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Surprise: It Isn’t Consumers Keeping American Factories Busy

US factories are humming along, constrained only by supply issues which might occasionally limit production. That’s the story, anyway. There’s too…

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This article was originally published by Alhambra Investment Market Research

US factories are humming along, constrained only by supply issues which might occasionally limit production. That’s the story, anyway. There’s too much business because of them, manufacturers taking in only more orders by the day leaving them struggling to catch up.

But what kind of stuff is it that is being ordered from our nation’s factories?

Without thinking too much about it, you’d probably say that they’re ridiculously busy trying as best as possible to fill demand for consumer goods. After all, federal government helicopters delivered hundreds of billions right into consumer pockets and then right out the door to Amazon.com.

Except, no. According to the Census Bureau, it is not consumer goods which are making such massive waves in production. On the contrary, factory orders for strictly consumer products are, actually, visibly unimpressive.

These are the kinds of numbers we’ve seen in countless other datasets; while better today (or, latest estimates for August 2021), “somehow” there were fewer total orders (despite “inflation” in prices) than compared to the prior peak in October 2018 (just before Euro$ #4’s landmine); which was already below the peak before, early 2014 at the start of Euro$ #3.

While we try to sort this out, there’s already the possibility that this part of the economy is slowing down anyway. According to these updated estimates, factory orders for consumer goods were a bit less in August than they had been in July. After a couple of good months, the pace of ordering has moderated over the past few since June.

It’s the same for the larger categories of factory orders, too, where a recent slowdown apart from those issued for consumer goods is widespread. It may be delta COVID, though why that might limit new orders for manufactured goods isn’t clear. This might also just be a temporary soft spot for any number of reasons.

By far, the most robust and untouchable factory category is for transportation equipment and goods. Compared to demand excluding those, new orders for that particular segment is and continues to be unstoppable. Cars and other vehicles, sure, but also transportation equipment – as in, trucks and other means of conveying the robust bulge of goods consumers are purportedly buying.

Not consumers, though. What if we’re seeing a wave of orders which are largely based upon trying to mitigate these transportation and handling chokepoints themselves? There hasn’t been a huge increase in either consumer goods demand nor in global trade volumes, yet there has been a nightmare of limited capacity to handle even this much.

How much of factory orders is really shippers, handlers, and freighters (as well as, possibly, warehousing and inventory management capabilities) attempting to get some new equipment just to fix these bottlenecks?

It would be almost circular as it would turn out to be transitory; consumers go nuts buying some goods but not others, goods demand rebounds faster than constrained supply can handle, and in that imbalance the supply chain flush with high prices rushes to upgrade and add new equipment that may not otherwise have been needed if not for the original and artificial disruption.

Once this becomes clear…

Like commodity prices, expectations for huge ongoing demand would have to be adjusted to a very different set of macro circumstances starting with demand. And that’s an even more uncertain problem given the inability of the government’s statistical beancounters to more accurately estimate these non-recovery rebounds (see: recent benchmark revisions below which make it clear just how much activity is overstated by overzealous statistical assumptions).

You could at least understand why and how this kind of speculative scenario might develop; huge government intervention which gets Economists to produce incredibly optimistic forecasts on top of real problems in the supply chain. Those dealing with those problems might then become a little too aggressive in buying new equipment comforted by their Economists and econometric projections.

Why not buy a bunch of new trucks, railroad cars, and new containers, even if they are effective at alleviating the supply bottlenecks, they’d still be productive given how, according to forecasts, the economy is going to be inflationary and roaring for a long time. New equipment not just for today’s issues, useful also into tomorrow’s undented consumer demand.

But if that demand was overestimated all along, and Uncle Sam’s influence not nearly so lasting, then there’s more than a trivial chance of what is right now still too little transportation capacity becoming too much.

Even if this might not seem likely, it isn’t impossible and may be considered less unlikely the more the second half of 2021 continues to disappoint.



