Brouwer & JanachowskiDecember 11, 2015
Quiet week for the Fed’s “data dependency”. But what we saw was not good.
- NFIB survey: the heartbeat of small company America, was down. Yes, employers do not expect any change in employment but they see lower earnings, lower sales, an inventory draw down and a weaker economy all heading their way. The two are not compatible and our guess is that the slow down is coming.
- Job Openings: the number fell and the Quit rates fell. It is an important indicator of labor confidence and it should track the unemployment rate.
- Z.1: There is a great quarterly report on the economy’s balance sheet and flow of funds. Its old name was “Flow of Funds” but now goes under the snappy rebrand of Z.1. It's full of good stuff if you have the time. We looked at Household net worth, which fell 1.4% in the last quarter. In the 140 quarters since 1980, that’s only happened 11 times outside of a recession.
No wonder then: that the Bond market has been soft. Investors have had to tolerate a lot in the last few months. Idiosyncratic names like Glencore, Anglo American (both miners), Volkswagen, Brazil and Emerging Markets have all seen their debt hammered. Then this week we got this:
The High Yield market, which we’ve warned about for a while, nose dived and is now down 11% since its mid year peak. Why?
- High level of debt financed M&A
- Big increase in absolute borrowing levels in the last few years
- Worry about liquidity and how the market will adapt to a rate rise
But, eerily, the 10-Year U.S. Treasury note hasn’t moved and, at 2.15%, is exactly where it was a year ago. So as the Fed ponders a rate increase because the economy is healing, bear in mind i) the treasury market ii) small businesses iii) job seekers and iv) credit markets do not believe them.
Bottom Line: Don’t expect much action in the next few weeks. There may be technical runs as investors adjust their book for the year-end. We’re in a circling pattern and selectively entering unloved emerging markets and highest credit bonds.
--Christian Thwaites, Brouwer & Janachowski, LLC
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