A trickle here, a flood there… Shortages and supply chain issues can and do change over time. It helps to keep things in perspective. Do things get better with time?
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economic indicators
It’s Not All Bad News? A Closer Look at Some Newsworthy Numbers
The number of numbers in the news can be… overwhelming, at times. Records of all kinds are broken every day, but here’s the good news: it’s not all bad news.
Trends ebb and flow, and we’re noticing some promising signs. Let’s break down a few.
First, remember that life is a mixed bag. The past two years have brought considerable heartbreak and stress, but any change also tends to make way for new growth.
Anecdotally, we’ve been heartened by the number of stories we’ve heard from you about businesses using their downtime well. Closures gave many folks the opportunity to refurbish or expand their operations—your coffee shop opening a new location, your favorite storefront getting some much-needed repairs. And so many grocery stores and retailers continue to develop their services, like the infrastructure for easier pickups and deliveries.
And then some numbers take a little more consideration to appreciate. For example, the most recently released data suggest that it’s quitting time for many Americans. In the final months of 2021, more Americans than ever were leaving jobs—by the millions—DealBook reports. This can be a great sign, as quits tend to happen when workers feel the outlook is good, that something better must be next. A quit trend like this sometimes accompanies a period of fast economic growth. No guarantees, but at least the sentiment is that many are looking forward to a better future.
Another bright spot is the surge in business applications: Americans are starting new businesses at the fastest pace in years. The New York Times explains that the number of business applications rose 25% from 2020 to 2021. That’s typically a sign of new energy being generated in the economy. When the rate of business formation is slow, it’s a sign that jobs are going stale, business relationships can get strained and rigid. Upheaval, however, has many working people rethinking their opportunities.
All this is to say that things are moving, things are changing. It’s never all good news; it’s never all bad news. We’ll be here. We’ll keep at it.
And we’re glad you’re with us.
Clients, got any numbers worth discussing? Call or write, anytime.
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It's Not All Bad News? A Closer Look at Newsworthy Numbers – 228Main.com Presents: The Best of Leibman Financial Services
This text can be found at https://www.228Main.com/.
Seasons and Cycles: Things Grow and Things Rest
Even in the heat of summer, I can’t help thinking about the cycles of nature—such a useful way to think about the cycles in the economy and the markets.
Winter, the fallow season, is a time for regeneration and recharging, getting ready for future growth. In spring seeds are planted and the first green shoots hint at better days ahead. Then a season of growth produces crops in a cornucopia of kinds and colors, to be harvested in the fall. Then it is time for rest and rejuvenation again.
Likewise, the economy grows and rests in turns. In recessions, excesses get corrected. Overall business activity shrinks. Resources used by businesses generally decline in price. Ultimately, a new growth cycle is spurred by the impulse to make a dollar by meeting the needs of others. Producers of goods and services prosper, until excesses create the conditions for recession again.
Unlike nature, however, the economy has a less-set schedule. The last recession was a just a two-month affair; some are two years long. Growth cycles may also be long or short. And further complicating things, some investments do well when others do poorly.
So we look for companies that have seasons of growth ahead, the best bargains we can find. For some holdings, it pays to own over extended periods, firms that dominate their sectors and will emerge from slowdowns in better a position to prosper in the future.
And when the slowdowns occur across the whole economy, we trust that, just as winter gives way to spring, the economy will find new growth after the recession. It always has, every single time in American history, although there are no guarantees about the future.
Clients, if you would like to get your portfolios in closer alignment with the seasons in the market, please email us or call.
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Play the audio version of this post below:
Seasons and Cycles: Things Grow and Things Rest – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
It’s a Whole New Ballgame!
When a team came from behind to forge a tie in the course of a game, a certain sportscaster in the last century would exclaim “It’s a whole new ball game!”
Games begin tied, zero to zero. So in a sense, a game that becomes tied in mid-course is a new game. We get the same sensation from the start of a new year. The coming of the new year is a good time to reflect on the year just ending, and to think ahead about the year to come.