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Economics

10 of The Best Canadian Dividend Stocks to Buy in November

One of the best ways to increase the value of a stock portfolio while protecting it from adverse market movements is to add Canadian dividend stocks. Particularly Canadian…

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One of the best ways to increase the value of a stock portfolio while protecting it from adverse market movements is to add Canadian dividend stocks. Particularly Canadian Dividend Aristocrats, that will provide income in any market environment.

Many investors first learning how to buy stocks in Canada want to know what the best options are today. This is why we decided to make a list of the top ten options in Canada.

This list of top Canadian dividend stocks takes 3 things into consideration

The growth, safety, and current yield of the dividend.

A high yielding income stock may be placed lower on this list due to safety, and a low yielding stock could be placed higher on this list due to the company’s dividend growth.

Warning – The best dividend stocks don’t always have the highest yield

A mistake that is made time and time again with dividend investors, particularly new ones that haven’t been burnt yet, is having tunnel vision on the dividend yield. They ignore the dividend payout ratio or the financial health of the company, and instead chase high yields to generate larger passive income.

Unfortunately for many in early 2020, this strategy resulted in devastating consequences. We witnessed the quickest pace of dividend cuts in history, and many income stocks that were bloated in value due to their high yields saw their share prices collapse.

Chasing yield is one of the biggest and most common mistakes beginners make, and it is imperative you put the quality of the company at the top of your list, rather than how much it will pay you.

Is there an ETF to make dividend investing easier?

Many people who don’t have the time to consistently monitor a dividend portfolio want to make their lives easier via an ETF. Fortunately, we have a plethora of them in Canada.

Whether it is Vanguard, Horizons, BMO or iShares, there are a wide variety of dividend ETFs Canadians can choose from to generate passive income in a single click. Some quick examples?

  • Horizons Active CDN Dividend ETF (TSE:HAL)
  • BMO Canadian Dividend ETF (TSE:ZDV)
  • S&P/TSX Canadian Dividend Aristocrats Index Fund (TSE:CDZ)
  • iShares Core S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
  • iShares Canadian Select Dividend Index ETF (TSX:XDV)

It’s important to note that these dividend ETFs do come with management fees, and need to be considered prior to purchasing.

If you’re looking for the cream of the crop in terms of Canadian dividend stocks, you’ll want to read this….

This list doesn’t contain any stocks we have highlighted over at Stocktrades Premium on our Dividend Bull List. If you want the true best of the best, click here to get started for free

We highlight market-beating income stocks for over 1800 Canadians, and have nearly tripled the overall returns of the TSX Index since our inception.

We also have a game changing dividend safety screener that can help you make better decisions.

With that being said, lets look at some of the top dividend stocks in Canada right now.

What are the best dividend stocks in Canada?

10. Bank of Nova Scotia (TSX:BNS)

ScotiaBank

In reality, we could litter our top 10 list with Canada’s Big Five banks. They are among the most reliable income stocks in the world.

Lets start with a Canadian dividend stock that focuses on yield.

As of writing, the Bank of Nova Scotia’s (TSX:BNS) 4.5%~ yield is the highest of the Big 5 banks and National Bank.

The Bank of Nova Scotia has grown its dividend every year since 2010, during which time it averaged approximately 6% annual dividend growth. The bank first paid a dividend in 1833 and has never missed a dividend payment since.

It has also raised dividends in 43 of the past 45 years. The 2008 Financial Crisis halted all the dividend growth streaks of Canada’s Big Banks. However, not one cut the dividend. This is in stark contrast to what happened worldwide.

A similar phenomenon is happening today. European Banks have been forced to cut the dividend, and some US banks such as Wells Fargo have also cut in 2020. In Canada, it is steady as it goes.

However, there is one key difference. The Feds have asked Canada’s banks not to raise the dividend during the pandemic. There is no current risk of a dividend cut at the Bank of Nova Scotia, however the company will not maintain its current 10 year dividend growth streak because of the restrictions.

