Will US GDP Grow This Quarter? (if not, will this be called a recession???)

HOW IS OUR ECONOMY DOING, AND WHERE IS IT TAKING US?

Most of my friends probably don't think it really matters whether they know how our economy is doing or where it is going because it is "out of their control".....and I agree, but only to a point.

It is clearly outside our individual control, but like a sailor measuring the wind direction and speed, knowing the economy and its direction is very important to all of us interested in navigating our future. (in so far as how much any of us actually navigate and don't just float along like a log)

HOW DO WE MEASURE THE ECONOMIC WINDS?

Well, there is an obvious first order way that is available to most everyone who controls their own finances.....that is just their own personal / family budgets. I mean how much each of us gets for income and then in expenses and how that affects our discretionary spending. (or how much we can save) IMHO, that is a lagging indicator....I mean this is not at all forward looking, and everything that made this situation occurred happened at some point in the past....setting our sails based on past history is not very useful.....the only use it is to us is to show us is whether we ARE -or- ARE NOT going in the direction we desire. (As a first order approximation, that might be be enough to kick us into action, but in terms of defining the action to do what, I don't think there is enough information)

WHAT OTHER METRICS THEN?

Well, the next thing we have to decide might be whether the general macro environment is getting better or worst....whether there is overall expansion or contraction. That is actually quite important because the notion that a rising tide lifts all boats is a truth.....and knowledge of this simple idea will help us better appreciate whether we might want to think more about next moves for opportunity or defense. (One can and should still look for both, but knowing general overall conditions might allow us to know more about how "everyone else" might be moving.....where the opportunity / dangers might be)

I suppose most folks will take to the news media for their first measure. I warn folks right up front that as we look for ways to measure things, we try to understand the incentives those giving us that data might have...."what's in it for them".....or perhaps "follow the money". That is not to imply that they will lie so much as at times lay their "thumb" on their measuring scale and allow their analysis to drift in the direction that benefits them. We all know this as being obvious when we think about the modern term "click bait".....which is not so new really when you think of the fantastic headlines we have seen in the years growing up on the headlines of the National Enquirer as we were in the store checkout lines.

 Now this isn't to say we can't trust our media....mainstream or otherwise, just that we have to realize that once they go beyond just reporting a particular number or statistic and then go on to "explain" that it means, they are moving into the arena where their own judgement and prejudices are going to work. (ditto for us too.....it is a human thing)

THE NEXT UP, OFFICIAL STATISTICS KEEPERS

The next step beyond personal intelligence is probably intelligence of close friends and associates. It makes sense to "ask around" and take the temperature of those around us....and knowing them only allows our BS detectors to work more perfectly since we can measure the information they provide better.

But beyond that, there are plenty of other places to look for data.....some are more useful and accurate than others...and of course, NONE are going to assess black swan events.....but that is another thing all together, and IMHO, something we should consider, but isn't covered here.

--> NH STATE DATA

States often have official organizations that look over the state and keep track of lots of statistics and metrics that I suppose elected leaders of the state would use to appreciate the conditions for future legislation and impacts of past legislation. But the date these state organizations roll up can be very useful to us too. 

• The state of NH has a department has a website on NH Employment Security, and here is their introduction site:  https://www.nhes.nh.gov/elmi/products/vs.htm 
• They also roll together reports under this page by the Economic and Labor Market Information Bureau, which publishes very interesting analysis / reports / analysis: https://www.nhes.nh.gov/elmi/index.htm
• One report that I found very helpful about 15 years ago when I was on the Budget Committee in Litchfield was the report named "New Hampshire Economic Conditions". Here is where you can find it: https://www.nhes.nh.gov/elmi/products/ec.htm

--> FEDERAL RESERVE NATIONAL PROGNOSTICATION

The US Government has no shortage of bodies working on measurement and predictive analysis. One such organization is technically a private organization / business, the Federal Reserve. It is a particularly important entity because is in charge of the countries money supply, and since the US Dollar is the median of exchange here, it is always one of the "products" used in every single non-barter exchange made.....so the "price of money" is key to all our economic lives. 

• The Atlanta Federal Reserve Bank has a group working to estimate future economic activity (GDP) and they report their findings in their GDP_NOW forecast. Their report can be found at: https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf
• More data on the GDPNow work can be found at their website: https://www.atlantafed.org/cqer/research/gdpnow.aspx

As I understand it, it must be noted that the GDP Now forecast is one that starts a quarter with projections based on models and projections and which is then continuously honed as the quarter goes on with real date coming in.....so the number changes over time as the quarter progresses. As of late, the estimate number has started out high at the start of the last two quarters and was then ratcheted down as those quarters progressed. 

