Global CIO Commentary by Scott Minerd
“We have been living with a number of myths over the last three years. One of them is that this economic expansion is subpar in terms of the number of new jobs created. The truth is that subpar job creation is not the main problem. The average number of new jobs created in the private sector during this expansion is 154,233 per month, versus 143,604 per month in the previous expansion. The bigger picture is that markets have had such a massive drawdown that we are facing a dynamic that we have not seen in our lifetime.
The main factor to consider in this is the housing mess. The persistent overhang in excess housing inventory will continue to be a drag on the balance sheets of financial institutions, meaning the plumbing of the financial industry is not going to function properly. Additionally, depressed home prices weigh on consumer sentiment and inhibit spending. Only once we move through this downturn in the housing market will we see the economic conditions and credit creation necessary to build a stronger, more robust recovery that will sop up the unemployment problem.
The good news is that there are signs that the housing situation is starting to improve. U.S. existing home prices are on pace to increase by 17% this year through August. If prices continue on their current path, this would provide a significant boost to household net worth and would enable stronger U.S. consumption through the wealth effect. Our estimates suggest that every 1% QoQ rise in household net worth would translate into 0.4% annualized consumption growth, and add 0.31% to nominal GDP. At the current pace of improvement, it appears that home inventory levels are likely to be cleaned up by around 2015."
Economic Data Releases
The Housing Market Continues to Improve in the U.S.
Existing home sales in August rose to a 27-month high of 4.82 million, pushing the number of months of outstanding supply down to 6.1, its lowest level since April 2006. Meanwhile, housing starts posted modest gains in August while the National Association of Homebuilders' confidence index, a leading indicator of future housing starts, rose to a six-year high in September. While housing data has been positive, other sectors have been less so. Jobless claims fell slightly to 382,000 last week, with the 4-week moving average rising to an 11-week high. Both Empire and Philadelphia manufacturing sentiment indices showed continued contraction in regional manufacturing activities. The leading economic index fell 0.1% in August, dragged down by declines in consumer expectations, new orders, and job indicators.
European Data Mostly Negative
While China Shows Slight Improvement Data from Europe was mostly negative with the only positive results coming out of Germany. In September, the German Purchasing Manager Index (PMI) for the manufacturing sector rose to a 6-month high of 47.3, while the service PMI rebounded strongly from 48.3 in August to 50.6 in September. Elsewhere in Europe the euro zone PMI composite fell to 45.9, the lowest level in 39 months as consumer confidence slipped to -25.9, the lowest level since May 2009. The latest data from China suggest minor improvements in economic growth. Foreign direct investment in August declined 1.4% YoY, rising from a decline of 8.7% in July. China’s HSBC Manufacturing PMI for September rose slightly to 47.8, up 0.2 from the previous month. In Japan, the Bank of Japan further expanded its asset purchase program by ¥10 trillion in an effort to further stimulate growth.
Chart of the Week
Average Return on Gold During Different Periods of Real Fed Funds Rate* (1970 – Present)
Data from the past 40 years suggests that the average return on gold decreases as the real federal funds rate climbs. Gold also tends to perform well in low or negative real interest rate environments. Currently, the real federal funds rate is sitting at around -1.6%. Historically, such periods have resulted in an average annualized gold return of 16.1%. Currently, the gold price has only increased by 8.5% from a year ago.
Due to the Federal Reserve’s pledge to maintain its ultra low interest rate policy through mid 2015, and amplified concerns over future inflationary pressures, the real federal funds rate is expected to remain in low or negative territories, leaving further upside room for gold.
Source: Bloomberg, Guggenheim Investments. Data as of 9/24/2012. *Note: The real federal funds rate is the nominal federal funds rate minus the YoY % change in the consumer price index.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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*Assets under management is as of 12.31.2018 and includes leverage of $12.4bn. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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