Banks like Royal Bank, Bank of Montreal, and Toronto Dominion Bank raised just prior to the pandemic, so their streaks will stay in tact. CIBC and Scotiabank were not as lucky.

But, don’t let this discourage you. The Bank of Nova Scotia is still an excellent option for high yield seekers.

Buying the Big 5 bank that has the highest yield has proven to be a good idea historically, and locking in a yield over 4.5% at a time when the Canadian 10 year bond yield is extremely low is an opportunity too good to pass up.

Scotiabank has been mired in inconsistencies in the past and has struggled to keep up with the other major banks. This is primarily why it is currently the highest yielding. But there are signs the company is quickly turning the corner, and has been one of the best in terms of performance over the last year.

Scotiabank 10 year returns vs the TSX

TSE:BNS VS TSX

9. Magna International (TSE:MG)

Magna

Magna International (TSX:MG) is establishing itself as a strong dividend stock worthy of investors’ consideration. It is one of the largest auto parts manufacturers in the world.

Magna supplies car companies with a wide range of parts, including many parts required for the production of electric vehicles and self driving cars. 

This exposure to EV vehicles is what many have overlooked in the past, thinking of Magna only as an archaic automobile parts manufacturer. This couldn’t be farther from the truth.

However, auto parts are a cyclical business. To succeed in both navigating the cycles and maintaining a reliable dividend, you need strong management, ones that can build a balance sheet to withstand all economic conditions.

Magna has just that. The company has over a billion in cash and its debt is under 1.3 times its EBITDA at the time of writing.

Not only that, but Magna has proved in 2020 that it has an extremely resilient business.

While Magna suffered a loss in what was a quarter in which peak lockdowns were having significant impact on all companies, it quickly rebounded in the third and fourth quarters of 2020 to post positive net income, and has continued to do so to close out 2021.

With Magna’s exposure to the fast growing electric vehicle industry, the company is well positioned to overcome any market cycles and keep growing its dividend.

Forward estimates of Magna’s earnings would lead to its payout ratio being in the sub 25% range.

Given this, Magna can be counted on to keep its dividend growth streak going. The company has a 11-year dividend growth streak and the dividend has grown by mid double digits on an annual basis over the last 5 years.

Magna is also trading at attractive valuations. Despite its recent run up in price, it’s trading at under 10 times forward earnings. Which, despite being above historical averages, is a solid price to pay for the company considering its potential growth in the EV market.

Magna International 10 year returns vs the TSX

TSE:MG Vs TSX

8. Alimentation Couche-Tard (TSE:ATD.B)

Couche Tard stock

Alimentation Couche-Tard (TSE:ATD.B) is one of the best Canadian dividend stocks to buy today, yet it doesn’t get much attention in the dividend world.

Why is that? Well, we’ll get to that in a bit.

With a market cap in excess of $50B, Couche-Tard is one of the largest convenience store operators in the world, and has over 15,000 stores globally.

If you’re from Eastern Canada, “Couche-Tard” will be a common name. However, the company tends to run under arguably its most popular brand, Circle K. 

Circle K is truly a global brand, selling gasoline, beverages, food, car wash services, tobacco, and so much more across North America and Europe, but also in countries like China, Egypt and Malesia.

Now that we know what the company does, lets move on to the dividend. Couche-Tard has been growing its dividend at an exceptional rate. In fact, the main reason Couche-Tard is on this list is because of its growth.

With an 11 year dividend growth streak, a 5 year dividend growth rate of over 22% and a payout ratio under 10%, this is a company that is in one of the best positions in the country to fuel dividend growth for investors.

With a yield of less than 1%, it’s often overlooked by income seekers. However, we do have to take into consideration overall returns here. And if we do that, Couche-Tard is simply a no brainer.

