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3 Things - Uncomfortable Facts, 25-54 Employment, Houston RE
Submitted by Lance Roberts via STA Wealth Management,
Uncomfortable Facts For The Bullish Bias
In a recent interview on CNBC, Steve Ricchiuto with Mizuho Securities points out the obvious to those that are paying attention.
The points that he makes are quite accurate but widely dismissed due to the current momentum push in the financial markets. However, one point in particular that I wanted to address was about valuations and profit margins. As Steve stated, companies are under pressure to maintain profitability in order to support rising asset prices. But, given the rise in employment and the squeeze on productivity, combined with global deflationary pressures and weak exports, this is becoming much more of a challenge.
The chart below shows a historical trailing valuations combined with corporate profit margins. The black dashed line represents 23x trailing earnings which has been the historical peak of bull market cycles with the exception of the late 90's "dot.com" craze.
What is important to note is that for investors bad things have tended to happen when profit margins decline at a time when valuations have been elevated. The next chart shows this a little more clearly by viewing net profit margins as compared to the S&P 500 index.
It is the risk of a mean reversion in earnings/profits that is of the biggest risk to stock market investors currently. As I have discussed previously, earnings have a very regular habit of reverting from 6% peak to peak increases which is where earnings currently reside.
Given that global deflationary pressures are on the rise, the ability for earnings to follow the expected predictions through 2020 seem overly optimistic. This is particularly the case given the strength of the US dollar which is a drag on exports which comprises about 40% of corporate profitability.
Again, the points that Steve makes are absolutely correct. However, as I stated just recently, the Fed has now likely boxed itself into a corner and will likely raise rates even though "real" economic strength would suggest caution.
"...I believe that the Fed understands that we are closer to the next economic recession than not. For the Federal Reserve, the worst case scenario is being caught with rates at the 'zero bound' when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the 'lesser of two evils.'"
Of course, Steve's comments about employment lead me to my next point.
Employment 25-54 Not As Robust As It Seems
The most recent jobs report sent the media spin machine into overdrive, to wit:
"Friday's monthly jobs report showed that in January nonfarm payrolls grew by 257,000 in the US. And with revisions to recent reports, the past three months were the strongest for job creation in the US in 17 years.
The main driving force behind this trend? Millennials.
Workers between the ages of 25 and 34 have been surging back into the workforce over the past several years, with this trend really taking off in 2014."
Here is the chart used to prove this point.
While this chart clearly shows that roughly 2,700,000 individuals, between the ages of 25 and 54, have entered the labor force, it is misrepresentative about the true nature of the employment level of that demographic. To clarify we must look at the employment-to-population ratio of the 25-54 age group. This is shown in the chart below.
What is missed by the first chart, which shows a massive surge of "millennials" flooding back into the workforce, is that when viewed as a percentage of the total available population of 25-54-year-olds it has only recovered back to levels last seen in the mid-1980's. At 77% currently, the workforce of millennials is well below its peak employment of nearly 82% at the turn of the century.
Furthermore, and very importantly, the current employment-to-population level is also higher given that during the post-financial crisis period (Jan. 2009 to present)the population of 25-54-year-olds has declined by 814,151.
Had the population of 25-54-year-olds followed its 2000-2009 growth rate of 592,638 annually, the employment-to-population ratio would be just 74% which would be lower today than at the lows of the financial crisis.
This decline in the population of millennials is due to declining birth rates over the last 30 years. The declining birth rate is another major headwind that will face the economy in decades ahead, but that is a post for another day.
Lastly, this chart clearly explains that an unemployment rate of 5.7% is highly misleading, as a large number of millennials are simply no longer counted as part of the workforce. Considering that this age group comprises the "household forming, tax-paying, consuming family heads of tomorrow," it certainly does not bode well for a resurgence of economic growth in years ahead.
As Myles correctly stated in his post, "This is the most important trend in the labor market right now." Unfortunately, when viewed correctly, it suggests that the real economy is likely to remain far weaker than expected in the years ahead.
