Goldman Sachs: 2017 In 100 Charts

Goldman Sachs" Sumana Manoghar, Hugo Scott-Gall, and Navreen Sandhu wax lyrical in their introduction to the 100 most interesting charts of 2017...

In this very special edition, straight from our hearts, We pro?le 100 of our best and most compelling charts. They tell the story of a changing world; and below it starts. But for now we’ll quickly run you through the major parts.

 

We begin with rising capex: Who is spending to defend? Is disruption overrated? Who else can Amazon upend? The potential in India? Can China’s overcapacity mend? Are people eating healthier? How do millennials spend?

 

We explore each of these themes and tell you how they link. We have some fun charts in here too. And surprises. Wink wink. We hope they join the thematic dots as you see them in sync, But most of all we hope that these charts make you think.

 

There are quotes, stats, and a crossword also in here, Plus a thematic poster to spread the holiday cheer. Let us know what you think and if anything is unclear, We’ll be back soon with more. Until then, Happy New Year.

The over-arching theme appears to be that of disruption... and survival.

The Empire Strikes Back: 2017 has been a year of incumbents defending against disruption

The Force Awakens: Seeking a revival in global capex

Disruptive new entrants…

…often trigger a response from incumbents

Innovation to disruption: Tracking tech cost curves

The Last Jedi: Japan remains a unique opportunity

Attack of the Clones: Automation and the future of jobs

Who is disrupted by automation? Labour

Can the pricing power of brands be restored?

The Phantom Menace: Obesity and deconstructing the notion of healthier eating

A New Hope: The deregulatory wave

Where does China stand out?

On a parting note, some charts that surprised us

 

Source: Goldman Sachs

 

 

The Biggest Bubble Ever, In Three Charts

Authored by John Rubino via DollarCollapse.com,

Each quarter, Credit Bubble Bulletin’s Doug Noland posts a “flow of funds” report that analyzes the debt and securities markets data released by the Fed in its Z.1 Report. It’s always shocking to see the numbers we’re dealing with, but even more so lately as history’s biggest financial bubble starts to dwarf its predecessors.

Here’s some of the scarier data in chart form, with Noland’s commentary:

To the naked eye, percentage debt growth figures for the most part don’t appear alarming. But there’s several unusual factors to keep in mind. First, the outstanding stock of debt has grown so enormous that huge Credit expansions (such as Q3’s) don’t register as large percentage gains. Second, overall system debt growth continues to be restrained by historically low interest-rates and market yields. Debt simply is not being compounded as it would in a normal rate environment. And third, it’s a global Bubble and a large proportion of global Credit growth is occurring in China, Asia and the emerging markets. U.S. securities markets continue to be a big target of international flows.

 

With global Bubble Dynamics a dominant characteristic of this cycle, it’s appropriate to place Rest of World (ROW) data near the top of Flow of Funds analysis. ROW holdings of U.S. Financial Assets jumped $724 billion (nominal) during the quarter to a record $26.347 TN. This puts growth over the most recent three quarters at a staggering $2.124 TN (16% annualized). What part of these flows has been associated with ongoing rapid expansion of global central bank Credit? It’s worth recalling that ROW holdings ended 2007 at $14.705 TN and 1999 at $5.639 TN. As a percentage of GDP, ROW holdings of U.S. Financial Assets ended 1999 at 57%, 2007 at 100%, and Q3 2017 at a record 135%.

 

 

Meanwhile, the Fed’s Domestic Financial Sectors category expanded assets SAAR $2.841 TN during Q3 to a record $95.213 TN. In nominal dollars, the Financial Sector boosted assets a notable $5.085 TN over the past three quarters, almost 8% annualized growth. Notably, the sector’s holdings of Debt Securities surged a nominal $775 billion in three quarters to a record $25.425 TN. Pension Funds were a huge buyer of Treasuries during the quarter (SAAR $1.075 TN). Over the past three quarters, the Financial Sector boosted holdings of Corporate & Foreign Bonds by nominal $427 billion to $8.026 TN. More very big numbers.

 

One doesn’t have to look much beyond the booming Rest of World and Domestic Financial Sector to explain ongoing over-liquefied securities markets. The numbers confirm a historic financial Bubble.

 

Total Equities Securities jumped $1.229 TN during the quarter to a record $43.969 TN, with a one-year gain of $5.923 TN (16.4%). Equities jumped to a record 224% of GDP, compared to 181% at the end of Q3 2007 and 202% to end 1999. Debt Securities gained $171 billion during Q3 to a record $42.385 TN, with a one-year gain of $1.080 TN. At 217% of GDP, Debt Securities remain just below the record 223% recorded in 2013.

