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Economic Expectations: Politics vs. Leading Indicators

October 11, 2019

ITR CEO and Speaker Brian Beaulieu discusses the current economic landscape based on insights from leading indicators.

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ITR Economics Divider


Transcript by Rev


Brian Beaulieu:
Hi. Thanks for joining us for TrendsTalk. ITR Economics here. I am Brian Beaulieu, the CEO and chief economist of ITR Economics.

Today we're going to talk about two issues really. One is the body politic and the other, the leading indicators. And there is a loose relationship between the two that I'll explain a little bit later on. Let's start with the the political sphere. We're going into the presidential election cycle and what that means to us is we're entering into the silly season. Where politicians are going to try and tell you that they're going to do this for you and that for you, and if you just vote for them, everything's going to be all right.

The problem with that is you have the power, not them, and they can't make it all right. You can make it all right. You have to decide. And recent examples of that are the tax cuts of 2018 fizzled out in terms of any upside momentum to the economy fairly quickly. And we find ourselves in this prognosticated cyclical decline here, in the second half of 2019, with the weakness continuing through the first half of '20.

Another example I can give you is politicians of all stripes are still out there saying that incomes aren't rising. Well they are rising. They're rising for people who have a job. Using government data adjusted for inflation, weekly earnings are going up. There's just, data's there, they're going up. The operative word there though is earnings. For those who have a job, who want to work for their money, inflation adjusted earnings are up. They're at a record high and they're going to continue to rise. They're better off than they were before. And we'll be exploring that in multiple different ways in at least one chapter, maybe two chapters for our fourth book, that we're currently writing. But understand that the system is working and you are in charge. That puts us ahead of the game.

We had some leading indicators recently fall back down on us, which is the second part of what I wanted to talk about. Like the ITR leading indicator, our first proprietary leading indicator. It had, tentatively, started going up for a couple of months and now it's edged back down. We've lost that tentative low. The ITR retail sales leading indicator had a higher probability of trend reversal and it to went back down below. And interestingly enough with the ITR retail sales leading indicator going back down, we were able to back track that to presidential tweets. And all that means to us, it's not a political commentary, all that means to us that there's an emotional content to the recent negativity in these leading indicators. And that emotionalism makes it a dangerous, but it also makes it be more easily dealt with than something fundamentally going wrong within the economy. It's tends to be more of a curio, which is why these indicators have dropped back down, but not enough to make us want to take our second half 2020 rising trend off the table as far as our forecast go.

We're still well within parameters of normal timing probabilities. A lot of what we talk about when we talk about leading indicators with you is based on median, AKA the most typical timing probability. But the majority range can be quite broad and I read a nice example of that today. I was reading about the yield curve which started coming down in May. And the father of the yield curve, himself, is saying, that has a six to 18 month window in terms of what it means for the overall economy. We work very hard to try and get our probabilities more narrowly defined than that even when we're using normal majority range probabilities. But it's a nice example of how you can't take timing too literally because every cycle has its own peculiarities, its own characteristics. I think the political drama that's going on now certainly isn't helping the economy and it's isn't going to help get this thing turned around any faster. That's for sure. We seem to be in for a bit of a slug best going through the low.

So continue to watch the leading indicators with us, if you would please. The JP Morgan indicator 112 is showing some interesting potential. We have the National Housing Permits ready change, showing some potential on the upside. By potential, I mean some nascent movement on the upside. We have housing for single unit homes where we have positive checking point signal, with a 312 above zero and running above the 12 12 ready change. So that's positive checking point. And that makes sense to us given the duration of the pain that we've been going through, and what's been going on with interest rates, and the fact that they have been moving down particularly on the mortgage market.

So we're getting there. It's just we lost some of these recently, but we'll get them back. We have no reason to think or see otherwise. We're at that point where it's fairly normal to have, I show people this when I do a talk, this dashboard of indicators. And they'll flip from red to green, red to green, and then before they go solid green. And we're in that flipping red to green, red to green mode. At least you're not getting red across the board anymore on an extended basis. This is just part of the normal process.

Expect some of the shorter term leading indicators to stay more negative longer than some of the longer term leading indicators. And the JP Morgan is one of those longer term ones. The ITR retail sales leading indicator is one of those longer ones. The Wilshire market cap, which is no longer actively declining, and it's ready change leads on median by eight months.

So there are some green shoots out there. There's a couple that we don't share with people because they're part of our secret sauce. And they're helping us stay the course because they are affirming the probability of rise in the second half of 2020. So be careful going through the near term. And real time, in the near term, is through mid 2020. And start thinking about how you're going to capitalize on that rising trend. Where you're going to get the cash? What are you going to do? How you're going to deploy that cash? For two reasons, to magnify the rise and to mitigate the inevitability of the next decline. And we don't think it's going to be a very long cycle that next cycle. So you're going to really have to work both issues simultaneously.

I hope you've gotten something out of this. I hope it gives you some food for thought. Thank you very much for listening to ITR Economics. This has been TrendsTalk.


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