This note was originally published at 8am on November 03, 2014 for Hedgeye subscribers.
“I don’t mind going back to daylight saving time. With inflation, the hour will be the only thing I’ve saved all year.”
During daylight savings time, in the fall and winter months, the U.S. Virgin Islands are one hour ahead of East Coast time.
Instead of getting up at 4am everyday, I could get up at 5am…and, you know…..be on an island.
Keith’s in Cali this week. When he gets back, I’ll try to leverage the jet-lag + daylight savings brain fog combo and float the “Hedgeye Caribbean” proposal, again….
“you miss 100% of the shots you don’t take”
Back to the Global Macro Grind...
In our 4Q Macro Investment themes call we profiled a series of bubbles which, among others, included:
Our timing on the complacency bubble proved particularly prescient (substitute “lucky” if you’d like). Prior to our themes call, the VIX was trading at its lowest average level in a decade and just 11% of trading days saw moves in excess of 1% in either direction. Subsequent to our call, the VIX has been higher by ~33% on average and the SPX has had daily moves greater than +/- 1% over 50% of the time.
We expect the Dramamine ride to continue.
Taking a broader view, each of the aforementioned bubbles are, in some magnitude, outcroppings of the larger bubble that is Central Banking.
With the explicit goal of QE initiatives being financial asset price inflation - and the hope for the ultimate trickle down and around effect - asymmetries and inequalities have become more pronounced in recent years. Such policy manifestations, however, are more an extension of secular trends than neoteric phenomenon.
The financial sector and those tied to it have benefited disproportionately since the turn of the interest rate cycle circa 1980. From 1980 to its peak in 2006, the finance industry grew from less than 5% of the economy to ~8.3%, taking share at a rate of ~13bps per annum while the financial sector weight in the S&P500 rose from less than 10% to greater than 20% over the same period.
Industry and activity chase price/profit and the broader reality of the great moderation – which, instead of promoting natural economic cycling, effectively propagated the accumulation of latent risk – is that 30+ years of lower highs and lower lows in interest rates supported a multi-decade run in financial asset price appreciation - a phenomenon exaggerated further by the twin peaks in both demographics and household & corporate leverage.
Alongside that financialization, the gini coefficient in the U.S. increased almost a full decile and the share of total income earned by the top 1% of families more than doubled from less than 10% to greater than 20%.
The minority with financial assets and those tasked with managing them - which, coincidentally, became increasingly less mutually exclusive - benefited as bond prices had a historic bull run while the ongoing, incremental lowering of discount rates provided for a perma-juicing of asset values via the Present Value effect.
Q: How much would the median home be worth today if rates were at 10% instead of 4%?
A: About -45%, or -$110K, less.
Quasi-relatedly, the policy perpetuated asset bubble rotation into housing destroyed a perfectly predictive housing model.
Over the pre-1995 historical period, New Home Sales could be modeled as an almost perfect periodic function. For the aspirant, part-time quants like myself, who would like to plot the function, here’s what I got on a 1st pass…..
f(x) = 241*sin(2Pi/82*x-20.5)+614 ….#CoolButUseless
Perhaps as the last of the cumulative displacement from trend burns off in the next few years we can return to a similarly predictable oscillation in new housing demand.
Anyhow, a couple weeks back, Janet Yellen expressed concern over the ongoing rise in inequality that team FOMC itself helped perpetuate.
Janet failed to explicitly address the role of central bank policy in that burgeoning divide but the Fed does hold an appreciation for the lag between Wall Street’s discounting of policy via prices and actual Main Street effects. And with the normal policy transmission channel left mostly prostrate by the zero bound in rates, the less potent and longer lagged trickle through of Wall Street wealth to the real Main Street economy has become the hoped for transmission channel detour route.
Ironically, or unfortunately, the problem with that ideology is that the prescription for ineffectual QE becomes more dovishness in the belief that it’s the bottlenecked transmission of policy and not the policy itself that’s core to the problem. From that perspective, more and/or longer ‘easiness’ remains the most favorable conduit for the (eventual) leak through of policy to the populace.
“You keep going until you can’t turn back. That’s where there isn’t any choice. You don’t know where that is. You don’t know until you pass it. And then it’s too late.”