 

 

This puts Total (Debt & Equities) Securities up $1.400 TN during the quarter to a record $86.080 TN. Total Securities inflated $7.003 TN, or 9.1%, over the past year. Total Securities experienced cycle tops of $55.261 TN during Q3 2007 and $36.017 TN to end March 2000. Total Securities ended Q3 2017 at a record 441% of GDP. This outshines the previous cycle peaks of 379% for Q3 2007 and 359% at Q1 2000. One more way to look at post-crisis securities market inflation: Total Securities ended Q3 $30.819 TN, or 56%, higher than the previous cycle peak in Q3 2007.

 

 

There’s no doubt that financial sector leveraging and foreign flows (especially through the purchase of U.S. securities) continue to play an integral role in the U.S. Bubble. Inflating asset prices and resulting bubbling U.S. Household Net Worth are instrumental in fueling the overall U.S. Bubble Economy.

 

As we think ahead to 2018, the question becomes how vulnerable U.S. securities markets are to waning QE and reduced central bank Credit expansion. Inflating a Bubble creates vulnerability to any slowdown in underlying Credit and attendant financial flows. And it’s the final parabolic speculative blow-off that seals a Bubble’s fate. It ensures market dependency to unusually large and inevitably unsustainable flows. The Fed’s latest Z.1 report does a nice job of illuminating the historic scope of the U.S. securities Bubble. U.S. securities markets have been on the receiving end of extraordinary international flows, while inflating securities and asset prices have spurred rapid financial sector expansion.

Note that in the two “% of GDP” charts today’s numbers are compared to the previous two bubble peaks when things had gotten so far out of hand that the following year saw massive financial crises. So the fact that we’ve blown through those two previous records portends interesting times ahead.

To sum up Noland’s analysis, the US, along with the rest of the world, has entered full Ponzi, where credit has to continue to rise at unprecedented rates to keep the system from imploding. But the more credit we take on, the more fragile the system becomes. A sudden decline in equities or bonds, geopolitical tensions escalating, cryptocurrencies threatening fiat currencies, you name it, can crack the façade of normality that rising asset prices create.

What is The Everything Bubble? And how can you prepare for it?

What do formerly successful hedge funds going out of business, wacky economic data points, and the election of populists like Donald Trump all have in common?

All of them are the product of The Everything Bubble.

In the aftermath of the 2008 Crisis, Central Banks attempted to corner the sovereign bond market via low interest rates and massive QE programs.

Doing this represented the End Game for Central Bank policy. In a fiat-based monetary system, (meaning the currencies are not backed by anything) sovereign bonds represent the ultimate backstop of the financial system.

Remember, because currencies are not backed by anything, they can be depreciated via money printing. So they are not immune to inflation. Sovereign bonds on the other hand pay yields based on inflation and so hedge (at least partially) against this risk.

So when Central Banks attempted to create a bubble in the sovereign bond market, they were literally creating a bubble in EVERYTHING because every other asset in the system trades based on where sovereign bonds are trading.

This screwed up EVERYTHING. It screwed up economic data, it screwed up traditional investment analysis, and it screwed the average citizen hence why people like Donald Trump have been elected to positions of power.

Put simply, Central Banks have attempted to rig the entire system. Nothing is real anymore. Everything is trading based on a false risk profile induced by Central Banks cornering sovereign bonds.

This is why I coined the term The Everything Bubble in 2014. It’s also why I wrote a book on this issue as well as what’s coming down the pike: because when this bubble bursts (as all bubbles do) the policies Central Banks employ will make those from 2008-2015 look like a cakewalk.

We are putting together an Executive Summary outlining all of these issues as well as what’s to come when The Everything Bubble bursts.

It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here:

https://phoenixcapitalmarketing.com/TEB.html

Best Regards
Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

UBS Makes A Striking Discovery: Ex-Energy, US GDP Growth Is The Slowest Since 2010

Last week, UBS released its Global Economic Outlook forecast for 2018-2019, which coming in at over 220 pages and with more than 270 charts, is rather "difficult to summarize" as UBS" chief economist Arend Kapteyn snarkily notes. Still, as Kapteyn helpfully summarizes, the 3 charts below capture some of the main themes from the report, the first of which is a doozy and crushes the Trump "economic recovery" narrative .

Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out "underlying" growth is only 1% or so (ex inventories) - the slowest since 2010 - and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace. The surveys suggest that is possible but the surveys have also consistently overstated growth so far. As Kapteyn adds, due to "skepticism about that rotation is why we are about 20bp below consensus for US growth next year." It also means that contrary to conventional wisdom, the US consumer has not only not turned the corner, but continues to retrench and with the personal savings rate plunging to 10 years lows, there is little hope that personal consumption expenditures will be a significant driver of US growth for the foreseeable future.

More details from UBS:

In Figure 5 we show what we think the contributions to US headline growth have been from the energy sector (structures and equipment investment combined). This is depicted as the grey area. The blue line is headline growth (ex-inventories) and the red line is headline growth minus the energy sector investment contribution, which we call "underlying growth ex-energy". Taken at face value, the chart suggests underlying US growth has been slowing dramatically, from about 2.6% in 2015 to only around 1% in 2017. We do not quite interpret it that way, and view it more as a story of stability and "adding-up constraints". The economy can only produce so much, and when one sector is strong (energy), it absorbs labour disproportionately, while other sectors pull back. Furthermore, when investment is weak the consumer accelerates. US growth post-crisis has hovered around a 2% average and nothing in our recession probability models suggests that there is anything ominous going on. But the point of Figure 5 is to show that as energy investment runs out of steam, other sectors will need to accelerate 

significantly to maintain the current pace of growth.

Message 2: The one (developed market) country that no one thinks can generate inflation (Japan) is likely to create more inflation than any other developed market.

"Japan is cyclically 2 years ahead of most other countries and it has a textbook Phillips curve with higher Phillips curve wage and price coefficients than all the other countries we looked at. The labour market is already extraordinarily tight."

If unemployment goes to 2.5% by end-2018 UBS sees (BoJ) core inflation going up towards 1.5% (70bp above consensus) and Yield Curve Control starting to get tweakend (10y  JGB to drift higher.

Message 3 : The Fed is going to $4 trillion in US Treasuries by 2025 even absent a recession, $1.5 trillion more than they hold today. The is because the Fed will hit a trough determined by the "floor system" for monetary policy coupled with some other balance sheet changes, of around $ 3 ¼ trillion by mid-2020 and currency in circulation growth then starts to drive the dynamics of the balance sheet. If they still want to roll off the MBS book they need to buy UST. That is part of the reason that the aggregate size of the G3 central balance sheet by 2025 will still be roughly as large as where it was late last year. And that"s with some fairly aggressive assumptions about BoJ balance sheet roll-off. So good for term premium.

Foreigners Bought A Record Amount Of Japanese Stocks, Just Before The Nikkei Snapped

There was something poetically ironic about last night"s 800+ point crash in the Nikkei...

... which was saved in the last minutes of trading by what was rumored to be the latest blatant BOJ intervention: it took place right after the month in which a record number of foreigners rushed into Japanese stocks, chasing the record momentum of the Nikkei and Topix.

 

According to the latest data from the Japanese MOF, in October foreigners made the largest investments ever in Japanese equities in October.

First, what did Japanese investors do? Having as recently as several months ago bought up record amounts of US Treasurys, this enthusiasm has long since vanished, and local investors were net sellers of foreign long-term bonds (-¥1.43 tn) for the second straight month. However, in each month of 2017 so far, Japanese investors have remained net buyers of foreign bonds (excluding banks whose monthly transactions are volatile and also dollar funded), although the pace slowed slightly at +¥727.7 bn, according to Goldman calculations. Trust banks" investment trust accounts (including pension funds), financial services providers, and life insurers were net buyers, at a stable +¥267.5 bn, +¥659.0 bn, and +¥420.4 bn respectively.

Japanese investors were also busy buying foreign stocks: they bought a net ¥1.0 tn of foreign equities in October, and have sustained their amount of net purchases at above ¥1 tn since May.

However, what is more notable is what foreigners were doing with Japanese assets this time, and as noted above, foreign investors were net buyers of Japanese equities in October (+¥3.43 tn), after being net sellers in Aug-Sep (-¥2.65 tn). This represented the largest investment in Japanese equities in a single month since the beginning of comparable statistics in 2005. It also explains the Nikkei"s unprecedented surge last month, in which the Japanese index had just one day in all of October.

Inward - outward security investments

Source: Goldman Sachs

Looking at net overall capital flows through portfolio investment in October, funds flowed in via inward security investment by ¥1.53 tn (with foreign investors net buyers of Japanese securities) and via outward security investment by ¥334.4 bn (with Japanese investors net sellers of foreign portfolios), making for an overall inflow of ¥1.86 tn (September: outflow of ¥2.43 tn).

