Reading the Economy

[MRM]

Reading the economy is a little like alchemy, but if you know what to look for, anyone can read the signs that give insight into the general direction things are going and you can make judgments for yourself rather than relying on the advice of people who are trying to sell you something. Something old is new again that I thought is important enough to share. The yield curve is coming back into the news. Yes, the 1980s called and wants its economic indicators back. The yield curve is not the only sign to read, but it is an objective piece of economic data that is a good indicator of the health of the overall economy and can be the basis for your own analysis.

The yield curve is basically the relationship of short term interest rates to long term rates in the government bond market. Typically short term rates are the lowest and rates get uniformly higher as the term of the loan gets longer. A good, healthy economy usually sees a sharp yield curve with even correlation between interest rates and the length of the loan.

Sometimes the yield curve flip and becomes inverted - short term rates are higher than long term rates. This is a serious danger sign for the economy because it suggests that the economy is slowing.

The yield curve is abnormally flat right now and is poised to become inverted. https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html This alone doesn't mean that a recession is coming, but recessions rarely come without an inverted yield curve.

You can't draw any conclusions from one statistic or a single data point, but an inverted yield curve is a big deal and it bears close watching. If the money supply expands without inflation kicking in, the labor market stays tight but not overheated, it will probably straighten out again and we'll mark this data point down as nerves over the impending trade war. It's just a whiff of rain that could turn into something on what seems like an otherwise sunny day.

[cabmandone]

All I know is that I can't keep up with demand for good used construction equipment! I buy 10 machines and six weeks later I'm out. I'm not having a problem selling but rather buying at a price where I can make a decent profit. It's a really good problem to have by the way.

[tabs]

Originally Posted by MRM

Reading the economy isa little like alchemy, but if you know what to look for, anyone can read the signs that give insight into the general direction things are going and you can make judgments for yourself rather than relying on the advice of people who are trying to sell you something. Something old is new again that I thought is important enough to share. The yield curve is coming back into the news. Yes, the 1980s called and wants its economic indicators back. The yield curve is not the only sign to read, but it is an objective piece of economic data that is a good indicator of the health of the overall economy and can be the basis for your own analysis.

The yield curve is basically the relationship of short term interest rates to long term rates in the government bond market. Typically short term rates are the lowest and rates get uniformly higher as the term of the loan gets longer. A good, healthy economy usually sees a sharp yield curve with even correlation between interest rates and the length of the loan.

Sometimes the yield curve flip and becomes inverted - short term rates are higher than long term rates. This is a serious danger sign for the economy because it suggests that the economy is slowing.

The yield curve is abnormally flat right now and is poised to become inverted. https://www.nytimes.com/2018/06/25/business/what-is-yield-curve-recession-prediction.html This alone doesn't mean that a recession is coming, but recessions rarely come without an inverted yield curve.

You can't draw any conclusions from one statistic or a single data point, but an inverted yield curve is a big deal and it bears close watching. If the money supply expands without inflation kicking in, the labor market stays tight but not overheated, it will probably straighten out again and we'll mark this data point down as nerves over the impending trade war. It's just a whiff of rain that could turn into something on what seems like an otherwise sunny day.

All right on the money, if you had normal monetary and fiscal policy Globally. But it ain't normal, since 08 you have had an Alice In Wonderland through the looking glass monetary and fiscal policy. The old rules of gravity do not apply anymore. It is upside down and topsy turvey, and since you do not seem to realize that fact after so much time it means you still do not grasp it.

PS Do not feel all alone most people (who are paid to know) do not get it, they are living in a world of what once was and not what is.

[tabs]

Originally Posted by cabmando

All I know is that I can't keep up with demand for good used construction equipment! I buy 10 machines and six weeks later I'm out. I'm not having a problem selling but rather buying at a price where I can make a decent profit. It's a really good problem to have by the way.

If the Boyz who are buying the equipment were really bullish they would go long (pony up to the table) and buy new equipment. Presumably they are not ponying up to the table to buy new in an effort to hedge their costs...

Since 08 there has been a new cost conscientiousness developing. It is called being cautious.

The price of used is going up as the supply drys up until a relative parity is reached with new then new will be the better value.

[Sooner or later]

Tabs, one of these years/decades you might be right.

[tabs]

Originally Posted by Sooner or later

Tabs, one of these years/decades you might be right.

You are perfectly welcome to keep on thinking that. All though there are some people who might not agree with that.

[tabs]

If you do not know/see that certain dots exists you can not connect those dots to complete the picture... What you will have is an incomplete picture that you can not make any sense of. It will remain a mystery to you or will be skewed in some fashion. You will not have an understanding of it.

[Tervuren]

We are coming from a set of very messed up financials.

