This note was originally published at 8am on May 30, 2014 for Hedgeye subscribers.
“To you from failing hands we throw. The torch; be yours to hold it high.”
-Dr. John McCrae
On Tuesday night I had the pleasure of attending my first hockey game at the Molson Center in Montreal. While I’m not necessarily a Habs fan, sitting in a seat on ice level next to the penalty box is definitely the right way to watch playoff hockey in Canada, especially in a 7 - 4 “Wild West” shoot out.
Last night, of course, was much different. The New York Rangers and their all-world goalie Henrik Lundqvist bounced back and New York beat Montreal to advance on to a date with destiny and a chance to win Lord Stanley’s Cup.
The last time the New York Rangers won the Stanley Cup was in 1994, exactly twenty years ago. The last time a Canadian team won a Stanley Cup was actually twenty-one years ago in 1993 when Montreal won. So if you do the math, in the last twenty years a Canadian team has won the Cup about 5% of the time. This comes despite the fact that 24% of the teams in the NHL are based in Canada.
Interestingly, statistician Nate Silver from ESPN actually ran the numbers on the probability of a Canadian winning the Cup over that period. According to Silver:
“If a championship team was randomly chosen for each of the 19 seasons the league actually played, the odds of a Cup win for a Canadian team would have been 99.2 per cent. Taking teams’ actual competitiveness into account, Silver estimated the odds of a Canadian win during that time period were 97.5 per cent.”
So, clearly next year is Canada’s year and this unfortunate run is just bad luck. But in the meantime, let’s go Rangers!
Back to the Global Macro Grind . . .
Despite the fanfare for the Ranges in the Big Apple last night, shockingly enough, the global macro markets didn’t react. The biggest laggard in terms of major equity markets overnight is actually Korea, which is down about 85 basis points. Even there, though, there is not much of a read through other than some profit taking ahead of the Dragon Boat Festival on Monday. (Is your dragon boat ready?)
The takeaway more broadly, of course, is that a general complacency is setting in on global markets. Two import signals of complacency are the VIX, which measures volatility on U.S. equities, and yields on peripheral sovereign debt in Europe. In both instances, they are literally at five year lows.
For those of you that are used to winning investing performance Stanley Cups, you get the joke. Either things are that good and there is nothing to worry about, or they are not and it is time to throw some proverbial caution to the wind by getting shorter and/or selling exposure.
On the risk front, a major concern we continue to have is that consensus is once again over estimating the potential for U.S. economic growth in the U.S. For the U.S. to hit consensus GDP growth estimates for the rest of the year, economic growth will have to come in at 4% in aggregate for the next three quarters. To state the obvious: that’s not happening folks.
My colleague Christian Drake view of Q1 GDP is as follows:
- Bad But Not A Surprise: The first revision to 1Q14 GDP came in at -1.0%, missing estimates of -0.5%. The magnitude of the revision was larger than expected but the negative print and downward revisions to inventories, exports, & Gov’t spending was not a surprise as the actual march data came in worse than the BEA estimates embedded in the advance GDP report.
- Inventory Drag: The negative revision to inventories was the biggest contributor to the total revision. The inventory ramp, which comprised a big portion of reported nominal GDP growth in 2H13, is now reversing as end demand/income growth proved insufficient at expeditiously drawing down that burgeoning stock.
- Consumption: Strength in consumption growth, particularly Services, was the conspicuous positive on the quarter. Notably, Services consumption was supported by the significant acceleration in healthcare spending.
Healthcare is indeed the juggernaut of GDP and something to focus on, at least in the reported numbers. As Christian points on healthcare spending in the GDP report:
Healthcare Spending: The strength in Healthcare Services spending stems largely from the implementation of Obamacare. The reported figures, by BEA’s own admission (see their note Here), are very much an estimate and the preliminary data are likely to be revised (significantly) over time as the Census bureau’s quarterly QSS and annual SAS survey’s provide harder data.
With reported Hospital and Outpatient spending both accelerating materially in 1Q14, it could also be that individuals are accelerating medical consumption ahead of ACA implementation and uncertainty around coverage changes.
Either way, in the context of the broader spending data, the takeaway is pretty straightforward – Healthcare Services represent ~17% of total household consumption expenditures and certainly impacts the direction of reported, headline consumption growth. To the extent that deceleration is the larger trend across the balance of services, a mis-estimation of ACA related spending and/or a significant, transient pull-forward in medical consumption could be materially distorting the prevailing, underlying trend.
Unfortunately, we’ll just have to hurry up and wait to get a clearer read on the magnitude of the impact.”
So, even as the labor market is showing some tightening, in part aided by people dropping out of the work force, economic activity broadly speaking is far from robust and likely to miss consensus expectations for the remainder of the year, especially with the housing market headwind. And at a VIX of sub 12, bad news will start to matter.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.42-2.51%
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research