About Me

Retired chief investment officer and former NYSE firm partner with 40 years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Friday, October 18, 2013

Liquidity Cycle -- Looking Ahead #2

Here are a couple of economic follow-ups to the overview outlined yesterday (just below).

Economic Power Index (EPI)
This index is expressed as a yr/yr % change and combines the 12 month momentum of
both the real or inflation adjusted take home wage and the change in total civilian emp-
loyment. A reading of +4.0% or higher suggests a robust, balanced economy with labor
as well as capital  being rewarded by decent productivity growth. 

The last time the EPI was up at the 4.0% level was in early 2007. Since then, no monthly
yr/yr observations have exceeded 2.0% and there have been some negative readings at
times in each of the past five years. The poor performance reflects both the very slow
pace of jobs growth and a real wage that has increased by a bit less than 1.0% per year.
Moreover, if one tosses out 2009 when the real wage was strong on a collapse of inflation,
the real wage has been eroding over 2010 - 2013. There have been strong increases in
productivity over this period, but business chieftains have disenfranchised the rank and file
in favor of rewarding shareholders and top management.

The EPI may do better in 2014 on modestly stronger jobs growth and the better take home
pay compared to this year when workers had to absorb a 2.0% increase in the payroll tax
back up to the old norm of 6.0%.

The EPI has been running about -0.5% this year and will remain a drag factor on the economy
until rising output finally pushes business to accelerate jobs and pay growth. To get this
sort of change, we may need to see capacity utilization, now around 78%, rise up and through
the 80% level. If this happens, count on higher inflation, too.

The sharp rise in business profit margin has come heavily at the expense of a sizable decline
in the real wage when it is adjusted for strong productivity growth. This a nice recipe for
the stock market in the shorter run, but will prove catastrophic longer term if sustained
as aggregate buying power weakens.

Global Economic Supply & Demand
Strong global growth through much of the past decade triggered tight supply / demand
conditions for basic materials, fuels and other commodities. This set off a large investment
cycle outside the US which substantially increased supply availability. The deep global
recession of 2008 - 09 created substantial slack which has been only partly taken up
over the past couple of years. Thus, going forward price boosts for commodities and
materials will be temporary to reflect inventory restocking with firmer trends to await
possible stronger growth in the out years of the cycle.

To get a flavor for the past 15 years for basic materials, check out the long term price
chart for copper. Comex Copper

 

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