2018 was interesting, to say the least.
• From a high point in January, the market became choppy and volatile. Some of the bargains we own got cheaper. Account values shrank over the course of the year.
• Some corporate earnings and economic indicators were strong, and interest rates rose.
• LPL Financial, our institutional broker dealer, used its increasing scale to reduce our overhead and improve the technology with which we serve you.
• We added staff at 228 Main, and started projects that will improve things in the years ahead.
2019 awaits.
• We will work to uncover potential opportunities as the economic cycle unfolds, and continue to monitor our holdings on a regular basis.
• Sorting out how to house a growing business in the years ahead will be a bigger issue as time goes on.
• We will continue to add systems and understudies to improve the sustainability and durability of the business. (I still want to work to age 92, after all.)
Your own look back and look ahead are about your own challenges and opportunities. Clients, if you would like to talk about those, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
When Will the Next Recession Arrive?
We know the economy, like the markets, goes up and down. It expands and contracts, as naturally as the tides come in and go out, or day gives way to night. Although much in life is unpredictable, it seems worthwhile to consider where we might be in the economic cycle.
The collapse of one or more of four major economic sectors has long been a factor in recessions. Home building, auto sales, capital investment by business, and inventories have been susceptible to booms and busts. Currently, three of these remain below long-term averages while auto sales seem to be at a sustainable pace.
LPL Research recently examined the Leading Economic Index and concluded that ‘plenty of gas remains in the tank’ for a growing economy. The index is based on ten separate data points, which we find have a history of usefulness: average weekly manufacturing hours; average weekly new claims for unemployment insurance; manufacturer’s new orders for consumer goods and materials; the Institute for Supply Management Index of New Orders; manufacturer’s new orders for nondefense capital goods excluding aircraft orders; building permits for new private housing units; stock prices for 500 common stocks; the Leading Credit Index; the interest rate spread (10-year Treasury bonds less federal funds rate); and average consumer expectations for business conditions. We concur with LPL Research.
The bond market gives us hints about the possible direction of the future through the yield curve, which remains pointed in the right direction for continuing expansion. So the fundamentals for continuing economic growth seem to be in place.
Do we have worries or concerns? Shoot, yes. The world is an uncertain place. There are political risks as long-standing relationships with our allies change, and potential new rules about trade and taxes promote uncertainty.
As long term investors, we do not need to fear recessions—we need to be ready to take advantage of any bargains that may result. We have taken steps to try to mitigate risk, although there are no guarantees against unwanted and unexpected volatility.
Bottom line: we expect continued growth in the economy, but we will try to be ready for anything. If you would like to discuss how this applies to your situation, please write or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Investing in mutual funds involves risk, including possible loss of principal.
Stock investing involves risk including loss of principal.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Are You Getting Your Piece of the Pie?
The Federal Reserve provides us with a quarterly report of household net worth. The latest number is $89 trillion, up 59% from the financial crisis year of 2008. I don’t care who you are, that’s a lot of wealth—and a nice increase.
The distribution of our wealth from person to person is the subject of some political debate, which we will leave to the politicians. It always has made sense to us to focus on the things within our control; let’s see what we can learn from the numbers.
Our $111 trillion of assets includes homes, pensions, stock, money in the bank, mutual funds, small business ownership, and bonds.
We owe $22 trillion, most in the form of mortgage debt but also including consumer debt like auto loans and credit cards.
Net worth is simply the value of our assets minus our liabilities, or what we own minus what we owe. $111 trillion minus $22 trillion is our $89 trillion in net worth.
Here are the pertinent points, as we see them:
1. Having wealth in different forms is a good thing, a form of diversification. We the people have money in the bank, different kinds of investments, homes and businesses.
2. Debt can make sense when it helps us own assets of enduring value that we can afford to pay for over time. $22 trillion is a lot of debt, but it helps us to own $111 trillion worth of homes and businesses and other assets.