With this type of dividend growth, its yield can only remain low if one thing is occurring, rapid share appreciation. And, this is 100% the case. In fact, a $10,000 investment in Couche-Tard just a decade ago is now worth over $100,000.

At that point, I don’t care about the yield. I’ll sell some shares and create my own dividend!

If there’s one stock on this list that should make investors reconsider how important yield is to them, it’s definitely Couche-Tard. The company is a more established blue-chip play now, so growth won’t be as extensive, but it’s still got a ton of room.

As a bonus, it’s also one of our Foundational Stocks over at Stocktrades Premium. We give 3 of our 10 Foundational Stocks to members who sign up for free today. So, click here to get started!

Couche-Tard 10 year returns vs the TSX

TSE:ATD.B Stock Vs TSX

7. Metro (TSE:MRU)

metro dividend

Metro (TSE:MRU) is one of the largest grocers in the country, and is also one of the most reliable Canadian dividend stocks to own today.

Consumer staple stocks like grocery stores tend to be viewed as “boring” options. In the midst of the COVID-19 pandemic, as growth stocks were out of control, defensive options like Metro were cast aside.

But, as we shift toward reopening and life gets back to normal, it’s starting to get more attention, justifiably so.

In terms of dividend, Metro is tied for the 8th longest streak in the country with crude oil producer Imperial Oil and fellow retailer Empire Company. However, one of the clear differentiators between Empire and Metro is Metro’s dividend growth.

With a 26 year dividend growth streak, the company also sports double digit 1 and 5 year growth rates. From a company operating in a mature sector like Metro, this is outstanding dividend growth.

With payout ratios in terms of earnings and free cash flows in the mid 20% range as well, this signals that the company shouldn’t be slowing this dividend growth pace anytime soon.

The company is not a pure-play grocer either. It entered the pharmacy scene with a major acquisition of Jean Coutu in 2018, and overall it has one of the most dominant presences in Quebec out of all major grocery stores. The province currently holds over 70% of its owned and franchised food and drug stores.

You’re not going to knock it out of the park with a company like Metro in terms of capital appreciation. But, you’re going to get a reasonable mid 1% dividend yield and likely mid to high single digit growth.

Not every stock inside of your portfolio needs to be flashy. And, if the capital markets do take a hit like we witnessed in 2020, shareholders will be thankful, as its share price was largely unaffected.

Metro 10 year returns vs the TSX

TSE:MRU Vs TSX Index

6. Canadian Apartments REIT (TSE:CAR.UN)

canadian apartment properties reit

Canadian Apartments REIT (TSE:CAR.UN) is one of the largest residential real estate trusts in the country.

The trust has a dominant presence in the sector and is one of the most popular REITs in Canada.

You might be saying right now “well I’m not looking for the top REITs, I’m looking for the top dividend stocks!”

But the reality is, if you’re looking to build a strong dividend portfolio, there is a good chance it’s going to contain a portion of REITs for a few reasons.

For one, a real estate investment trust is forced to pay back a particular percentage (90%+) of its earnings to unitholders. Being a common shareholder of a stock, the dividend does not necessarily need to be placed highest on the totem pole.

And secondly, due to the fallout of the pandemic in 2020 and 2021, inflation is going to be a long standing fear and overall concern when it comes to the deterioration of investor capital.

So, what performs exceptionally well in times of high/rapid inflation? Real estate. Which is one of the reasons why CAPREIT makes this list.

The company primarily engages in the acquisition and leasing of residential properties here in Canada. The company’s portfolio contains both mid-tier and luxury properties, and generates the majority of its revenue from the Toronto and Greater Montreal regions.

CAPREIT is in one of the best financial positions out of all Canadian REITS, with a debt to gross book value under 40%, and its dividend accounts for less than 75% of funds from operations.

In 2020, the company was added to the the TSX 60 Index, which represents 60 of the biggest companies on the Toronto Stock Exchange.

