As you can see in the Chart of The Day (pg 30 in our current Macro Themes slide deck – if you’d like a copy, ping sales@Hedgeye.com), the US Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).
“The perpetuation of debt has drenched the earth with blood.”
No volume, no worries. We’re at the all-time bloody SPY highs, baby. Didn’t you hear? This time is different. Ask the guys who said bond yields would rise as US growth accelerated (our call in 2013) throughout 2014, who are now saying that US growth will rip, as bond yields fall?
Since I started playing this game in the late 1990s, most of the time was supposed to be “different” (newsflash: it wasn’t). While the stock, bond, and commodity market bubbles have all had different narratives, one thing is not different – prices go up, then down, a lot.
Another thing that has not changed, for literally 200 years, is the bull/bear debate on US government debt, central planning, and easy money. It’s ole school Jefferson vs. Hamilton. And, until the next stock market bubble pops, to some Hamilton will appear to be right.
Back to the Global Macro Grind …
The stock market is not the economy. Drawing down US National Savings in order to A) keep up with the Policy To Inflate USA’s cost of living to all-time highs and B) perpetuate a levered slow-to-no-growth real economy is not the path towards long-term prosperity.
But, Keith, the stock market is up. Indeed. So is Argentina’s.
Argentina is basically in default, but its stock market was up another +1.5% yesterday to +78.4% YTD. If only CNBC could do an inversion from New Jersey to Buenos Aires, they could bounce their ratings off all-time lows trumpeting Argentina’s big government success.
Alexander Hamilton would have been the darling of big debtor, money printing, and taxing TV too. He did, after all, promote a US National Debt as a “public blessing.” Whereas the more libertarian minded Thomas Jefferson said:
“I consider the fortunes of our republic as depending on the extinguishment of the public debt.”
-Hamilton’s Curse (pg 38)
So which one is it that drives your family or country’s fortunes – debt or savings?
As you can see in the Chart of The Day (pg 30 in our current Macro Themes slide deck – if you’d like a copy, ping ), the US Personal Savings Rate (% of Disposable Income) has been falling for the past 3 years (as the stock market makes new highs).
How do you solve for sustainable Investment Growth in America if you can’t solve for S (Savings) = I (Investment)?
I’m pretty sure that the answer to that is you get everyone to borrow (lever up) to either buy growth or, in Kinder Morgan’s (KMI) case, to pay the dividend. Oh, those juicy dividends. Gotta have them - especially if the risk free rate of return on American Savings is centrally planned at 0%.
Who is dumb enough to put money into a savings account that earns 0%? Throughout this summer I have taken my Cash position in the Hedgeye Asset Allocation Model from 10% to 56%. “So”, evidently me. Why?
After an economic cycle plays out (we’re going on 63 months into a US economic expansion), if I’ve raised cash at a measured pace, I’ll have it to re-invest it in my business when the proverbial poop hits the fan (see 2008-2009 Hedgeye Risk Management ROIC for details).
But that’s just me. I like to save (raise cash) so that I can invest counter-cyclically.
What does being counter-cyclical mean? It means the opposite of what the Old Wall pressures companies and investors to do, which is chase returns and invest in inventories, capex, etc. at the end (instead of the beginning) of a cycle. In public co. CYA speak, most CFO’s are pro-cyclical.
Which brings up the most important part of my decision making process – the bloody cycle!
You either agree with me or not here, but at SPX 2,000, you do have to make a decision. You either invest up here, or you book gains and raise cash for a rainy day. Which means you have to have a view on where we are in the economic cycle:
If this time is different, you don’t have to ever worry about things like no-volume (Total US Equity Market Volume was -13% and -39% vs. its 3 month
and YTD averages yesterday), peak debt leverage ratios to peak cash flows, or the Russell 2000 trading at 55x trailing earnings.
All you have to do is wake up at 9AM every day and tweet me that we’re at the bloody highs.
Our immediate-term Global Macro Risk Ranges are now (all 12 big macro ranges, with intermediate-term TREND signals in brackets, are in our Daily Trading Range product, every day):
UST 10yr Yield 2.34-2.44% (bearish = bullish Long Bond)
SPX 1 (bullish)
RUT 1138-1178 (bearish)
BSE Sensex 256 (bullish)
VIX 11.06-13.15 (neutral)
USD 82.01-82.94 (bullish)
EUR/USD 1.31-1.33 (bearish)
Pound 1.65-1.67 (bullish)
WTI Oil 92.34-97.41 (bearish)
Natural Gas 3.81-3.99 (bearish)
Gold 1 (bullish)
Copper 3.16-3.25 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
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This note was originally published at 8am on August 13, 2014 for Hedgeye subscribers.
“Year after year we have had to explain why the global growth rate has been lower than predicted.”
That’s a quote from earlier this week where the new vice chair of the un-elected-central-economic-planning-committee (Federal Reserve), Stanley Fischer, was way too honest about the Fed’s growth forecasting track record.