--> THE CONFERENCE BOARD LEI (Leading Economic Index)

The Conference Board, Inc. is a 501(c)(3) non-profit business membership and research group organization. To me is seems like a global Chamber of Commerce of sorts.

• Here is the WIKI entry on it:  https://en.wikipedia.org/wiki/The_Conference_Board 

Their interests go far beyond economics, and I'm not passing judgement on any of these, only pointing out that they do produce what they suggest is a forward looking predictive analysis that is considered by many for its predictions, their set of Leading Economic Indicators.

• Their latest PRESS RELEASE on their metrics can be found here: https://www.conference-board.org/topics/us-leading-indicators
• But I believe you can actually create an account and dig into their numbers more directly. You can do that here: https://data-central.conference-board.org/

--> THE STOCK MARKET AS AN INDICATOR

Stock and Bond (and I suppose currency) markets are known to be leading economic indicators of sorts. Depending upon up much you believe in the efficient market theory, you can consider these markets as "bets" that many millions of people are making about the future of particular businesses, industries or sectors. I believe one of the Conference Boards LEI measures is in fact these markets.

One can of course just look at the general market price rises and falls as an indication of health, and this is probably valid if you consider it also takes into account a heavy dose of emotion and sentiment in the short term. They old saying is: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” That doesn't mean the data is useless....in fact, if you think of it, this actually "adds" very important information to that way of measuring!

Here is another way to use stock market price flows....by looking under the surface of just the broader number and at which "sectors" are doing better or worst than others.....otherwise known as sector rotation. Just like the saying above, it has information as a short term and longer term measure....and is probably a bit like reading tea leaves in that you need to "understand" what that means. (probably done by looking at others measures and triangulating to an opinion) 

• Here is a link that lets you look at prices various ETFs that invest in different companies in different sectors of the economy.....but you can create your own "mix" of stocks or FUNDS to cut across the companies or markets in any way you might find useful. (even across sectors across countries.....etc...) (you can also easily use this to look back at the visual history of any relationships you find interesting in the past and maybe correlate them with events happening back in that time....to perhaps test some theory / idea / relationship you might think exists): https://stockcharts.com/freecharts/perf.php?XRT%2CXLF%2CXLE%2CXLU%2CXLK%2CIYT%2CGDX%2CXLI%2CXLP%2CIYR   
• There are of course other companies that give your ways to create your own "charts" that allow a look back at history and which of course might also have predictive value. Here is one FREE site that allows you to cut across data all sorts of ways: https://stockcharts.com/freecharts/ (of course many of the FREE looks are there to wet your appetite so you might "pay" to get your own particular stocks....but the FREE view still offers good insights. Here is an example: https://stockcharts.com/freecharts/rrg/ )

INFLATION (Growth Compared To What?)

The next important aspect of all of this is defining what I think of as the denominator in the equation.....we can look for say investment growth, but what is most important is purchasing power or growth above the level of inflation. Many of the above measuring systems do NOT take this account.....directly or indirectly.

If we want to actually measure progress, we need to consider inflation. Here are a few places that measure and predict inflation, otherwise known as devaluation of currency. (lessening of purchasing power of a currency)

Here are a few sites that give us insights into inflation and growth, in the USA and the world.

• OECD Inflation Measures across the world: https://data.oecd.org/price/inflation-cpi.htm#indicator-chart
• OECD Graphical Measure of Inflation (allows you to choose countries and timeframes): https://data.oecd.org/price/inflation-forecast.htm#indicator-chart
• OECD Producer Price Index Analysis: https://data.oecd.org/price/producer-price-indices-ppi.htm#indicator-chart
• OECD Price Level Index - Comparative price level indices are the ratios of purchasing power parities to market exchange rates.: https://data.oecd.org/price/price-level-indices.htm#indicator-chart
• OECD Housing Prices: https://data.oecd.org/price/housing-prices.htm#indicator-chart
• OECD Equity (stock) Market Prices (I suspect not inflation adjusted): https://data.oecd.org/price/share-prices.htm#indicator-chart
• Federal Reserve Bank of Cleveland INFLATION NOW prediction: https://www.clevelandfed.org/our-research/indicators-and-data/inflation-nowcasting.aspx
• IMF, Real GDP Forecast: https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD
• IMF - Variety of Datasets: https://www.imf.org/external/datamapper/datasets
• IMF - Net lending/borrowing (also referred as overall balance): https://www.imf.org/external/datamapper/GGXCNL_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC
• IMF Primary net lending/borrowing (also referred as primary balance): https://www.imf.org/external/datamapper/GGXONLB_G01_GDP_PT@FM/ADVEC/FM_EMG/FM_LIDC
• Philadelphia FED GDPplus: https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/gdpplus
• Philadelphia FED Beige Book: https://www.philadelphiafed.org/surveys-and-data/regional-economic-analysis/third-district-beige-book
• FED Survey of Professional Forecasters:  https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/survey-of-professional-forecasters
• FED Aruoba Term Structure of Inflation Expectations (Interesting Survey): https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/atsix
• FED Aruoba-Diebold-Scotti Business Conditions Index - https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/ads
• BLS Inflation Rate Calculator: https://www.bls.gov/data/inflation_calculator.htm

