along with non-GAAP reporting because it makes everyone feel good.

What bad stuff gets left out? Well, stock based compensation for one; it should be expensed as compensation but often is not. Or inventory write-offs and plant closings which seem to happen every year but are slipped out of the earnings calculation as so-called non-recurring items.

How bad is it? The gap between GAAP and non-GAAP has never been wider. Total non-GAAP EPS for the S&P500 are expected to hit $118 for 2015. At an S&P of 1940, $118 implies a P/E multiple of 16.5x.

Now look at GAAP earnings. Using standardized I/B/E/S GAAP earnings (Institutional Brokers’ Estimate System) which excludes pro-forma write offs, add backs, non-recurring items and countless other misleading numbers, you get total S&P500 earnings for 2015 of just $91.5 rather than $118, the lowest S&P500 GAAP earnings per share since 2010. This results in a GAAP P/E above 21, the highest since the financial crisis.

GAAP

So what is going on here? The growing decline in earnings is being hidden from you. The blue bars tell the tale. At some point, the overstatement of earnings will become clear. It will not be a good day for shareholders.

Wayne Wile – Upward GDP Revision Not Good News

The second estimate of real US fourth quarter GDP released today was a miserable seasonally-adjusted annual rate of 1.0%. But it was up from the even more miserable first estimate of fourth quarter growth of 0.7% which came out at the end of January. The second estimate was even above the consensus range. Good news, right?

Wrong. The increase was due to a higher estimate of inventory accumulation during the quarter. The growing inventories of today are the declining sales and recessions of tomorrow.

Here’s the data:

Prior Consensus Consensus Range Actual
Real GDP – Q/Q change – SAAR 0.7 % 0.4 % 0.2 % to 0.8 % 1.0 %
GDP price index – Q/Q change – SAAR 0.8 % 0.8 % 0.8 % to 0.9 % 0.9 %

The first estimate does not use the data from the full quarter, just the first two months. Demand slowed as the quarter progressed, resulting in a gain in inventories of $81.7 billion compared to the first estimate gain of ‘just’ $68.6 billion. Meanwhile, today’s report downgraded personal consumption expenditures to an annualized (and pathetic) plus 2.0 percent in the fourth quarter versus an initial estimate of 2.2 percent. Alarming.

Any increase in inventories is not good, dear reader, especially if consumption is weakening at the same time. The economy is slowing as any number of data points show. Inventories are already at multi-year highs and the inventory-to-sales ratio has been climbing now for more than three years. Where is the economic recovery in the chart below?

GDP growth

We continue our call for a near-term US recession. Do you really want to own US stocks?

 

Wayne Wile, The War on Cash (2)

On February 16, 2016 the Washington Post published an oped piece by Larry Summers titled “It’s time to kill the $100 bill” in which he makes it clear that the war against paper money is only just starting. Not surprisingly, just like in Europe, he argues that killing Benjamins will help eradicate crime, saying that “a moratorium on printing new high denomination notes would make the world a better place.”

Who is Larry Summers, you may ask? A very well connected American economist and Professor of Harvard University. He was the Chief Economist at the World Bank from 1991 to 1993 and Undersecretary for International Affairs for the US Treasury from 1993-1995 in the Clinton Administration. In 1995, he was promoted to Deputy Secretary of the Treasury under his long-time political mentor Robert Rubin of Citibank fame. In 1999, he succeeded Rubin as Secretary of the Treasury. While working for the Clinton administration, Summers played a leading role in the deregulation of the U.S financial system, including the repeal of the Glass-Steagall Act. Following the end of Clinton’s term, he served as the 27th President of Harvard University from 2001 to 2006.

Larry is the faithful voice of the financial and economic establishment. When he speaks, you should reach for your wallet before he does.

Larry Summers
This Larry Summers trying to look thoughtful and wise.

Mr. Summers proposes in the Washington Post “a global agreement to stop issuing notes worth more than say $50 or $100. Such an agreement would be as significant as anything else the G7 or G20 has done in years.”