The REIT doesn’t have the flashy yield that many others do in the mid 2% range. However, it’s important to understand that while payout ratios were high and dividends were getting cut in the sector during the pandemic, CAPREIT was at no risk of cutting the distribution.

As mentioned at the start of the article, the reliability of a dividend is much more important than the overall yield.

CAPREIT 10 year returns vs the TSX

TSE:CAR.UN Vs TSX

5. Canadian Natural Resources Ltd (TSE:CNQ)

CNRL stock

For the longest time, we avoided putting any Canadian oil producers on this list. But, the environment has certainly changed, and oil companies have a chance to perform exceptionally well over the next few years.

So, why Canadian Natural Resources (TSE:CNQ) and not a company like Suncor or Imperial Oil? Well, Canadian Natural has proven time and time again it is the best major oil and natural gas producer in the country.

The company has raised the dividend for more than 2 straight decades, and has double digit 1 and 5 year dividend growth rates. 

Despite major producers like Suncor and many junior producers slashing the dividend at a record pace, Canadian Natural managed to actually raise the dividend in the midst of a global pandemic and oil crisis.

The company is one of the lowest cost producers in Canada with breakeven prices in the $35~ WTI range. This makes the company extremely reliable in almost any price environment as cash flows will remain positive.

At $70 WTI, which would be considered the low point prediction by most analysts over the next few years, Canadian Natural will be able to generate a significant amount of free cash flow, and is in an outstanding position to return it back to shareholders.

New projects and expansion are likely to be put on the backburner as balance sheets are restored, and instead Canadian Natural will likely look to return capital to shareholders through increased and special dividends.

Despite the extremely bullish situation for Canadian Natural Resources, it isn’t as high on this list as others. Why? 

The cyclical nature of the business makes it very difficult to profit from oil and gas companies over the long term. Timing a proper exit when the market begins to turn sideways or downwards is critical to outperforming.

Canadian Natural’s share price still does have some upside here, but capital gains shouldn’t be your focus with oil and gas producers. Instead, soak up the dividends during this oil and gas boom, and try to find an opportunity to exit when things calm down.

Canadian Natural Resources 10 year returns vs the TSX

TSE:CNQ Vs TSX

4. TC Energy (TSX:TRP)

TC Energy Logo

We can’t talk about the top dividend stocks in Canada without mentioning one of Canada’s pipelines. TC Energy (TSX:TRP) is the second-largest midstream company in the country and it owns a 20-year dividend growth streak. This is tied for the 13th longest dividend growth streak in the country.

The company provides 25% of North America’s natural gas transmission and has over 93,300 km of natural gas pipelines.

Over the course of its dividend streak, it has averaged 7% dividend growth. The company has guided that it intends to grow the dividend 7% in 2021, and 5-7% in the years after that.

When the price of oil was crashing, the company continued to reiterate its dividend guidance. Now that we’re are seeing the price of oil recover and the economy reopen, it’s likely TC Energy, despite not being impacted as much by the price of oil as a producer, will still get some of the growing oil price tailwinds.

The company has a low-risk business model in which 95% of EBITDA is generated from regulated or long-term contracted assets. This is exactly why in the midst of the pandemic it stated that operations were relatively unaffected.

Many pipelines have take-or-pay contracts with producers. Which means regardless of product shipped, the pipeline gets paid. This creates extremely reliable cash flows and is why companies like TC Energy and Enbridge have some of the safest, most reliable dividends in the country.

The company currently yields over 5%, is trading at less than 15 times forward earnings and is set to benefit from an energy crisis that, for many analysts, feel is just getting started.

TC Energy 10 year returns vs the TSX

TSE:TRP Vs TSX Index

3. BCE (TSX:BCE)

BCE dividend

When it comes to moat and reach, BCE (TSX:BCE) ranks up there with the best. Is it the best telecom to own for overall growth? No. But, is it a dividend beast? Absolutely.

In fact, if you invested $10,000 into the company in the mid 1990’s, it’s looking like over $370,000 today if you had reinvested the dividends.