WHAT TO DO WITH ALL THIS DATA?!?

That is up to you! We each need to formulate our own questions and search for the answers. I for one think that not only are there BLACK SWAN events that come about, but there are also big blind spots in the data we use....and then of course our own interpretations.....so I suppose I am a bit conservative and rist averse.....so I suggest diversification and never going "ALL IN" on any idea.

DON'T BUY THE DIP, BUY THE TRAIN WRECK!

 - OR .....WHICH IS STRONGER, STAGFLATION OR YOUR STOMACH

Today I heard someone say the title I used here....."DON'T BUY THE DIP, BUY THE TRAIN WRECK".....

The idea actually goes along well with the old saying: "DON'T FIGHT THE FED" because it was Jerome Powell that told us they FED was going to raise rates that they we would be feeling PAIN.

What is pain in this perspective, well it probably means job losses.....and along that path there will be the inflation stripping away purchasing power as we get there.

 Today's market prices seem to be increasing, but yesterday's market slide was pretty horrible after the much higher than expected declines. 

DEFENSE is the word of the day..... (SO: "Don't buy the dip....wait....then, buy the Train Wreck!")

EVER WONDER WHO RECEIVED PPP LOANS AND HOW MUCH?

 SOMEONE POINTED ME AT TWO WEBSITES THAT LISTS PPP LOAN HOLDERS

We all know that many of not all PPP loans were forgiven, and I think we have all heard of companies that "cheated" and taken loans when they should not have. I'm not suggesting that most were bogus, in fact the government shutting down everything required something like this to happen. (in hindsight, that might all have been a mistake, but that's bot the thing I am writing about here)

So the first website is one that lists total PPP loans for each company....in this case, I had it list all companies in North Conway. 

https://pppreport.org/advanced.php?business=&address=&city=North+Conway&state=NH&zip=&naics=selected&naicscode=&businesstype=selected&race=selected&gender=selected&veteran=selected&nonprofit=selected&jobs=selected&cd=selected&loanamt=selected

The second website is similar, but lists each individual loans....so you will see that some companies took out several PPP loans. (Again, the list shown in the link below if for North Conway, NH....but you can research with your own parameters)

https://ppp-loan.info/?BorrowerName=&BorrowerState=NH&BorrowerCity=North%20Conway

YIELD CURVE INVERSIONS....THEY ARE A REGULAR THINGS THESE DAYS.... (OUCH!)

WHAT ARE YIELD CURVE INVERSIONS?

Simply put, the cost of borrowing money generally goes up the longer the loan is...that is, the lender is taking on all kinds of extra risk over that longer time. So interest rates on longer term loans are typically higher than those on shorter term loans.....and bond are just debt instruments, a lender contract with a borrower.

So it is quite normal for say a 30 year bond to have a higher interest rate than a 20 year bond, which is higher than a 2 year bond and so forth.

A yield curve inversion exists when the shorter term bonds have a higher interest rate than the longer term bonds.

Here is a Wikipedia article on yield curves: https://www.investopedia.com/terms/i/invertedyieldcurve.asp

HOW ARE THE YIELD CURVES PRESENTLY?

Well, they are significantly inverted, and have been for a bit as of late. But this isn't the first time in recent history they have been inverted......I track the yield curves with a spreadsheet, and I saw them inverting early this year.

Here is my spreadsheet showing the current inversion:

The square that I have hilighted is what is known as the 2's/10's calculation.....a comparison of the 10 year rate and the 2 year rate...this is the relationship that most focus in on....I understand the Federal Reserve focuses in on the comparing the 10 year and the 1 year, smoothed with a 3 month moving average.

