Sweden's sake is not ours

Sweden's sake is not ours

28 August 2018 from Mikael Syding

Are you following macro statistics? Why? Are you one of all those who note when consumer price, GDP and interest rates are published, and then consider a few minutes about what this could mean for the stock market? Then you're one of all the macro tourists who step up the street and walk down through semi-familiar environments and take hundreds of photos that nobody will ever watch.

You may remember that Swedish GDP grew by 4.5% 2015, 3.2% 2016 and 2.3% 2017, but what do you use in practice? Can it be used to anything at all? It actually does, but hardly by shopping on the numbers just when they are published.

In the last five quarters, the growth rate in GDP, measured as the current quarter in relation to the previous quarter, has been relatively stable at about 0.9%. The series looks like this: 1.1%; 0.7%; 0.8%; 0.8%; 1.0%. Is it good or bad?

Are GDP statistics something you can use in your stock trading? Not directly, but macro tourists are happy to take the camera out of the suitcase and spend a few minutes to get a perfect picture that nobody cares about.

A fun anecdote about macro is that US President Donald Trump called, among other things, "news fake news" and explained how bad it actually went for the country. Immediately after the election, he is based on exactly the same statistics and news as he proudly tells us that the United States is stronger than ever. It went quickly.

Why is it so difficult to use macro statistics? An important reason is that it is published with great delays from the measurement period; another that it measures in a highly unrecognized manner, which is also rarely relevant to value creation on the stock exchange. A third reason is that macro data is often adjusted several times as new information becomes known. Not seldom the adjustments are greater than the actual number. The GDP figure for the second quarter, starting with published several months after the middle of the quarter, is not even the final figure that will be in future tables and graphs. Finally, there is no clear link between GDP growth and share prices, as they are based on expectations of future growth, profitability, interest rates and inflation; and even more on the degree of optimism or pessimism with investors.

Macroeconomic developments are of course important, but if you just shed a quick eye on the statistics just when published, and thus do not take into account the different degree of lag, significance and magnitude of the adjustments, you're just an insightful macro tourist and can not count on to cut any excess return with your observations.

If you want to create value with your macro analysis, instead, consider whether the development of the day is sustainable, how many years and under what conditions. For either, numbers of growth, employment, productivity, inflation, interest rates, house prices, consumption, loan growth and more are linked together; or they do not. If they do not hang out, something sooner or later has to change - a little today or much tomorrow. Macro analysis can rarely say so much about when, but it can show opportunities or problems that gradually grow up.

The 2008 financial crisis is a good example of relevant and valuable macroanalysis. Several skilled assessors began to warn of the rising imbalances in the US mortgage market as early as 2004. At that time it was clear that the trend for house prices and mortgage loans was not sustainable. For each year that went, more and more became increasingly aware of the rising risks, but although house prices peaked in the summer of 2006, and a couple of mortgage funds collapsed in March 2008, most investors did not take the problem seriously until the second half of 2008.

This does not mean that macro analysis is impossible; It only means that events that are inevitable may still last for a long time manifesting in reality.

GDP growth is another example: it can be counted as the increase in the number of employed in Sweden (number of inhabitants times the share of work) plus productivity growth. If today's GDP growth is higher than a reasonable forecast for the increase of working and their productivity, it is not sustainable and will have to be adjusted down. The downgrading itself is much more relevant to stock market development than the actual level.

In Sweden, approximately 10 million people live, of which approximately 57 percent are working age (20-64 years). Half of the Swedes (about 5 million) have work. Are these good or bad numbers? High or low, and how can they reasonably develop? What growth in the number of employed is it reasonable to expect and what productivity growth will they have?

The employment rate can provide some guidance. It has been between 64 and 67 percent throughout the 2000s, but in recent years it has increased to 68.5%. Is it reasonable to believe that it is a permanently higher plateau when the previous massive economic upsets in 2000 and 2007 only reached up to 67 percent? A decline to the average of about 65 percent would correspond to a negative GDP growth of 5%. It is clearly more than the total lost during the financial crisis 1991-1993 and in line with the -5.2% reported in 2009. In the latter case, we rapidly and quickly rebounded thanks to history's largest monetary stimulus package from the US, China and the EU as well Other massive fiscal measures - a trick that becomes difficult to repeat.

As a result, the crisis was temporarily disrupted, but the debts and imbalances that formed the causes of the crisis have only worsened since then. A simple macro analysis of, among other things, debt, employment and productivity shows that the world, including Sweden, is in worse condition in 2018 than 2008. Unfortunately, the analysis can not say exactly when the bill is to be paid, but with the second longest upturn in history already behind us, it's likely not especially far left.

Liabilities and labor markets lead us to inflation and interest rates. One thing is that high employment gives increased risk of falling employment and GDP, but since the link to the stock exchange is not particularly clear, most people may ignore the statistics. However, high employment often leads to rising salaries and other prices - consumer price inflation.

CPI, consumer price growth adjusted for the interest rate component (since interest is of course not an expense ... Suck.) Was 2.2 percent in July (ie 2.2 percent in the year ending July 2018). CPI has risen steadily from 0.0% more than four years ago to 2.2% in July 2018. It is by far one of the highest levels since 1991, in addition to the extreme 2008 and 2001-2003 in the wake of the millennial bubble.

It's just like this that can get a macro analyst to think about a little extra. It was the economic crisis 1991-1993, 2001-2003, 2008-2009 and coincided with high inflation. It took 8-10 years between the crises and now inflation is again 8-10 years after the recent crisis and the period of inflation over the Riksbank's target. Most GDP forecasts for 2018 are around 2.5% and for 2019 at just under 2.0%. The guideline is right, but as usual, the forecasters probably do not have enough (fun yet, the Swedish Financial Supervisory Authority believes in as little as 1.4% GDP growth 2019).

The big difference between 2001-2002 and 2008 compared with today is that the policy rate was above 4 percent (in September 2008, the repo rate was 4.75% and as a curiosity it was 8.9% in September 1995) and today it is minus 0, 5%. This means that the scope for lowering interest rates to counteract a recession is extremely limited.

Does this look reasonable for you? Is it sustainable that households will grow by 7 percent a year when nominal GDP is at half the rate? Households net loans around three times as much money each year as GDP is growing. What if the loans would decrease instead, what happens with GDP? Is it hard for negative key interest rates after a long boom, extremely high employment rates and almost highest inflation in decades?

Household debt in relation to revenue is twice as high today as in 1996. Certainly, interest rates are low today, but it is really impossible to imagine that interest rates and inflation return to the levels that prevailed (and, as a rule, are usually considered "normal, with 2 % inflation, 2% growth and 4% repo rate)? In such cases, households' interest expenses will be twice as large as in relation to revenue.

To make it simple: no, this is not a long-term sustainable situation. And if it is not, something has to be changed. The question is not about but when.

The top of an analysis that indicates the need for change is that you can position yourself for the change before it happens, but then you must first decide on a scenario. Will it be lowered interest rates, increased bond purchases, changed rules; and what instruments should you buy to take advantage of that scenario? Will commodity futures, index listings, government bonds, bank shares, gold or sales options work best? You can figure it out yourself.

 

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18/11/2018 15:16:36

 

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