Houston "We Have Another Problem" - Commerical Real Estate
As I have penned recently, Houston has a problem when it comes to tumbling oil prices.
"As oil prices rise and fall so does the number of rigs being utilized to drill for oil which ultimately also impacts employment. This is shown in the chart below of rig count versus employment in the oil and gas sector of the economy."
"Obviously, the drawdown in energy prices is going to start to weigh on the Texas economy rather sharply over the next several months. Several energy companies have already announced layoffs, rig count reductions and budgetary cuts going into 2015. It is still very early in the cycle so it is likely that things will get substantially worse before they get better."
While much of the mainstream media continues to tout that falling oil prices are good for the economy, (read here for why that is incorrect) the knock-off economic impacts are job losses through the manufacturing sector and all other related industries are quite significant.
One of those areas is commercial real estate. If you look in any direction in Houston, you see nothing but cranes. The last time I saw such an event was just prior to 2008 when I commented then that overbuilding was a sign of the maturity of the boom. The same has happened yet again, and not surprisingly, the "sirens song" has been "this time is different."
Unfortunately, not only is this time not different, the economic impacts are likely to much more substantial, not only in the Houston economy, but nationwide. To wit:
"The jagged skyline of this oil-rich city is poised to be the latest victim of falling crude prices. As the energy sector boomed in recent years, developers flocked to Houston, so much so that one-sixth of all the office space under construction in the entire U.S. is in the metropolitan area of the Texas city."
But here is the economic problem:
"And as a reminder, every high-paying oil service jobs accounts for up to 4 downstream just as well-paying jobs. Case in point:
The rush of building has created thousands of jobs—not only at building sites, but also at window manufacturers, concrete companies and restaurants that feed the workers.
But just as the wave of office-space supply approaches, energy companies, including Halliburton Co. , Baker Hughes Inc., Weatherford International and BP PLC, have collectively announced that more than 23,000 jobs would be cut, with many of them expected to be in Houston.
Fewer workers, of course, means less need for office space."
While the media and mainstream analysts discount the negative economic impact of falling energy costs, I have personally witnessed it in the mid-80's, the late 90's and just prior to 2008. In all cases, the negative outcomes were far worse than predicted which left economists scratching their heads as to what went wrong with their models. Of course, considering the BLS only saw a loss of 1900 manufacturing (oil and gas) jobs in January when there were 26,000 layoffs may explain part of the problem.
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no graph, no news article-no matter how revealing, no organization can match the power of the printing press. it will take the spilled blood of many good men to produce a free transparent market. untill then, these are just vomiting camel patterns
i love when people talk about being in a Recession.. We're in a DEPRESSION.
"In the energy segment, credit will get tighter until uncertainty in oil prices goes away," said Joe Argue, chief lending officer at Amegy Bank.
http://www.bizjournals.com/houston/blog/money-makers/2015/02/oil-price-s...
please, STOP with the negativity...
We are frolicking a field of sweet clover, surrounded by the Green Shoots of the New Recovery!
"i love when people talk about being in a Recession.. We're in a DEPRESSION."
Yes...the Great Debtpression
Say there friend, would you like to sign this here promissory note?
How tp short commercial real estate paper is what inquiring minds want to know. Long the DIY and booze paper - warning, transactions are USD only.
Houston was able continue building nail salon hives after the last fraud traunche dipped in the gentries pocket. I'd drive around in awe in suburban Houstion. On one side of the street was a teo year old strip mall (nail salon hive). and across the street a few paces down a brand new nail salon hive was weaving its way into the generic checkerboard of a large expanse of mediocre parking lot land scape and excess capcity.
And then the math: How many nail salons can a community, even one as spread out as Houston, support?As a punk in elementary school, I checked out a book, The Earth for Sam. In that book the author asks the question, What if everybody was a "barber"?
Houston is a major carbon distribution hub. But the energy corridor is not about working valves, so, Huston nurtures a bountiful harvest ghost resumes overly underlain with unneeded mining credentials (excess capacity) as the production rig count gets tinier and tinier.