Source: Goldman Sachs

The trick, for Abe whose investor-friendly election last month was the main catalyst for the influx of foreign money, is that just as foreign money comes easily chasing upward momentum, it can and will leave just as easily, and once said momentum is lost - and if there are any more surprises like last night"s mini crash - watch as all the transitory Nikkei gains from the past month are exposed to be just that.

How Many Hours Americans Need To Work To Pay Their Mortgage

When it comes to the cost of living in cities, a general rule of thumb is that housing prices are much higher in the country’s economic and population hubs, especially in the cities along the coasts.

As Visual Capitalist"s Jeff Desjardins notes, particularly in recent years, prices have been pushed sky-high in places like New York City or San Francisco through a combination of limited supply of new homes, increasing demand, shifting demographics, and government regulations.

PUTTING IT INTO PERSPECTIVE

Today’s visualization from HowMuch.net applies a common denominator to compare 97 of the biggest cities in the United States. Using a measure of median household income against the average mortgage payment in each city, we get a gauge of how many hours must be worked each month just to pay down the house.

The visualization uses data from the U.S. Census for household income and Zillow for median home listing price, while calculating mortgage payments based on a standard 30-year term.

Courtesy of: Visual Capitalist

THE RESULTS

Using the above method to compare the amount of hours it takes to pay down a monthly mortgage, we see some interesting contrasts in the country.

Here are the five most expensive cities in the United States for housing:

With about 170 hours in a normal work month, the average people in these cities are spending 50% or more of their income just to pay down their mortgages. It’s worst in New York City and Los Angeles, where at least 65% of income is going towards housing.

These cities stand in stark contrast to the five cheapest cities based on hours of work needed:

In a city like Memphis, TN it takes only 18.4 hours of work a month to pay down the average mortgage. That’s equal to only about 10% of monthly household income.

COASTAL DISPARITY

Interestingly, even though coastal hubs have high prices relative to the cities in the middle of the country, they differ quite widely against each other. This discrepancy does not necessarily show in terms of ranking, but more in terms of the actual hours of work needed.

Washington, D.C., for example, requires less than half the hours of work to pay down a mortgage than Los Angeles or New York City. Meanwhile, a popular west coast hub like Seattle only needs 72.8 hours in comparison to New York’s 113.5 hours.

ECB May Have Only €220 Billion In QE Left If The Hawks Get Their Way

After seemingly sending out trial balloons (via Bloomberg and Reuters simultaneously) on tapering last Thursday, which had almost zero impact (see “ECB Reportedly Considering Slashing QE in Half in January, EURUSD Shrugs), Draghi’s minions have been busy again.

“Central bank officials familiar with the matter” told Bloomberg that some - presumably quite hawkish - ECB policy makers “see room for little more than 200 billion euros ($235 billion) of purchases under the institution’s bond-buying program next year.”  With said “officials” (who asked not to be named because the talks are not private anymore) seeing a limit to bond buying of 2.5 trillion euros under the current rules and purchases expected to reach 2.28 trillion by the end of 2017, we can do the calculation.

According to last week’s trial balloons, the ECB was looking at reducing its purchases from €60 billion euros to about €30 billion for at least nine months.

As we also explained in “How Will The ECB"s QE Tapering Impact The Market? Here Are The Possible Scenarios”, the market neutral level of APP extension estimated by Citi appears to be around 250 billion Euros, or roughly €50 billion more than "some" ECB policymakers will permit. The three broadly market neutral scenarios laid out in Citi’s model were €20bn x 12mth, €30bn x 9mth and €40bn x 6mth as shown below.

For what it’s worth, Citi’s neutral scenario corresponded closely with a Reuters poll (from 11-14 September) which suggested the consensus amongst economists was for €40bn (range €30- 50bn) over 6mths (range 3-12mths).

And while we can argue about what the ECB should do to optimize conditions in the real economy, it now has a little problem vis-à-vis market expectations for the upcoming 26 October meeting. A 220 billion Euro extension is among the worst scenarios and, as Bloomberg confirmed “such a limit is at the lower end of volumes under discussion, setting the Governing Council up for a potentially difficult policy meeting.”

Citi previously noted that risks are skewed towards higher yields and bear-steepening due to issuer limit constraints. Following today’s trial balloon, HSBC commented that “The debate about the likely pace of QE continues to intensify in the run-up to the 26 October ECB meeting...If the ECB are correct then this would mean the pool of bonds would be used up beyond that point.”