3. Since debt or liabilities are subtracted from assets to determine our net worth, it makes sense to minimize debt over time. One who pays off a car loan and then keeps putting the payment amount in savings each month might get by with a smaller loan the next time a vehicle is purchased.
4. Because assets are the starting point for determining net worth, one should seek to invest effectively for growth and income over time. Money does not grow on trees, but it may grow over time.
Our $89 trillion net worth is a very large amount of wealth for us as a society. The decisions we make play a big role in determining whether or not we each get our piece of the pie. We have written about Four Habits for Financial Success which might help, and we encourage you to call or email if we can be of service.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Next Recession is Coming, Continued
Federal Reserve of St. Louis
Once again it is time for our quarterly assessment of economic conditions. Is the economy growing or shrinking? This is the fundamental question.
The next recession is always out there, of course, as is the recovery which will follow it. The excesses that build up in good times lead to imbalances that get corrected by economic downturns. But what are the current indications?
• The Index of Leading Economic Indicators is supposed to point to the direction of the economy in the months ahead. It has remained solidly in positive territory.
• The bond market speaks to us about economic conditions through the yield curve. Although it has flattened somewhat recently, it remains in growth mode.
• The Current Conditions Index from LPL Research remains in positive territory.
• The “Overs,” a proprietary LPL measure of potential over-spending, over-borrowing, and over-confidence, point to continuing expansion.
• Details on the LPL Research work are available here.
Economic news is always mixed, and can always be better. But jobs and incomes and spending continue to grow in fits and starts. The weight of the evidence says we are doing OK, at least.
We do have challenges. Policy makers attempt to manage the economy from above, using a philosophy that was discredited long ago. Their interventions create distortions which we monitor carefully. Much of our work involves avoiding the problems created by people trying to “help us.”
We are on the job, doing the best we can to preserve your interests and take advantage of opportunities as they arise. Call or email us if you have questions or comments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All indices are unmanaged and may not be invested into directly.
Cars and Trucks, Philosophy and Money: A Research Case Study
How do YOU get where you want to go? Transportation. We are invested rather fully in automakers and related companies, so we pay a lot of attention to this vital sector of the economy.
Many companies in the sector are reaping handsome revenues and profits, paying generous dividends, and yet the valuations in the marketplace do not reflect the good results. Some say this is because vehicle sales are at a peak, 17 million units a year, so stock prices reflect a future decline in revenues and profits. Others forecast new sales records ahead for the industry, with rosier outlooks. Who is right?
With 260 million light vehicles in the US fleet, it seemed to us that 17 million, or one-fifteenth of the fleet, was clearly a sustainable annual sales pace. After all, replacing 1/15th of the fleet does not seem excessive.
But we know the story is a little more complicated than that. We wanted to see how annual sales compared to fleet size through recent history. We looked back at annual sales data from Wards Auto and annual fleet size from the U.S. Bureau of Transportation. It turns out that the current rate of about 6% annual-sales-to-fleet ratio is in the middle of the 4 to 8% range that has prevailed over the last 25 years.
Annual sales are made up of two things: changes to the size of the fleet, and replacement for existing vehicles in the fleet. Annual sales equal the change in the fleet plus a replacement factor of 5.5% of the fleet, on average, over the past twenty five years. This means that we are replacing 1/18th of the fleet every year.
We immediately wondered if replacing 1/18th of the fleet makes sense—eighteen years is a long time to replace the whole fleet! But if that replacement rate held steady for many years, the average age of the fleet would not be eighteen years, but only half that—nine years. With the current actual average age at eleven years (Ward’s data), this makes sense.
What does it all mean? When you figure a replacement rate of 5.5% plus a fleet growth rate equal to population growth, or use the average fleet growth rate of 1.2% over the last twenty-five years, you find that annual average sales might be in the 16.5 million to 17.5 million range going forward.
