IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING?

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For now, I think 10s will err towards the 21-day MA at 2.48% and then 2.54% (highs reached after the last hike). Note that one thing helping such a goal is the behavior of 10s on Market Profile, a histogram of yields vs. volumes. What you’ll see on that chart is a series of gently rising volume ‘bulges’ meaning simply we’re trading more at marginally higher yields. Move over 2.44%, the top of the very recent activity, and that 2.48% comes into play.

31 March 2017 By David Ader, Chief Macro Strategist for Informa Financial Intelligence

Ader’s musings. Before I go into my more macro thinking, I’ll start with a simple 10-yr U.S. Treasury yield bar chart with, highlighted in rose, a very defined sideways channel whose broad parameters are 2.31+ to 2.63+%. Having been bullishly biased, the near-term charts look a bit more bearish with momentum shifting to higher yields. I’m not that bearish, but it’s a range and we got near the upper reaches. It surely is noteworthy that with the close in the week just passed around 2.41+%, said yields are lower than they were at the close on the day of the last two Fed hikes. Interesting, no? Clearly there’s some divergence between Fedspeak and targets and the market. It’s not the only divergence out there; down below I talk in more detail again about sentiment measures are harder economic data.

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

I had the opportunity recently to conduct (is that how you phrase it, “conduct”?) a webinar entitled “Demographics and Long-term US Growth Impact.” That was the working title. The practical title should have been something along the lines of “Trump promises to make America great again, but he can’t make us young again.” The upshot of the presentation was that our demographics pose a long-term restraint on economic growth and by long-term I mean for a generation to come. (Here’s a link to the webinar done under the auspices of Informa’s WealthManagement.com https://goo.gl/IyzwC7 )

There are many issues at hand the essence of which is that the older population cohorts are becoming an increasing proportion of the US population, a move which will continue apace for, oh, about a half century more. This translates to a slow rate of Household Formation and Labor Force growth for starters and you need both, along with productivity gains, to boost GDP. There is a more immediate set of problems for the aging population. One is that they are, as a group, ill prepared for retirement when measured by savings in retirement accounts. Anecdotally, the aging boomers are staying in the workplace longer which is a good thing in terms of sustaining the labor force. However to some extent it also a forced situation as they simply need to work. A difference between this older workforce and the population as a whole is that older workers tend to seek flexibility in terms of schedules and vacation time and, simply, need medical coverage. A recent Fed study showed they tend to earn less than they once did, and certainly income gains slow dramatically for people in their 50s and beyond.

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

In the course of the presentation I touched on Household formation, how slow it’s been, and a general decline in the rate of home ownership. That decline should raise concerns when baby boomers start selling their homes since they are by far the group that owns homes. Further, the implication is that there will be rising inventory of homes, specifically older and aging homes, for years to come.

That the U.S. population is aging is an established fact. The median age today is 37.8 yrs. In 2000 it was 35.4 yrs. and in 2026 it will be 39.3 yrs. As a percentage of the total population the 55yrs+ fogeys make 34.7%. That was just 27.4% in 2000 and grows to 36.4% in 2026 and by 2026 will rise to 38.9%.

Here’s the thing: Homeownership Rate has been declining quite sharply. That rate stands at 63.4% for the overall population against a peak of 69% in 2004. However, the rate for the older cohorts has been relatively steady and rather higher than for the younger cohorts. Homeownership for the 65+ set is the highest for the population at a whopping 78.8% against its peak of 81.1% in 2012. Contrast that with the 35 and under set.

So, with the 55+ folks having the highest rate of homeownership and their ranks having grown (and continuing to grow) relative to the population, who is going to be upsizing when retirees are downsizing? The answer would seem to be far fewer than we’d like.

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

Equity in a home remains the most important asset for US households and, traditionally, has been a reliable investment to help supplement a comfortable retirement. The broader demographic shifts which I’ve discussed would argue that one’s home no longer fits the bill. At the least, it’s role is at risk of being severely diminished.

A recent Fed study (Liberty Street Economics; A Close Look at the Decline of Homeownership) made note of the data presented in these charts. The conclusion contained this line, “Why this secular decline is occurring is unknown.”

They suggested declining real income for some households and give a nod to ‘urbanization.’ Both make sense. To those I’ll add in no special order, 1) debt-laden college graduates who will remain renting longer, 2) smaller US family size, 3) preference by well-to-do youth to stay urban, 4) crappy homes and McMansions built in the last 25+ years that don’t hold their value, 5) millennials ‘postponing’ traditional household formation or finding alternatives (don’t ask). I’m sure there are other factors and I’d love to hear your thoughts on the matter.

