The search for yield continues!

The equity markets have recovered from an early year swoon, as hedge fund managers lifted their hedges and investors piled into perceived safe yielding assets. The markets are correctly discounting near zero rates for longer than the Fed is forecasting. This week’s Fed meeting is once again very important. If the Fed decides to fight market expectations and signals faster interest rate increases, I would expect volatility to pick up once again. We would be back to the scenario where the Fed raising rates with global demand deteriorating and global credit conditions tightening is a dangerous game. If the Fed chooses to accept the markets conclusion that they cannot raise rates, without causing a severe bear market and the negative feedback loops associated with those financial conditions, then the search for yield will continue. Utilities, REITS, and gold mining shares are currently the leading performers in the market. The search for yield has shifted from junk bonds to REITS, utilities and dividend strategies. Gold has emerged as the go to currency. The result of this is REITS and utilities are now selling at valuations historically associated with high growth companies. Meanwhile, many small domestic companies are growing and are selling at valuations associated with slow growth companies in the past. An opportunity exists for asset allocators to make money for their clients. The Fed’s policies have turned the equity markets upside down. Last year’s historic divergence between momentum and value is also in the process of converging. The search for yield has forced U.S. investors into a historically over exposure to equities. With corporate profits falling from historically high margins this is a risky situation.

Corporate profits are falling, global demand is weak; the search for yield has driven equity ownership to the second highest on record! TGM

Consumer - “Where art thou?”

Have I been to bearish on the U.S. consumer? Construction spending is one indicator that is not pointing to a recession; mortgage bankers purchase applications are also running plus 30%, YOY. Individual security analysis shows many construction oriented companies are in strong fundamental bull markets. Auto sales remain strong, but are being driven by credit being offered to people who may not be able to repay. Restaurant sales are also a source of strength. Meanwhile, Redbook sales are at levels associated with a recession, imports are weak, intermodal rail traffic has slowed, Treasury withholdings have slowed, National Federation of Small Business Sentiment is at a 2 year low and many service oriented sentiment indexes are pointing to the slowest growth of the expansion. Inventory to sales ratio’s remain at recessionary levels.

Is housing accelerating?

Redbook sales continue to point to a problem with consumer spend-

ing!

Construction spending remains strong and is coroborated by individual security

analysis!

Payroll tax receipts appear to have slowed

dramatically!

Beware of seasonal adjustments

Beware of seasonal adjustments and a warm winter as far as economic statistics are concerned. After 2 years of horrible Q1 economic statistics and harsh winters, the administration has implemented new seasonal adjustments for the winter months. On top of that we have had a significantly milder winter. While many Wall Street economists dismissed the weak economic statistics last year due to weather, they are not warning to beware of the statistics this year. Over the next 60 days we should get a more accurate indication of the true state of the consumer. I have been concerned about an emerging recession given many economic indicators are at levels associated with recessions in the past, I remain so.

On Thursday March 10th, the Census Department released it’s 4th Quarter Services Survey, the most accurate but delayed report on the service sector. Total nominal services slowed to a 2.1% annual growth rate, half the rate of a year ago. Most incoming real time surveys show that trend continuing.

On March 1st, Allen Greenspan was quoted “In my experience, I have never seen so many unknowns...I have not been optimistic in quite a while..And I won’t be until we can solve the entitlement programs. Nobody wants to touch it, but it’s gradually crowding out capital investment, and thats crowding out productivity, and that crowding out the standards of living. Where do you want me to go from there?” I agree that the future is quite difficult to forecast; I would argue that the levels of debt outstanding, the rules and regulations of the current administration, and the distortions in the capital markets after years of Zero Interest Rates and Global QE’s are more important than the perceived uncertainty around entitlement spending. Labor force productivity is extremely weak; in past macro updates I have outlined why I believe productivity is so weak. Without productivity gains the exceptionalism of America must be questioned. Whether it is because the BLS is overstating NFP growth or because of a continued move from higher paying jobs to lower paying jobs due to outsourcing remains an open question. Zero interest rate policies are hurting capitalism, forcing savers to speculate, overvaluing securities, and creating malinvestment led boom bust cycles.

Treasury withholding, net exports, ASA staffing, industrial production, and corporate profits are all pointing to continued economic weakness bordering on recessionary conditions.

Small business optimism at 2 year low!

Markit Services at 2 year low!

ASA Staffing down YOY since June of 2015!

Industrial America is in a recession!

Has Gold broken out or will the commercials win again?

From 2001 until 2011 Gold outperformed the S&P 500 as central bank efforts to keep the world out of a depression inflated all commodities. Commercials held a significant short position during that whole period. They would routinely use dips to cover shorts and rallies to extend their shorts. From 2011 until last December, every time the commercials put a significant short out, the rally in Gold would end. The commercials would then use the pursuing weakness to cover their shorts. Their buying and selling was a very good short term indicator. The big question is has Gold regained the upper hand and will it outperform equities for the next decade? Regardless, U.S. investors remain dangerously under invested in Gold given the levels of debt outstanding, historically weak nominal GDP growth, and determined global central bankers!

Commercial short in Gold at levels equal to the end of every

rally since 2011!

Gold outperformed equities for a decade from 2001>2011 despite

commercials being short the whole time!

Total credit market debt outstanding remains at dangerous levels.

On Thursday March 10th, the Federal Reserve released it’s quarterly Z.1. The good news is household net worth made a new all time high. The bad news is non-financial domestic debt did also. Readers of my macro piece understand that I believe the growth or contraction in credit outstanding is now the driving force behind broad economic and individual sector growth. In short Wall Street has taken over the channels of monetary policy from the traditional U.S. money and banking model.

Federal Debt levels are a risk to financial assets whether

you are willing to admit it or not: Got Gold?

Total non-financial domestic debt has continued to rise

materially in this credit cycle!

The growth rate of credit is correlated to economic

growth rates!

As Federal Debt growth slowed, so did the

expansion!

Household debt has not grown during this

expansion, but remains elevated!

Weak consumer spending is a byproduct of weak

household debt growth.

While the S&P 500 continues to go nowhere, sectors and individual securities are all over the place; active money managers should be outperforming the index. Global central bankers are determined to keep financial

asset prices from cratering. Opportunities are everywhere for an experienced long-short manager. Proper asset allocation, solid macro research, good equity research and talented position traders should be able to outperform a historically overvalued equity market in a slow to no growth global economy. Passive investing

has had its day.

Gold miners are the best performing industry group

YTD. They may have begun a multi-year bull market.

Defensive groups such as water supply utilities are also leading

the market higher. as the search for yield continues.

The world has turned upside down as utilities are now

priced like growth stocks used to be.

Many REITS are selling at historical valuations. Will this be the next malinvestment?

Money Center Banks are being held back by excessive regulations, limiting growth

and the economy!

If Donald Trump wins and makes America great again, could this

be the trade of the year?

Emerging markets have been a bear for years. There has to be

opportunities here!