The upshot is that the current sales rate may be near the actual equilibrium pace, with future years coming in higher or lower depending on economic and other factors. We reject the notion that current sales are at an unsustainable peak, while acknowledging they will go up and down.
We know the future rarely follows a straight line from the present, though. Think of the dramatic evolution that the automobile has undergone in our lifetimes: fuel injection, catalytic converters, four wheel drive, air bags, onboard computers… what’s next? The work of understanding the world is never done, and we will always be researching and studying to further our knowledge.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
The Next Recession is Coming… Again
Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.
The most notable feature of the current economic expansion is its slow, plodding pace. Most people with jobs or in business are familiar with one of the reasons for this: unprecedented expansion of the regulatory state. Our shop and many others in many lines are coping with new kinds of nonsense that hampers production or service. (We are not arguing for a Darwinian, regulation-free society, of course.)
The silver lining in our plodding economy is the lack of a boom in any major sector that could create a big downturn. New home construction has not really exceeded the sixty-year average. According to the National Auto Dealers Association, vehicle sales–while near a record–only replaced 1/15th of our vehicle fleet last year. It seems to us that the peak in auto sales lies ahead of us. Capital spending and business investment, which has at times gotten too inflated in the past, has remained extremely subdued.
Energy, of course, did boom—and then busted. But our diverse and dynamic economy has largely absorbed the job losses, and consumers and businesses are enjoying unforeseen low gasoline and energy prices. Corporate earnings have not been great, but should strengthen in the quarters ahead.
The Index of Leading Economic Indicators points to near-term trends in economic growth, and it has flashed a steady positive reading for years. The bond market speaks to us about economic conditions through the yield curve, which remains encouraging and positive. LPL Research publishes a Current Conditions Index which measures economic vitality right now—and it has remained in positive territory. LPL Chief Economist John Canally draws mostly comforting conclusions from the latest labor market statistics (ht.ly/v7Co3003MvP )
So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either. This is good news for investors.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Next Recession is Coming, pt 2
Regular readers will recognize this headline. The next recession is always coming. Human nature being what it is, the economy will always have cycles just as the world will always have seasons. We humans are great at this: taking a good thing too far. The excesses that build up in good times lead to imbalances that get corrected by economic downturns.
Because investment trends are based loosely on what is going on in the real economy, it makes sense to think about where we might be in the economic cycle. So from time to time we report to you the state of the economy as we see it, with an eye on that next recession. Hat tip to LPL Research, people who do a lot of work on topics we need to know about.
In his latest report, LPL’s chief economist John Canally looked at the current fears in the marketplace and compared them to the groundhog. Many people pay attention to the groundhog, but he actually isn’t worth a darn at weather forecasting. Likewise with the drop in the price of oil, the rise of the dollar, some shrinkage in one sector of the economy—people are paying attention, but these things are not good at forecasting recessions.
Canally also compares the current situation to the 2007 economic and market peak and how things look for consumers. The savings rate is more than double, the mortgage rate is better by a third, household debt is a lower percentage of income and falling, and gasoline prices are….well, you know. Bottom line, we’re in pretty good shape.
Did you know the bond market provides a recession forecast that has worked very well since 1950? The bond market speaks through the yield curve, a simple measure of whether shorter term rates are higher or lower than longer term rates. When short term interest rates get above long term rates, there has always been trouble ahead. LPL’s Anthony Valeri just released a study concluding that the yield curve is not indicating recession.
We’ve never had a recession in recent history that was marked by strong jobs growth. And here we are, with a record 64 straight months of jobs growth. Nor has a drop (or a crash) in the price of oil ever precipitated a recession. The oil price drop is a mixed bag: the energy industry has been hit hard with job losses and reduced corporate earnings. But the losses to energy are gains to the rest of us.
So yes, the next recession IS coming. We just do not think it will arrive soon. Our plodding plow-horse recovery continues, no boom—but no bust either.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
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