In any event, the point if I haven’t made it already is that the older cohorts probably have less ‘value’ in their most important asset than they think or certainly a more tedious time when trying to sell it when sunnier climes beckon.

Earlier in March I made note of the divergence between the confidence measures exhibited by everything from various ISMs and regional Fed reports to University of Michigan and the Conference Board. (As an aside one ‘confidence’ measure stands out in its weakness which is the that of Presidential Approval. Trump’s Approval Rating is down to 35% according to Gallup, 37% out of Quinnipiac and a lofty 40% according to CBS. According to Business Insider, “It took Trump just 69 days to accomplish something that the country's most unpopular presidents took years to achieve.”)

Anyhow, we offer kudos to Bloomberg Intelligence economist Michael McDonough, whose approval rating by me is especially high, for casting light on that divergence between confidence and other economic measures. In short, the charts below were lifted from him.

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

McDonough looked at the components to Bloomberg’s Economic Surprise Index, a composite measure that looks at how much prognostication experts, i.e. economists, under- or over-forecasted a given economic release. What he did was break down the Surprise index into its components to show that the gain was largely about sentiment: surveys and the like. In contrast the combination of other measures (adding them up and taking an average) that look to the ‘real’ economic data were underperforming and in most cases quite sharply.

I remind you all that sentiment doesn’t contribute to GDP.

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

I could have left things at that, but being the jealous sort took things one step further to try and gauge what the markets are responding to. I think the charts make this pretty clear. The visual correlation with sentiment and the S&P500 is strong. Although I probably did this wrong it appears to be better than a 90% correlation since the election and sentiment leads. The correlation is there with 10s as well but more like 65%.

So there it would appear that the sentiment measures have indeed been driving price action in both stocks and bonds, and sentiment can be a fickle thing. I offer that up as a warning that either the data catches up or the markets are mispriced. Price action post the non-vote on the Affordable Care Act underscores this to a degree.

Speaking of sentiment, we just got to see the Consumer Confident report for March which was huge. A component to that which I have not traditionally followed (I prefer U Michigan) is the ‘inflation outlook 12-months hence’. Well, the ‘expect higher inflation’ element soared to 72.3, just about tagging the highs of this cycle while the ‘expect lower inflation’ camp dropped to 7%, which is right on top of the lows of this cycle.

As you perhaps suspect already given my bias, these have proven to be remarkably good contrarian signals over time. They are NOT good short-term signals, however. For that I reference back to the Daily Sentiment Index, pictured below, which is in bull mode:

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING

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IF WE’RE ALL DOWNSIZING, WHO IS UPSIZING David Ader is Chief Macro Strategist for Informa Financial Intelligence. For further information on our products and services, please see: https://financialintelligence.informa.com/ Bringing 30 years of investment strategy experience to his role at Informa Financial Intelligence, David Ader has held senior positions at major investment banks and financial information firms as well as serving on investment policy committees and management teams. Most recently Partner, Head of Government Bond Strategy for CRT Capital, he headed the team voted #1 in U.S. Rates Strategy for the last 11 years and #1 in Technical Analysis for the last five years in Institutional Investor’s annual survey. Informa Financial Intelligence obtains information for its analysis from sources it considers reliable, but does not guarantee the accuracy or completeness of its analysis or any information contained therein. Informa Financial Intelligence and its affiliates make no representation or warranty, either express or implied, with respect to the information or analysis supplied herein, including without limitation the implied warranties of fitness for a particular purpose and merchantability, and each specifically disclaims any such warranty. In no event shall Informa Financial Intelligence or its affiliates be liable to clients for any decision made or action taken by the client in reliance upon the information or analyses contained herein, for delays or interruptions in delivery for any reason, or loss of business revenues, lost profits or any indirect, consequential, special or incidental damages, whether in contract, tort or otherwise, even if advised of the possibility of such damages. This material is intended solely for the private use of Informa Financial Intelligence clients, and any unauthorized use, duplication or disclosure is prohibited. This material is not a comprehensive evaluation of the industry, the companies or the securities mentioned, and does not constitute an offer or a solicitation of an offer or a recommendation to buy or sell securities. All expressions of opinion are subject to change without notice.