The US, for the last couple of years has exported more gasoline than the continental market consumed. Why build Keystone? To flood an already flooded market. Ferc is no longer billing tariffs for cartage through a pipe traversing federal assets (meaning ours), So how will the Keystone Cops finance the Keystone Pipeline? By taking harvest from you and yours and mine and mine, ya think?. Thats what they've always done before.
And after all the fracking damage and hoopla and fiasco et' al, including the ill thought scam to sell Europe a bunch of USA carbon product through a "hoped" cutting of Russia out of Europe was going to keep the rally going - who the fuck is coming up with this lose / lose hair brained version of global tic tac toe. Japanese researchers reported cold fusion does work. Meanwhile, the old monkeys in the old societies have locked themselves inside old scientific legacies - and avoid the heresy of new knowledge - it's either chemical or it's physics, there is no in between - tell that to Einstein's ghost the next time you have a quantum mechanics discussion with him.
For sure our "bunz up and kneeling" tube snake charming CSPAN dandies nasty pouting their double secrets for bling tokens or discount coupons to K Street Kiddie Brothels when the "Street" bag men are paying a call will again find someway to protect us from ourselves and that old ]demon rut, "freedom". They be all looking everywhere and pulling out all the stops to continue the pretense of the US as something less than it is, and that they, are something more than they are.
Who owns this mound of sand and rock? WE DO? This is OUR LAND. And whoa be any poor unfortunate caricature of sentience who be thinking otherwise.
Zippity do da
Zippity day
My oh my
CSPAN beef on the spit
It's a wonderful day!
as far as stock prices go all of the above is, imo, irrelevant
Market WILL NOT go down until ZeroHedge turns bullish. Could be awhile.
More proof that this market is built upon a foundation of reeking bullshit...
If this was a market that may be true. This is an abomination.... or is it an obamanation..... whatever... it's fubar
I agree, it ceased being a market years ago. It is a manipulated vehicle for cronyism and ripping off everyone...
BULLISH!!!
OT but important to me.
I owe ZH a great debt for helping to undo the damage caused by public school.
I'm currently reading the great deformation and I've read creature from Jekyll island. What else can I read to further my education?
I have fourth turning and war is a racket only reading list.
Walden is the only book you ever need to read.
EASY!
Hard Choices
-H Clinton
Known and Unknown: A Memoir
-D Rumsfeld
The Audacity of Hope
-BH Obama
And finally, the piece de resistance,
Speaking of Freedom
- GHW Bush
I suspect (actually, I know) that there are 3 downvoters here that do NOT get sarcasm, even not very vieled sarcasm. But you were right to leave off the /sarc tag on something so obvious - fuck 'em. If they can't tell from your psued, they can't tell shit from shinola anyway.
Sorry I could only give you one greenie...
The Art of War
The Money Masters finally put online for free at youtube is a must watch, Creature from Jekyll Island.
Hearitonline.com (now defunct)had an old fellow George Whitehurst Berry who personally was executing positions when the Hunt Bros tried to corner the silver market in the late 1979. I learned more from listening to this guy about central banks than anyone in my life, and his show Crash Are you Ready was the most informative I have ever heard - if you can find it, as it seems I think much of his podcasts may not be online any longer.
http://theredpillradio.com/gcnpodcast.html
by Andrew M. Gause
http://www.amazon.com/Secret-World-Money-Andrew-Gause/dp/0965658902
My all time fave:
Extraordinary Popular Delusions and The Madness of Crowds
http://www.gutenberg.org/ebooks/24518?msg=welcome_stranger
And of course: Orwell's 1984
http://msxnet.org/orwell/print/1984.pdf (free .pdf)
and...
"How To Move Thousands Of Ounces In Silver - The Dollar Is Dead"
Kaiser Sousa, 2015 - Fuck The MoneyChangers Publishing
Thanks everyone!
This will keep me occupied the next couple of months.
Public school stunted my brain and college was even worse. I've been spending the last decade trying to undo the damage. Luckily for me I've always loved reading. Even more lucky, people much smarter than myself were kind enough to write their ideas down so that I might explore them later.