Since I was seeing Institutional investors in Boston for the last few days, I kept suggesting that there was no irony in Fischer’s timing – with Q3 GDP Slowing in the USA, the Fed is getting ready to get more dovish.
Janet Yellen followed Fischer’s lead (Reuters article yesterday) saying that she is “resolved to not raising rates too soon.” That’s code for push out the dots (Hatzius). As an early-cycle slowdown manifests in the US, you’ll be looking at 2016 (or beyond) for a rate hike.
Back to the Global Macro Grind…
Here’s an abbreviated summary of investor Q&A that the big man, Darius Dale, and I answered in Beantown for the last two days:
Q: If the rate of change in real US economic growth continues to slow, what are the odds of Yellen’s Fed getting more hawkish than the Bernanke Fed was forced to become in the face of 2013’s US #GrowthAccelerating?
If they did, wouldn’t that be interesting! There was this non-linear strategist by the name of Volcker who did that. Janet won’t.
Q: if the Fed eases (if only rhetorically), do you buy or sell long-term Treasuries?
But, but, ‘I can’t buy the long bond (like I did during 2011 #GrowthSlowing when the 10yr went to 1.7% because it’s expensive…’ Right, right. And, as an alternative to “expensive” safety, the Russell is “cheap”…
Q: If the US goes into a recession, do you buy the Russell 2000 here?
After over 5 years (62 months) of US economic expansion, it’s pretty clear to us that Consensus Macro isn’t anywhere in the area code of being set up for an early cycle US consumer recession. The main reason for that, of course, is that after they missed calling the 2007 top and 2008 decline, most of consensus didn’t come out from under the Old Walls and realize the US was in an expansion until 2013!
Q: How dare gravity (the cycle) surprise both backward-looking-linear-economists who are looking for 3% GDP growth (every quarter for the next 6 quarters) and consensus all at the same time?
A: At first, slowly – then all at once
With bond yields at the long end of the curve falling, US Housing stocks (ITB) leading yesterday’s losers (-0.9% on the day to -9.5% YTD), and the Russell 2000 failing @Hedgeye intermediate-term TREND line of resistance again (-0.8% to -2.7% YTD), this early-cycle slowdown is starting to look, well, like a classic economic cycle.
Q: When does Consensus Macro fold on growth expectations?
A: By year-end
The real smart money (the macro money that’s actually been making money) gets that economic cycles are always testing us to hear Mr. Macro Market’s message – and, as Ray Dalio would say, they are not that sympathetic.
This morning I’ve outlined our immediate-term TRADE risk ranges with @Hedgeye’s proprietary intermediate-term TREND signal in brackets (you can get all 12 relevant macro ranges in this format in our popular Daily Trading Ranges product):
UST 10yr Yield 2.39-2.48% (bearish)
SPX 1889-1946 (bearish)
RUT 1107-1148 (bearish)
DAX 8922-9366 (bearish)
VIX 13.82-18.18 (bullish)
USD 81.17-81.66 (neutral)
EUR/USD 1.33-1.34 (bearish)
Pound 1.67-1.69 (bullish)
Brent Oil 102.32-104.95 (bearish)
Natural Gas 3.74-4.03 (bearish)
Gold 1300-1323 (bullish)
Copper 3.12-3.20 (neutral)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – August 27, 2014
As we look at today's setup for the S&P 500, the range is 31 points or 1.00% downside to 1980 and 0.55% upside to 2011.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
Takeaway: There’s so much noise from companies around e-commerce trends. Contrary to what they say, they’re not all winning. Here’s the scoreboard.
Listening to a full quarter’s worth of conference calls might lead one to think that e-commerce is the savior to everyone’s business. It’s not. Here’s a visual that might help contextualize e-commerce trends by retailer. On the left axis we show e-commerce comp by retailer (columns). There all on there – except those that don’t disclose data (i.e. Macy’s). The right axis shows e-commerce sales as a percent of total for each company (represented as circles). A few takeaways…
1) E-commerce represents about 7% of sales for retailers in aggregate, and the group put up a collective 20% dot.com comp this quarter – or about 140bp in total growth. This accounts for about half of the 2.6% average revenue growth for the group.
2) It’s impossible to miss that 3 of the top 5 growth rates are Athletic brands. Yes, Nike and Adidas have an embarrassingly low e-commerce penetration rate of 3-4%, which is a third of what we see at brands like KATE and RL. But there’s no denying that these brands are stepping up efforts to go direct to consumer. Can’t be bullish for Foot Locker.
3) Who would have thunk that the highest e-commerce penetration rates among the more traditional retailers is GPS and SHLD, which are topping out at 14%. They also have among the lower dot.com growth rates in the quarter. GPS is particularly noteworthy at 11%.
4) Rounding out the bottom with e-commerce penetration – i.e. worst execution but biggest opportunity – are SKX, VFC, WMT and TGT.
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