Marc Ostwald, global strategist at ADM ISI in London, also commented on the ECB’s limited room to maneuver. “If they stick to the capital key, then there are only about 55 billion of Bunds that they could buy, which in turn caps what they can buy in total, especially with limits on what they can buy of smaller countries debt. However, they could reduce the relative proportion of govt bonds in a 30 billion euro per month QE pace to try and circumnavigate the problem…but even that will only be a marginal help.”

Bloomberg also notes that some policy makers are concerned about the reluctance of investors to sell their bonds “Reducing monthly buying to 25 billion Euros – which would total 225 billion euros over nine months – may address some of those concerns, the officials said.”

Perhaps the best tactic here is to release as many trial balloons beforehand, that 26 October becomes a non-event...

Americans Seen "Flirting With Financial Disaster" As 2Q Credit Card Debt Soars Back To 2008 Highs

With credit card data in for Q2 2017, American households look to once again be on a collision course with the ever-elusive $1 trillion goal that narrowly escaped their clutches in 2008.  With nearly $940 billion in credit card debt outstanding, 2Q 2017 marked the second highest consumer revolving debt balance since the previous peak in 2008.  Per WalletHub:

All of which adds up to nearly $8,000 of credit card debt per household, up 5% YoY versus flat-ish wages.

Of course, the more surprising component of the 2Q 2017 credit card data is not that banks continue to trip over one another for the "opportunity" to underwrite Americans" purchases of fidget spinners, but rather that they continue to do so despite the rather ominous recent rise in charge-offs.

Not surprisingly, Morgan Stanley recently noted the same trend in subprime credit card delinquencies...which they apparently found staggering in light of the fact that "everything is awesome" in the job market.

Of course, after spending the entire month of August analyzing those seemingly contradictory facts, Morgan Stanley came to many of the same conclusions that we note a regular, recurring basis.  Apparently, soaring credit card delinquencies have something to do with stagnant wages in the face of soaring healthcare costs and rising rents...who could have guessed that?

Investors ask, "Why are card losses rising if employment is  so good?" Our deep dive & quant work shows subprime is stretched from higher rent, healthcare costs & low  wage growth, with lower credit availability a coming drag.

A Tale of Two Consumers, with the subprime consumer increasingly at risk, driving up net charge-offs (NCO) and lowering EPS: The economy is solid and unemployment is very low, but credit card delinquencies have been increasing... so we spent the month of August delving into what is really  going on with the US consumer.   We found that the average consumer is in good shape but the financial pressures on subprime consumers are high and, critically, rising

1. Banks are  pulling back on subprime card loan growth. For the past 3 years, bank lending to subprime card posted an 8% CAGR, faster than prime"s 5% growth.   But banks are now beginning to put on the brakes.  Subprime loan growth has slowed over the past two quarters to 10% y/y in 2Q17, down from 13% y/y peak in 4Q16.    Our quant work shows a negative correlation between change in loan growth and change in losses.  Result? Expect declining subprime loan growth to drive up subprime losses over the next 12 months. 

2. Rent and healthcare costs a bigger burden for lower income consumers… and rising.  Consumers in the lowest income quintile spend 38% of after-tax income on rent and another 18% on healthcare costs, a combined 56%.  This is well above the average consumer"s  40%.  Pressures are building on both.  Our REIT colleagues expect rental rates on mid- to low income apartments, Classes B & C,  will continue to rise from already high levels, but at a decelerating pace.  Our healthcare colleagues expect healthcare costs to rise ~5% annually over the next few years.   These costs put more pressure on lower income consumers, who have lower wage growth.

3. Discretionary income not keeping up with debt service burden growth.  Debt service burden (interest and principal repayment) is growing 2%, faster than the 1% growth in discretionary income for the average consumer. That means, after paying for basic needs like  shelter, food, healthcare, and utilities, there is less left over to pay back lenders. Middle income renters are in the toughest spot as  it looks like their borrowing has accelerated in auto, student, and personal loans, while their  disposable income growth has been below average.  The lowest income quintile is burdened by high and rising rent and healthcare costs.

Ironically, after declining for decades, Morgan Stanley presents the following chart which reveals that healthcare costs as a percent of disposable income started consistently rising again only after the passage of Obamacare.  Meanwhile, soaring apartment rents are also wreaking havoc on disposable income for middle-class families.

Meanwhile, despite a "strong job market", debt payments can only continue to grow at a faster rate than income for so long before it starts to take a toll on overall credit performance.

Alas, all things that Yellen & Co. can cure with some more rate hikes...