France has already banned residents from making cash transactions of €1,000 ($1,114) or more. The biggest banks in Norway and Sweden are urging the outright abolition of cash. And there are reportedly plans at the highest levels of government in Israel, India, and China to remove cash from circulation.

Deutsche Bank CEO John Cryan predicts that cash “probably won’t exist” 10 years from now.

Governments want you to use money they can easily control, tax, and confiscate. Paper currency gets in their way. Do you think this is paranoid, dear reader? Are these not already the motives you have learned to expect from the authorities?

I suggest you follow the advice of Bill Bonner (http://www.acting-man.com/?p=43321): Always do the opposite of what they tell you to do. As he notes: When cash is outlawed, only outlaws will have cash. We should all be among them. And we should all own some gold.

Wayne Wile, The War on Cash

Both Central banks and commercial banks have always hated cash. When you hold cash, the banks don’t have it. And the banks want it all. Money in the bank funds the bank. Cash in your hands takes you outside their system, empowers you and reduces their profit potential.

But now this natural antipathy to cash is getting more serious. New rules governing bank insolvencies and the emergence of negative interest rates as the new cornerstone of monetary policy together make it all the more important that banks keep cash out of your hands. So, welcome to the new war on cash.

Wayne Wile - Cash
Wayne Wile, “Welcome to the new war on cash.”

Starting with Cyprus in March 2013, central banks and governments have introduced so-called bail-in laws which enable the authorities to seize deposits held in insolvent banks rather than bailing out the banks with public funds. Bank failures will now be paid for by those who have loaned the bank money, and yes dear reader, your bank deposit is legally a loan to the bank, yes even in Canada. Bail-in regulations now apply here too.

By now, we all know that central bank asset purchases (known as Quantitative Easing or QE) have failed to boost the economies of all the jurisdictions that have done them—Japan, the Eurozone, Denmark, Sweden, Switzerland and the US. The new, more extreme central bank plan to spur economic growth is negative interest rate policy (NIRP). Europe and now Japan have implemented NIRP in a frantic attempt to push companies and individuals out of cash and into borrowing and spending. Nearly a third of the world’s sovereign debt—more than USD7 trillion—now costs money to own. You have to pay the borrower to own this stuff.

The sovereign debt market is not the only victim of NIRP. The central banks of the Eurozone, Switzerland, Sweden, and Denmark now charge interest on deposits they hold from commercial banks. Not surprisingly, these commercial banks are now beginning to charge interest on deposits they hold from their customers. Your best defense? Take out your money in cash.

So it should therefore come as no surprise that governments worldwide, as well as organizations such as the IMF, BIS and OECD, are actively promoting the idea that cash should be eliminated to cut off funding for terrorism and crime.

On February 15, 2016, the European Central Bank’s Governing Council voted to withdraw the 500-euro note from circulation. This note is the second largest denomination issued in Europe after the 1000 Swiss franc note. Of course, ECB president Mario Draghi insists that withdrawing the note has nothing to do with limiting your access to cash. Rather the decision is aimed at fighting crime because, as Draghi put it: “There is a pervasive and increasing conviction in world public opinion that high-denomination bank notes are used for criminal purposes.”

Meanwhile, hang on to your $100 bills. A new report by Peter Sands, former chief executive of Standard Chartered Bank, was recently released by Harvard’s Kennedy School. The report urges governments of the 20 largest economies to ban all high-denomination notes. According to Mr. Sands, such notes are the “currency of corrupt elites, of crime of all sorts and of tax evasion. They play little role in the functioning of the legitimate economy, yet a crucial role in the underground economy. The irony is that they are provided to criminals by the state.”

Mr. Sands should know criminal activity when he sees it. While CEO, his bank helped Iran evade US sanctions which led to criminal charges, major fines and other penalties.

So, dear reader, the war on cash has begun. You can look forward to having all your savings locked into the banking system where you will be charged whatever interest rate the banks think is appropriate. Gold anyone?

Wayne Wile – Goldman, Sachs is Wrong on Gold

Gold’s number one bear Jeff Currie, the Global Head of Commodities at Goldman Sachs , this week defended his call for much lower prices, even restating his target of $1000 by year end. Goldman Sachs Group Inc. is predicting that the Federal Reserve will increase U.S. interest rates no fewer than three times this year.