For today's market madness:
Fooled by Randomness by Taleb.
For "bigger picture" truth, try Autobiography of a Yogi by Paramahansa Yogananda...
War is a Racket is only part of Butler's story try Archer's book on the attempt to over throw the government by using Butler. He outed the bankers and it all got buried. I also found Richard's book on Gladio interesting
Good luck and happy learning
Yeah the Business Plot.
Realizing the implications from that and who the players were will be a fun learning experience.
Sounds interesting. I've heard of the plot. Can you be more specific about titles please?
Start with 'War is a Racket' and follow that thread.
The Money Bubble
The Death of Money
The Real Crash
contra corner blog by David Stockman for current updates
Houston..... we "do" have a problem. Massive frickin traffic. Maybe some folks will be pointing the nose north and heading out. This city exploded over the last few years. A slow down is needed.
Growth can be good, at a reasonable speed. Houston shoots off like a rocket on the upside and collapses like a satisfied penis on the down. I think we just blew our load.
Hope you're right, traffic sucks on north side
Traffic in Houston sucks everywhere.
I finally broke down and bought an EZ-Tag. Goddamn, I love that thing.
hell. im paying $6.50 in tools and sitting still on the Hardt half the time
A World Economic downturn is obvious and the downturn is picking up speed.
Now your painted into a corner with ZIRP and now even NIRP what levers can you pull to stir demand.
There are none because all of the cheap money has been spent on inflated depreciating assets (housing), yeild seeking (bonds/ rentiers) or capital gains seeeking (shares). The limits of returns on these things have been reached and there are no bigger fools left, on top of which these assets can supply little demand.
It will be a slow death like strangulation
There are some good restaurants in Houston.
If Bosnia War is anything to go by the United States will not allow any EU-brokered deals to succeed
http://russia-insider.com/en/politics_ukraine/2015/02/12/3394
and that's why S&P500 sill go to 2150 for the February FOMC minutes
I don't know, I think the stock market rise is a capitulation of sorts. The elite cannot create wealth by starting a factory, for instance. That's the opportunity cost foregone when money pours into the stock market. I'd say that the higher the market goes, the greater the likelihood of collapse.
I often get the feeling on my brief visits to this site that most posters here would be truly disappointed if the world didn't implode. I'm not saying it couldn't, but how anyone could be happy about it eludes me completely. Try logging on to Kiva and lending a little money to someone struggling for a better life. It might might make you see eveything in a somewhat different light.
Then again I'm just a clown.
I am sitting on six figures in cash...of course I am hoping for a collapse
tums up for da lass line
it's more like posters here are sick of the financial repression benefiting the wealthy and connected at the expense of productive savers. Nothing but a collapse will flush out the malinvestment and end the capital destroying financial fraud enabled by our current policies. The longer this unsustainable experiment continues the greater the damage will be. So yes...the world needs to implode so there can be a true recovery.
Just looked - Kiva is some loan operation. You're not a clown - you're really a fukin clown. People need to get out of debt slavery I don't mind opposing opinions - but I think you're really pimping debt and ought to be banned go fuk yourself
IMHO
Speaking of real estate and resource declines. Look what happens when iron ore falls 50%. The house some fool paid 1.3 million in an Australian mining town a couple of years back can't get a bid past 360k today.
http://www.idiottax.net/2015/02/the-west-coast-difference.html
This is the interesting thing about central planners and one of their great weaknesses: Ego. What the Fed is contemplating is that a recession is on it's way despite ZIRP. I would probably add that they know that the economy has not come roaring back, either, despite Obama and DNC comments to the contrary. At best the economy has stabilized.
So, not wanting to appear to ineffectual they would prefer to raise interest rates, speed up the next recession so they can go back to ZIRP to look like they are really doing something. In other words, it is preferable to cause more pain to you than suffer a bruised ego and demonstrate the limits of power and genius of central planners.
Government is always for itself first and you...much farther down the list.