Here is an example from the FED Website.....albeit older:

SO WHAT DOES THIS SIGNAL?

It is a reliable signal of recession.....roughly 6 to 18 months after the inversion. So the inversion earlier this year could have been a sign of our being in a recession right now! We shall see how the government office that calls these things feels before the elections I guess. Bit either way, we are getting some heavy duty inversion right now.....so IMHO, if we are not in recession currently, we will be in short order.

Here is another article that talks about how & why inversions have predictive power: https://www.unionbank.com/private-banking/perspectives/market-economic-outlook/inverted-yield-curve-explained

HOW ABOUT OTHER COUNTRIES AND THEIR YIELD CURVES?

Well, I am not sure how predictive this is in other countries, but it seems to me the general concept should generally apply.....so here is a list of countries with inverted yield curves as I type this. (This week)

Also, here is the article that the above graph was sourced from.   http://www.worldgovernmentbonds.com/inverted-yield-curves/

WHAT TO DO?

I just suggest you prepare for a recession.....and in this case, perhaps an inflationary one. (whether inflation is high or lower, I suspect it will be higher than any wage / benefit increases we will be seeing because of the slowing economy)

So perhaps be UBER careful with debt.....in fact, try to get out from under it unless it is long term with low rates. Try to save money for that rainy day....the one you might see with a job / benefits loss. Also, get your cash flow under control.....spending down, saving up. (I wouldn't just make a plan for it, I would kick that plan into action and get ahead of it)

Interest Rates Going Up.....Costs (Inflation) Going Up......Next Thing To Watch, Zombie Companies!

WHAT IS A ZOMBIE COMPANY?

This is how Investopedia defines a Zombie Company....."What Are Zombies? Zombies are companies that earn just enough money to continue operating and service debt but are unable to pay off their debt. Such companies, given that they just scrape by meeting overheads (wages, rent, interest payments on debt, for example), have no excess capital to invest to spur growth." ( https://www.investopedia.com/terms/z/zombies.asp )

WHY WORRY NOW?

Well, first we are talking about supporting debt....that means the company is going to be rolling over debt at ever increasing interest rates. The debt costs for them will be rising!

Second, the inflation we have been seeing is pushing up input costs for everyone, including these Zombies.....so as the definition describes them of barely having the money to continue on as a going concern, so rising input costs can't be a good thing. If they had better pricing power in their industry, they would NOT be running their company so close to losing money.....increasing input costs can only hurt their cash flow.

Oh, and the slowing economy only applies pressure to their incoming revenue stream...their customers will likely diminish and so they will see pressure on their money flows coming in. 

These three things don't guarantee failure, but they surely apply negative pressure to EVERY company, and so those are are so close to failure might well step "over the edge" and so fail.

HOW DID I COME TO THINK ABOUT ZOMBIES?

Well, the conversation about zombie companies have gone on for the longest time when we went through not only the DOT COM crisis and then the housing crisis. Not just US companies, there are many all across the world, but the lost interest environment has allowed these companies to take on more and more debt to keep their operations going.....as interest rates go down, they can take out more debt at the same cost....they can "kick their debt problems down the road". Increasing interest rates have the opposite affect.

So I came to think about this again when I came across several articles....and this first one has a pretty good analysis of current times / situation.

• First one on USA and Australian Companies: https://www.livewiremarkets.com/wires/up-to-one-third-of-all-australian-and-us-companies-could-be-zombies
• Second, and article written by the Federal Reserve Board of Governors: https://www.federalreserve.gov/econres/notes/feds-notes/us-zombie-firms-how-many-and-how-consequential-20210730.html

HOW DOES ONE FIND ZOMBIES?

Well, first I suppose it makes sense to look at what others feel to be Zombie companies....here is one list: https://finbox.com/ideas/zombie-companies-list

Then I think we each need to be able to look at a companies balance sheet and cash flow statements to see how they keep their company afloat....whether their actual business was enough to keep their "lights on". One thing that you might find in a zombie is their need to continuously add debt in order to continues existence....debt without say growth or productive capacity increases.....but the other thing you might find is a company that is "hollowing itself out" by needing to sell of assets in order to keep the money coming in so they can keep the lights on.....but if the sales of those assets is resulting in them lowering their productive capacity (which will ultimately lower revenues in the future.....that is a bad recipe for a downward spiral)

WHAT NEXT?