In a report issued on February 9, 2016, analysts including Jeffrey Currie and Max Layton wrote: “Our economics team forecasts that the Fed will raise rates by 25 basis points three times this calendar year, to 1.3 percent.” Nonetheless, the US economy will still grow above-trend this year, boosting inflation expectations, according to the Goldman report. In their view, higher interest rates will curb bullion’s appeal because the metal doesn’t pay interest like other assets such as bonds.

The report says faster economic growth, as well as expectations for consumer-price gains, are “forecast to result in an increase in U.S. real interest rates, which under our gold framework is set to drive gold prices down to about $1,000 by year-end,” the analysts wrote.

512px-Goldman_Sachs_Tower

One of the greatest dangers facing small investors is listening to the big bank propaganda machines.

There is no way to know exactly what Goldman Sachs really thinks or what is actually in its interests. In my opinion, gold is now in a major, multi-year bull market. Get on board. If the Fed raises rates three times this year, send me your hat and I will eat it.

Wayne Wile’s Art Collection (Part 1)

Wayne Wile became an art lover and collector at an early age. “It was fascinating to me that none of us sees the world in the same way. This was immediately clear to me in my dealings with clients and business associates. For me, it was natural to explore differences in perception and that drew me to art, not only for its beauty but also because it exposes the differences in how we see the world around us.”

Some of his earliest acquisitions as a collector were the works of Nova Scotian John Cook, born in 1918 in Halifax, and John Kinnear of London, Ontario, born in England in 1920.

In the late 1990s, he encountered Gallery Arcturus in Toronto, which began a long association and collaboration. Gallery Arcturus was established in 1994 by The Foundation for the Study of Objective Art, a Canadian federally-registered charitable organization, to provide members of the public with an opportunity to view and study works by contemporary North American artists free of charge and without commercial motives.

The Gallery has acquired an extensive permanent art collection for display and study, including drawings, paintings, collages, photographs and sculptures made by notable North American artists including Deborah Harris, its curator artist-in-residence, the photographer Simeon Posen, the Inuit art sculptor Floyd Kuptana and a members of the School of Reductionism in Grass Valley, California, including Della Haywood, Heather Valencia, Robert Trice, Kelly Rivera and the renowned artist, teacher, writer, and founder of the School of Reductionism, E.J. Gold. The permanent art collection has continued to grow every year and now totals 227 works of art.

In 1997, The Foundation for the Study of Objective Art purchased a 10,000 square foot heritage building located at 80 Gerrard Street East in downtown Toronto and renovated it to serve as the permanent location for the Gallery and its administrative offices. The Gallery Arcturus building was immortalized by the famous Canadian Group of Seven artist Lawren Harris in a painting from 1912 titled “Houses, Gerrard Street, Toronto”, now a part of the McMichael Canadian Art Collection.

Through Arcturus, Wayne Wile encountered the work of Della Heywood and became one of her most avid collectors. Born in Vancouver, B.C. in 1953, Della’s primary interest from early childhood was art. In the 1960s, she studied visual and performing arts with David Orcutt, founder of the experimental Intermedia Group, whose Balinese puppetry first explored the show worlds that later beckoned her.

Working with Tony Onley, a well-known and respected Canadian artist, she visited his landscapes as they were in nature and witnessed their transformation into abstract paintings in his studio. Ever since, landscapes have been an important part of her repertoire.

Wayne Wile - Companions II
Della Heywood ‘Companions II’ Acrylic on Canvas 24inX48in (Wile Collection)

Della attended Vancouver’s Emily Carr School of Art and Capilano College where she studied lithography, metal etching, linocuts, serigraphy, drawing, sculpture and carving, in addition to painting. In her development as an artist, Della was much influenced by the Impressionists and Post-Impressionists, whose love of light, intensity of color and immediacy of gesture taught her to be unafraid.

As Wayne notes, “it’s easy to see Della’s mastery of technique, her ability to draw. But what captured me was her vision which is bold and original, as well as the spectacular intensity and effectiveness of her palette.”