The Daily Update - Canaries in the Coalmine

Global growth remains strong with the latest IMF forecast showing an increase to 3.82% for this year up from 3.65% in 2017, before strengthening to 3.93% in 2019. Growth in the United States is expected to be strong too, at least according to the IMF, with only a marginal decline to 2.78% from 2.86%. So what’s to worry about?

Potentially there is nothing to worry about, but as bond investors we are always worrying about something. At Stratton Street we have a chart pack which includes some of the “canaries in the coalmine” that might be acting as early warning signs of a future economic slowdown. There are not many slides in this pack, but one that has been showing a clear downward trend is US housing. Existing home sales have declined for six consecutive months, and housing starts are showing signs of stabilising, albeit at a much higher level than we saw in the aftermath of the last recession.

There are two things worth noting here, firstly it should not be too surprising that housing demand would decline as rates rise given the link to mortgage costs. This is particularly true when yields at the long end start to rise, given most US mortgages are fixed off long-term rates, rather than being fixed to short rates as is the case in the UK.

Secondly, the current level of US housing starts of 1.268 million has only just RISEN TO the level that housing starts DECLINED TO in 6 of the last 8 recessions since 1960 and considerably below the roughly 1.6 million level that existed immediately prior to the recessions in 1973 and 2001. We will obviously be keeping a very close eye on housing data over the next few months.

In our view, the housing data is not quite as surprising as it may first appear. Our research suggests that economic growth and inflation are very closely tied to population growth, particularly the growth in working age population. As the number of people of working age starts to decline, demand for housing would also be likely to decline as well. So it is worth pointing out that the latest figures for the growth in the US working age population currently stands at zero. Under those circumstances, it seems highly unlikely that demand for housing will start to increase any time soon.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.