It is the largest telecommunications firm in the country and provides services to over 9.6 million customers across Canada in the form of its wireless, wireline and media segments.

It is the only one of Canada’s Big Three telecoms to have a strong presence from coast-to-coast. Rogers tends to have more exposure in the east, and Telus in the west.

BCE currently yields in the mid 5% range, which is right around the company’s historical average. The company has a 12-year dividend growth streak over which time it has averaged approximately mid single digit dividend growth.

At first glance, the 12-year dividend growth streak might not seem that impressive considering the company’s long and storied history. However, the streak is a little misleading.

The company froze the dividend in 2008 when it was being taken private by a group led by the Ontario’s Teachers Plan.

However, the deal ultimately fell through and the company resumed growing the dividend. Since it went public in 1983, BCE has never missed a dividend payment, nor has it cut the dividend.

One of the biggest drawbacks with the company is the high payout ratios. Currently, the dividend accounts for more than 100% of earnings.

Although this is concerning, the rate as a percentage of cash flows drops considerably. Currently, the dividend accounts for only 93% of free cash flow. This is still high, but when we factor in the company’s long standing history, I think they can make the ratios work.

BCE is neither cheap, nor expensive when compared historically or to its peers. Not surprising as BCE is one of the most consistent and reliable stocks in the country.

Don’t expect earth shattering returns from the company’s share price. But, own this one for a decade and reinvest the dividends, and you’ll likely be happy.

BCE 10 year returns vs the TSX

TSE:BCE Vs TSX Index

2. Royal Bank of Canada (TSX:RY)

Royal Bank dividend

The Royal Bank of Canada (TSX:RY) is the largest bank in Canada and is among the largest companies in the country. It has been named Canada’s most valuable brand for six years running and is consistently among the best performing Big Five banks.

In fact, it has been the top performing Big Five bank over the past 3, 5, and 10-year periods. 

The company has operations in the capital markets via RBC Direct Investing, but also deals with commercial banking, retail banking and wealth management.

Given the strong results posted by Canada’s banks during this pandemic, we believe that it is only a matter of time before Canada’s Big Banks receive the green light to once again raise dividends. 

Today, the best positioned to do so is Royal Bank.

At 41%, RBC has the lowest payout ratio among its peers. It is also important to note, that the respectable payout ratio is on a trailing twelve-month basis, which means that it still includes some pandemic related quarters. So, you can expect this payout ratio to continue heading lower.

The company is the Canadian bank with the most geographical exposure, to over 37 countries in fact. This allowed the bank to perform exceptionally well during the pandemic as it was exposed to a variety of countries that were at different stages of recovery/lockdown, unlike a bank like TD Bank, which relies heavily on the United States.

There are rumors that interest rates are going to be on the rise sooner rather than later, as the Bank of Canada may have over estimated the impacts of the pandemic on the economy. In order to “cool” it off, they’ll have to raise rates and slow borrowing. 

Financial companies perform best in rising rate environments, so there might be more room to run for Royal Bank, and other Canadian financial companies.

Royal Bank owns a 10-year dividend growth streak over which time it has grown the dividend by mid single digits annually. Now yielding in the low 3% range, the Royal Bank is deserving of its place among Canada’s top dividend stocks.

Royal Bank 10 year returns vs the TSX

TSE:RY Vs TSX

1. Fortis (TSX:FTS)

Fortis dividend

Fortis (TSX:FTS) has been a mainstay on our list of top dividend stock for years. As the largest utility company in the country, Fortis is arguably one of the most defensive stocks to own.

Fortis owns the second-longest dividend growth streak in Canada. At 48-years long, the company will be among the first Canadian stocks to reach Dividend King status – a prestigious status reserved for those who have raised the dividend for at least 50 consecutive years.

Given our current environment of uncertainty, dividend safety and reliability is the main reason why Fortis is our top dividend stock in Canada.