Nucky Thompson epitaphed the bubble in 1920’s Prohibition barbarism and capped the series finale of Boardwalk Empire with that quote.
I suspect there’s some transferable insight in that Boardwalk epiphany.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.35%
WTIC Oil 79.47-81.43
To Bootlegging, Central Banking….and kindred spirits...
Christian B. Drake
U.S. Macro Analyst
Takeaway: Current Investing Ideas: EDV, HCA, MUB, RH, TLT and XLP.
Below are Hedgeye analysts’ latest updates on our six current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*We also feature two pieces of content from our research team at the bottom.
Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.
More #Quad4 Confirmation
All told, with both growth and inflation slowing, we reiterate our #Quad4 asset allocation of long TLT, MUB, EDV and XLP. We see downside to 1.7% on the 10Y Treasury bond yield over the intermediate term.
We sent out a report explaining our position on Friday. Click here to read.
There’s only one thing that matters right now with Restoration Hardware – and that is next week’s Grand Opening of the new Restoration Hardware Design Gallery in Atlanta.
The store, which is in the Buckhead section of Atlanta, was constructed in space formerly occupied by ESPN Zone. It is about 3x the size of existing design galleries, and 7x larger than legacy stores. While one store will not make or break this company, the anecdotes about productivity that come out in the ensuing weeks will be a major focal point for Wall Street.
The company reports earnings in the second week of December, and will have quantitative insight as to how the store is performing. They set expectations for $650/square foot once the store is up and running, but we think it will come in well ahead of that.
* * * * * * * * * *
ADDITIONAL RESEARCH CONTENT BELOW
We continue to stay on the sidelines here... with a bearish bias.
After a heavy week of data, both the fundamental picture and behavioral market activity suggest continued downside pressure.
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Real Conversations: Crisis Coming? Stockman on ‘Likely Global Recession’
David Stockman, the outspoken former Reagan budget director and bestselling author of “The Great Deformation,” sits down with Hedgeye CEO Keith McCullough to discuss a number of important subjects in this wide-ranging interview including consequences of what the Fed is currently doing and why a global recession may be in store.
EXCERPT | Are Global Central Banks Running Out Of Bullets? A Call with John B. Taylor
This is an excerpt from the Q&A portion of the Hedgeye Macro Team's conference call with Stanford University Professor John B. Taylor.
Contact email@example.com for access to the full call.
COMPLIMENTARY VIDEO | Hedgeye's Morning Macro Call with CEO Keith McCullough 11/12/14
We are pleased to present this complimentary peek behind-the-macro-scenes of Hedgeye's daily Morning Macro Call for institutional subscribers. Watch for a special appearance by retail analyst Brian McGough during the Q&A.
While you're at it...
Click here to subscribe to Hedgeye on YouTube. It takes one second (and it's free).
Hedgeye CEO Keith McCullough Warns About Bull on Fox Business: Beware of "Rainbows In Puppy Land"
Outspoken Hedgeye CEO Keith McCullough minced no words and pulled zero punches discussing the bull market run on Fox Business' "Opening Bell' Thursday morning, reminding viewers of the 'fetal position' many were in just a month ago.
Gambling central bankers across the globe are torching their currencies, inflating dangerous bubbles, and threatening markets and economic stability around the world.
On The Other Hand
On the one hand, gas prices have dropped for 46 straight days to their lowest level in four years.
How 'Bout That Weimar Nikkei!
"[T]hose who were long Japanese stocks for a centrally planned “economic recovery” (i.e. those who were down, in Nikkei terms -10-15% at one point this year before Abe/Kuroda devalued, again)," wrote CEO Keith McCullough in Thursday's Morning Newsletter, "have seen a +20% return from Japan’s October 17th low of 14,532 (as the economy continued to slow). 'So,' call being long Japan (or Germany’s stock market in 1924) for the wrong reasons, a win!"
Liquidity Traps = Bearish
Does Russia Pose a Threat to Stocks?
According to its top commander, NATO officials have seen Russian combat troops and military equipment entering Ukraine this week. This comes on the heels of increased tensions between Russia and the West over recent months, including a sharp uptick in Russian fighters and bombers flying missions over Europe.
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