I suppose I need to add this to the analysis of the stocks I have in my 401K investment.....I tend to look a lot at their dividend cash flow, and the general health of the balance sheet....but I other than total debt and things like Quick Ratio and Current Ratio, but I need to look closer at their debt trajectory. (and figure out how to do that easily)

Latest Surprise That Has Sensitized Me!

 RUSSIA WAR AND US SANCTIONS KILLS ONE OF MY INVESTMENTS

I had been investing in an ETF that focused on Russian Companies. (URUS) I had been in this ETF for some time, and it was preforming pretty well. (not a ton of asset value increase, but a reasonable dividend)

This was all before the war, and of course before the US Embargo of Russia. Well, when the war began, it was pretty quick before the US sanctioned Russia, and cut off all money coming and going between the countries.....that instantly caused the URUS ETF to stop trading and then basically "close" there was really no way to liquidate it, and in theory the stocks of the companies contained were still alive and well, just NOT accessible to owners. 

All the funds I had there are essentially in limbo, or GONE depending on how you think this all shakes out. The account lists it as a value of ZERO and they are noted as being "suspended". The ETF firm has told clients that they will be liquidating the accounts by the end of 2023....so in theory, the stocks could come back and all would go along from here. I doubt the dividends from the sanction period would ever show up.....and quite honestly, I think the position has been ZERO'd. (Thank you US government for pulling me over the coals without even a warning)

THIS SENSITIZED ME TO RISKS IN OTHER NON-AMERICAN INVESTMENTS

After this problem, I started to think about some of the other stocks I owned. I owned three stocks traded on the US exchange that were Chinese ADR, (Stocks on other markets that were also traded on the US exchange) 

When the temperature around Taiwan and China started to come more to a boil, this came back to top of mind.....but I just didn't think we had the sort of antagonistic relationship with China as I thought we (the current administration) has with Russia. (Russia has been a whipping boy for our current government for all kinds of things) I didn't see that being quite the case with China, but then I thought more about an article that said that Chinese President (or whatever his title is) has met with Putin 50 times in the past few years.......and our President has maybe had two or three meetings....and I think these were phone calls at that.

But even this didn't get me to the edge of the cliff.....

SO WHAT GOT ME ON THE EDGE

I came across this interview with Kyle Bass, who is a private wealth manager who I have heard in the past, and to me sounds very intelligent. He apparently knows a lot about China, and he pretty clearly outlined a possibility of war between the USA and China! (the video of that interview is below)

Needless to say, having just been surprised by my investments in Russia evaporating, I was not in the mood to lose three Chinese company stocks. I owned two oil companies and one Chinese bond fund....The two oil companies are good dividend stocks, and they were even making me some capital appreciation. (even during the recent market downturn) But I just don't want to be surprised again....and I sold all three of them.

WHAT DID I REPLACE THEM WITH?

Well, I decided to reach out and buy another BRIC country oil stock, a company on Brazil. Is that a risk....sure, I think Brazil is actually more aligned with Russia than the USA these days, but I don't know that we are going to war with them and so unlikely to get "killed" by US sanctions. Of course, anything is possible....finger crossed.

Now What.....Retired and Going Into a New Post-Covid World of Economic Instability

 Getting back into writing.....to focus my thoughts and perspective

I'M BACK!

I have decided to try and BLOG once again about investing and the world economy. We appear to be in a time of global slowdown, and a world that appears to be de-globalizing. How should we navigate this personally?

I tend to be risk averse, so my default base case is to become even more frugal. But that's not very easy being on a fixed income in retirement.

So I will probably try to "think my way through" things as I write.

WHAT AM I DOING NOW?

At the moment, I am still pretty conservative with my retirement savings. In true risk averse / conservative style, I have diversification in my portfolio with about 50% being managed by a Financial Adviser and another 50% by myself. I don't force their hands, unless things get very much out of control. (as they did in 2008)

As for the money I invest, I am about 50% in cash (dry powder) and then the majority of the rest is in a fairly safe dividend paying portfolio of stocks. Both arms of my portfolio are doing OK, so I can't complain.

Anyways....what to do is what I will be pondering and writing about....and what sort of "signals" do I see as I navigate our very odd financial environment.

WHAT IS COMING?

NEXT POST.....burned by RUSSIA ETF closure and spooked out of three Chinese companies because of a prediction by Kyle Bass! (https://www.youtube.com/watch?v=fomuXEaEAJA)