ECB Shadow Rate Near -6%

The chart below adds more depth to the traditional understanding of interest rates. This chart looks more confusing than it is because the grey line represents the Bundesbank policy before the ECB was created. The dotted line is the Fed’s shadow rate including QE and the green line is the shadow rate of the ECB…

Draghi Now Sings A Hawkish Tune

Draghi Expected to Taper 2018 Bond Buying While it definitely was dovish of Mario Draghi to say the ECB hadn’t discussed unwinding the balance sheet, it didn’t imply the ECB wouldn’t taper the 60 billion euro bond buying program in December. We got further clarification of the ECB’s tapering potential in December in the latest…

100% Of Citi Clients See No Recession In 2017

The chart below is gaining popularity in the bearish community on Twitter because it shows near unanimity in investors’ opinions that the economy won’t go into a recession in 2017 or 2018. I agree with what the respondents said if the tax cuts are passed to boost 2018 GDP growth. If they aren’t, a 2018…

Q2 Earnings Shaping Up Well

Q2 Earnings Will Likely Be Good With central banks putting out guidance to shrink their balance sheets or taper buying and with U.S. fiscal stimulus delayed by at least a few months, earnings are more important than ever to keep the market up. As long as earnings growth is solid, the market should be steady.…

Valuations Are In The Top Quintile Implying 0.2% Annualized Returns

The chart below gives you an alternate way to look at the valuations in the stock market opposed to looking at the historical value of the Shiller PE. With the Shiller PE currently at 29.87, the market is in the 5th quintile meaning it’s in the category of market periods in the top 20% of…

Wage Growth Acceleration Not Likely Unless Skills Gap Narrows

The increase in demand for workers isn’t leading to accelerated wage growth because there is a skills gap between what the labor force has and what employers want. The chart below reinforces the chart I showed in a previous article which had survey data. As you can see, hiring has fallen while the job openings…

The AHCA: Will It Stall The Bull Market?

Healthcare Plan Update The market is pricing in the economy maintaining the current pace which could mean stocks will rally when something gets done and selloff if nothing gets done. I’m expecting it to be a binary event meaning I don’t see a scenario where stocks selloff after a deal gets done even if the…

ECB Gets Audited

Clarifications Before I get into the discussion in this article, I want to point out an error I have made. I have compared GDP growth to S&P revenue growth, but that’s a mistake because it’s not an ‘apples to apples’ comparison. S&P revenue growth is in nominal terms while GDP growth is in real terms.…

Oil Nearing My High $30s Target

The biggest story of Wednesday’s trading was oil’s fall. WTI oil fell 3% to $42.47 which is the lowest price since last August. The 20% price decline in the first half of 2017 was the worst decline for a first half since 1997. Initially oil prices rallied because the EIA reported that inventories declined 2.5…

Stock Speculation Reaches 2007 High

Even though the stock market fell slightly on Tuesday, the bull market is still strongly intact. As you can see from the graph below, the annualized volatility is the lowest since 1965. That’s remarkable as it means the volatility is lower than every year in the entire tech bubble bull market. The year is almost…