Throughout the past three, five, and ten-year time frames, Fortis has consistently raised the dividend by approximately 6%.

Further demonstrating its reliability, Fortis is one of the few companies which provides multi-year dividend growth targets.

Through 2024, Fortis expects to raise the dividend by 6% annually – inline with historical averages.

Unlike Royal Bank which would have benefitted from rising interest rates, a company like Fortis would be negatively impacted by interest rates. This is because utilities are a capital intensive industry, one that requires a lot of capital investments and debt to build infrastructure like power generation facilities and transmission lines.

However, Fortis’s movement in price has been relatively unimpacted by rising rates, and likely won’t be moving forward. That is a strong sign of confidence in the company.

$10,000 in Fortis in the mid 1990’s is now over a quarter million dollars if you reinvested your dividends. The company has simply been an exceptional performer.

And, with a beta of 0.05, indicating this stock is 1/20th as volatile as the overall market, it seems to operate almost more like a bond.

Combine strong dividend growth with an attractive yield in the mid 3% range and you are looking at the top income stock to own in Canada today.

Not only can investors lock in a safe and attractive dividend, they can do so at respectable valuations.

Fortis 10 year returns vs the TSX

TSE:FTS Vs TSX Index



Author: Dan Kent

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Economics

A Central Banker Comes Clean, Discusses Data Manipulation

A Central Banker Comes Clean, Discusses Data Manipulation

Authored by Robert Aro via The Mises Institute,

It’s not often that a member of…

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A Central Banker Comes Clean, Discusses Data Manipulation

Authored by Robert Aro via The Mises Institute,

It’s not often that a member of the Federal Reserve’s inner circle ditches Fedspeak in favor of something more honest. Governor Christopher J. Waller did exactly that, in his speech titled: The Economic Outlook and a Cautionary Tale on “Idiosyncratic” Price Changes and Inflation, where the latest addition to the Fed’s Board talked about manipulation of (price) inflation data.

He raises some concerns:

Inflation has been running higher this year than I and most forecasters expected. It has not been high for just a month or two—it has been high all year.

Waller mentions the price of lumber and how it has “skyrocketed through May.” He also talks about how used car prices have increased substantially, and he now closely monitors housing services, such as rent. Eventually, he shares a kernel of truth:

As I mentioned earlier, a lot of commentators, including me, have deflected concerns about high inflation readings being the result of “outliers” or “idiosyncratic” price movements.

Lately, there have been many reports about how inflation rates are being skewed due to increases in lumber and used cars, which conveniently allowed overall price increases to be downplayed for some time, or worse, the idea that:

As a result, recent high inflation readings are transitory and not broad based. But there is a fallacy in doing so that one should avoid in judging whether higher inflation is indeed transitory.

He provides a simple example of some of the problems with inflation data; here are four highlights below:

Now, one could look at this data and manipulate it in several common ways.

First, if one used a trimmed-mean measure of inflation, you would throw out the highest and the lowest readings for each year.

While this may help in statistical modelling, the real-world doesn’t work this way. Unfortunately, if just one product or service that someone purchases has increased in value by an extraordinary amount, the individual can’t easily “throw out” the item from their expenditure due to its high value such as fuel for a car or gas for heating a home.

A second way of manipulating the data is to say in year 1, “Look, inflation is being driven by good A, which had an idiosyncratic, outsized price increase. If you throw it out, the underlying inflation rate is 2 percent.

By “selectively throwing out unusually high price increases,” he explains how inflation data can be shaped to meet the goal of whomever is using the data.

Third, one can justify throwing out good A in the first year by saying it did not reflect a broad-based price increase…

Again, with enough rationale, there really is no limit on just how much data can be manipulated or discarded entirely. 

Saving the most recognizable method until the end:

Finally, one could claim, correctly, that the large price increase for good A is “transitory”—it went up strikingly in year 1 but then dropped back, meaning inflation should fall back to our inflation target in coming periods. But that will mislead you in terms of understanding the true inflation rate, because you are putting zero probability that a large spike in inflation will happen to another good in the future.