I wish we taught a little bit about having interest work against you as a youngster compared to not having it work against you.

Debt does make the economy run faster, but dang it sometimes its like shifting into first at 120MPH, yeah, the engine spins really fast, but then kaput.

[cabmandone]

Originally Posted by tabs

If the Boyz who are buying the equipment were really bullish they would go long (pony up to the table) and buy new equipment. Presumably they are not ponying up to the table to buy new in an effort to hedge their costs...

Since 08 there has been a new cost conscientiousness developing. It is called being cautious.

The price of used is going up as the supply drys up until a relative parity is reached with new then new will be the better value.

AFAIK new is doing well. I haven't been lacking in trade evaluation requests. Used has increased thanks to some jackasses pushing tier 4 emissions requirement. It amazes me what I can get out of an IT4 machine with more hours vs a T4 Final machine. I'll sell the IT4 machine faster and make better money on it. I think once the fear of T4 Final subsides used will calm down a bit.
What has driven my sales is the fact that I can offer a low hour machine with some remaining warranty at enough of a discount to make it worthwhile to buy the used piece. Bobcat, CAT, Case.... dealers primary goal is to sell new so they keep their used inventory prices closer to new than someone like me does. I like that they really crank up the prices on their used equipment since it makes selling mine a lot easier.

[recycled sixtie]

I don't want to make this political but politicians in general find it easy to spend money because it is not their own. Tabs is in many ways right but I am not as pessimistic as him.

I am happy to see the economy humming along at a decent rate and low unemployment. It wont last forever though as there will be another recession but we don't know when.

[1979-930]

Originally Posted by cabmando

All I know is that I can't keep up with demand for good used construction equipment! I buy 10 machines and six weeks later I'm out. I'm not having a problem selling but rather buying at a price where I can make a decent profit. It's a really good problem to have by the way.

That's only because of the cost of new equipment with Tier 4 engines. I saw this coming 5 years ago and purchased a used fleet of low hour machines to get me to 2020 or 2022. By then there should be a good inventory of used Tier 3 & 4 machines to purchase and the cost will come back down. Even if only relative to the dollar; at that point they will cost less as a percentage. I hope.

The cost of these new machines are so out of line, due to government regulations, that a $60k re-power to Tier 3 engine looks cheap. And this is for a Machine I only paid $65k to buy. That's inflation!

[Shaun @ Tru6]

I've read the same RE: the yield curve.

I am more concerned with China who is known for keeping cards close to the vest and playing the long game vs. our "next election cycle" strategy. Yesterday China announced a $106 billion stimulus plan in preparation for the forthcoming trade war.

[Nickshu]

Originally Posted by tabs

The price of used is going up as the supply drys up until a relative parity is reached with new then new will be the better value.

Sounds like the 911 market. Except for 996's.

[wdfifteen]

Interesting. Just this morning I was reading a WSJ article on the yield curve and how predictive it has been.
Things are going to get interesting.

[LWJ]

I am watching. Might not be a bad time to hoard some cash. Vulture opportunities pop up when you have the ability to act.

[tabs]

Originally Posted by recycled sixtie

I don't want to make this political but politicians in general find it easy to spend money because it is not their own. Tabs is in many ways right but I am not as pessimistic as him.

I am happy to see the economy humming along at a decent rate and low unemployment. It wont last forever though as there will be another recession but we don't know when.

I am only as pessimistic as the size of the debt...us and global.

[tabs]

Originally Posted by wdfifteen

Interesting. Just this morning I was reading a WSJ article on the yield curve and how predictive it has been.
Things are going to get interesting.

Old dogs should learn new tricks especially when the rules of the game have changed.

[jcommin]

Originally Posted by tabs

If the Boyz who are buying the equipment were really bullish they would go long (pony up to the table) and buy new equipment. Presumably they are not ponying up to the table to buy new in an effort to hedge their costs...

Since 08 there has been a new cost conscientiousness developing. It is called being cautious.

The price of used is going up as the supply drys up until a relative parity is reached with new then new will be the better value.

If is is anything like 20,00 lb to 30,000 lift trucks the answer is no. Lead times on these type of vehicles is over 34 weeks. The used market for these vehicles is very high and expensive,

[tabs]

The FED is raising short term rates while people pour money into longer term bonds as a flight to safety because they are worried about the economy which drives yields down.

The economy has been anemic for most of this century. What stimulates the economy is huge government spending which is creating debt. So what kind of robust economy do you really have if it is being juiced by deficit government spending?

[Baz]

You guys are speaking a foreign language to me.......but I do appreciate that you are engaged.

My focus is mostly on reducing overhead and batting down the hatches here.

I'm dug in.