Baltic Dry Bulk Index Indicates Economic Growth Is Strong

ADP Report Solid

The top economic reports of the week are the BLS and the ADP employment reports. The ADP report was good as it showed 190,000 jobs created. This is the third lowest growth in the past 12 months. Sustained growth below 200,000 would indicate the labor market has little slack to give. It wouldn’t be surprising to see this occur in 2018 given how low the unemployment rate is.

The mid-sized businesses led the way with 99,000 jobs created, followed by small firms with 50,000 jobs created, and large firms which had 41,000 jobs created. The service sector dominated the job creation with 155,000 jobs created, while the goods producing sector added 36,000 jobs. The three industries which hemorrhaged jobs were construction which lost 4,000 jobs, information tech which lost 13,000 jobs, and the other services which lost 2,000 jobs. It’s really difficult to make any sweeping judgements from these reports because they vary wildly. Even though we can’t extrapolate trends from one report, it’s still not good to see the information tech sector losing jobs because it consists of well-paying jobs. The education and health segment grew the most as it added 54,000 jobs.

The growth in education and healthcare jobs is evidence of the point I have made about productivity growth. The sectors which have productivity growth tend to need less jobs because tech makes workers more efficient. Eventually all we’re left with is education and healthcare which have lower productivity growth. There’s always going to be a certain number of teachers and doctors, regardless of the tools they use. Even though healthcare is getting better in terms of life expectancy, the cost is increasing as well. It’s an inefficient system which doesn’t successfully offer the proper incentives to lower prices. In fact, college tuition and healthcare are one of the biggest drivers of inflation. College might be getting better at teaching kids by utilizing technology, but the productivity of teachers doesn’t go up. The key overarching point to this is that the productivity growth might be in a long term trend lower. The low productivity growth doesn’t mean technology isn’t driving changes in the economy.

More Evidence Of Strong Economy

In the past few weeks, the price of copper has fallen from close to $3.25 to $2.94. Copper is often referred to as ‘doctor copper’ because its movements are indicative of the direction of the economy. I think it’s ridiculous to draw conclusions about the economy from short term price action in a volatile commodity. The price does have value as an economic metric, but that’s only for long term trends, not sell offs that last a few weeks. I’d reject the notion that the economy is weakening because of that small selloff in copper at face value. That’s not because I’m bullish. It’s because I know the price can go anywhere in a time span of a few weeks. If you need more evidence that the economy is strong, the Baltic dry bulk index in the chart below shows the index is near the 2013 high. It has been in an uptrend since early 2016 which is also when the S&P 500 earnings bottomed. Trade growth in 2017 beat estimates which is why this index is doing so well. The selloff in dry bulk stocks starting in late 2013 caught many speculators by surprise as the famous dry bulk stock, DryShips had an amazing collapse. The stock kept doing reverse splits, but its down about 99% since the peak in December 2013. Even this single digit midget has been on a good run because of the great macroeconomic dynamics. The stock is up 51.6% in the past 3 months.

(Click on image to enlarge)

Oil Speculation Still High

I’ve written about the speculation in oil before. I expected the price would come down after the OPEC meeting on November 30th, but that didn’t happen as the long speculation remains in place. The chart below shows the combined speculation in WTI oil traded on the Nymex and the ICE along with the Brent ICE contracts. As you can see, there is a combined 989.9 million barrels of oil owned by speculators which is a record high. Because the size of the market is increasing, the fact that it is a record isn’t as impressive as it otherwise would be. However, the last time there was so much speculation in early 2017, the WTI fell from $54 to $43. The total short position is also relatively high as it’s slightly less than the peak in early 2017. This time the long bets are more in the refined products than crude oil, but I doubt that makes a difference.

(Click on image to enlarge)

Earnings Estimates Also High

We reviewed how most investment banks expect global GDP growth to be about 4%. Analysts are equally bullish on global earnings. As you can see from the chart below, the 2018 earnings growth is expected to be 10.5%. 2017 earnings growth was the first year in at least the previous 4 years to not be a sharp disappointment from the initial estimates. The 2018 earnings estimates might have fallen slightly because of how good 2017 ended up being. It’s tough for me to comment on whether this will be accurate because I only follow American corporate earnings. It makes sense that analysts have high hopes given the high hopes for global economic growth. If earnings meet these estimates, the only thing that can take away the glory would be inflation. It’s hard to imagine a repeat performance to this year’s global synchronized rally in international equities.

Conclusion

There’s nothing to dislike about the economy as the Baltic dry bulk index is high and the U.S. economy is creating a lot of jobs. It’s always possible that the BLS report doesn’t match the ADP number, but it’s hard to see a bad headline number coming out. That being said, I’d rather be long a market that doesn’t have high expectations like in early 2016, than one that has high estimates for global GDP growth and MSCI earnings.