Calculating inflation is problematic for countless reasons, but at least he noted several of them. Coming from a Governor at the Federal Reserve, it becomes almost praiseworthy, especially because Chair Jerome Powell has seldom, if ever, spoken this candidly about the methodology employed by the Fed. It’s refreshing that the new Governor noted some of these problems and came clean with his own candid opinions on how they’re trying to solve them.

But before applauding Waller, don’t forget, he’s a central banker at heart, therefore some Fedspeak is warranted:

…I continue to believe that the escalation of inflation will be transitory and that inflation will move back toward our 2 percent target next year. That said, I am still greatly concerned about the upside risk that elevated inflation will not prove temporary.

Still, the insight has been appreciated. The problem is not the statistical technique or the calculation itself, rather, it’s that these techniques are then used to make real world decisions, often devoid of economic theory or consideration for any semblance of reality.

Tyler Durden
Wed, 10/27/2021 – 12:10



Author: Tyler Durden

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Economics

Plunge In Exports Sparks US GDP Downgrades, Economy On Verge Of Contraction

Plunge In Export Shipments Sparks US GDP Downgrades, Economy On Verge Of Contraction

US economic data took a double hit this morning with…

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Plunge In Export Shipments Sparks US GDP Downgrades, Economy On Verge Of Contraction

US economic data took a double hit this morning with a contraction in durable goods orders and perhaps even more notably, the US merchandise-trade deficit widened to a fresh record in September as exports retreated for the first time in seven months.

The goods trade deficit increased by $8.1bn in September (mom sa), much more than expected, to $96.3 billion.

Source: Bloomberg

It appears the container ship crisis is starting to blowback into the economy as the value of imports rose 0.5% to $238.4 billion, spurred by a 3.6% increase in the value of capital-goods shipments, while exports fell 4.7% from a record high in August to $142.2 billion, driven by a 9.9% decline in the value of outward shipments of industrial supplies and a 3.6% drop in capital goods.

Source: Bloomberg

This prompted Goldman Sachs to reduce their Q3 GDP tracking estimate by 0.5pp to 2.75% (qoq ar) ahead of tomorrow’s advance release.

But, at a time when the Wall Street banks are scratching their heads for credible explanations why they are keeping (or raising) their year-end S&P targets at a time when economic growth is in freefall and inflation is soaring (read: stagflation), an unexpected source of honesty has emerged – the Atlanta Fed, which now sees the US on the verge of contraction.

In its latest GDPNow forecast published moments ago, the Atlanta Fed slashed its estimate for real GDP growth in the third quarter of 2021 to just 0.2%, down from 1.2% on October 15, from 6% about two months ago, and down from 14% back in May.

Remarkably, the GDPNow tracker is about to turn negative even as the average “blue chip” Wall Street bank has a Q3 GDP forecast of just below 4%…

The collapse in the Atlanta Fed tracker has correlated almost tick for tick with Citi’s US macro surprise index which has also plunged in recent months…

… which in turn is the inverse of Citi’s inflation surprise index:

According to the Atlanta Fed economists, after releases from the US Census Bureau, the National Association of Realtors, and the US Department of the Treasury’s Bureau of the Fiscal Service, a decrease in the nowcast of third-quarter real government spending growth from 2.1 percent to 0.8 percent was slightly offset by an increase in the nowcast of third-quarter real gross private domestic investment growth from 9.0 percent to 9.3 percent. Also, the nowcast of the contribution of the change in real net exports to third-quarter real GDP growth decreased from -1.56 percentage points to -1.81 percentage points.

In short, everything is slowing and it is the consumer – that 70% driver of GDP growth – that may be about to hit reverse.

Tyler Durden Wed, 10/27/2021 – 11:45

Author: Tyler Durden

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