“U-G-L-Y, You Ain’t Got No Alibi”
Every year around the holidays I make a point to pick up a stranger, fund a trip to the nearest fast food drive-thru and further them towards wherever “point B” happens to be.
I picked up my first hitchhiker in four years this past weekend.
My multi-year drought in holiday humanism hasn’t been intentional, there’s just been a secular bear market in central CT hitchhiking.
My father started the tradition when I was young. He passed away when I was 17 and I’ve carried on the tradition over the last decade+.
It’s an homage of sorts and my way of paying-it-forward.
Back to the Global Macro Grind….
The thing about ‘paying-it-forward’, in real terms, is that one generally has to get paid to begin with.
While the recent crescendo in Energy/Russia/Greece crashing captions has dominated newsflow the last couple weeks, accelerating wage inflation – and its seemingly perpetual imminence – remains a trending and favorite topic for headline writers.
Indeed, slack reduction and the hoped-for flow through to wage inflation has been the bull case for purveyors of panglossianism for the last year.
The flow of Wall Street wealth to Main Street income remains core to Janet Yellen’s policy calculus as well – and front-running reactionary central bank policy remains the game – so the iterative, Bayesian review of the monthly labor/wage data remains a ceaseless exercise.
THE THEORY: Conventionally, wages are viewed as a lagging indicator, with wage inflationary pressure building as the labor supply declines and the economy moves towards constrained capacity.
That an output gap still exists in the domestic economy remains readily apparent. The core of the slack debate continues to center on the magnitude of the shift in labor supply-demand dynamics and whether policy makers will move ahead of or behind any emergent inflationary curve.
THE (RECENT) SLACK DATA:
So, the continued, albeit frustratingly slow, transition to tautness remains ongoing on the labor slack front. Does that portend material (imminent) upside in wage growth?
Remember too that those averages were achieved alongside peak positive demographics, accelerating credit growth, and a favorable interest rate backdrop.
Is a return to a halcyonic 3-4.5% level of nominal wage growth in the face of persistently lower inflation, an aging workforce, top heavy demographics, lower productivity and lower credit growth a reasonable expectation?
We don’t think so.
Hourly wage growth for the private sector has been stuck at ~2% for the better part of the last four years. The trend in wage growth for production and non-supervisory workers (+2.4% in November) has been better but not great.
Assuming there is an intermediate-term to the current expansion (now 67 months old), there is probably some runway for further wage gains but with upside to something closer to ~+2.5% than to the ~4% (a double from current levels) of prior cycle peaks.
Strong dollar deflation and a protracted deceleration in global growth should only constrain the upside for domestic inflation.
To review the current state of the top 7 Global Economies:
If you’re keeping score that’s: 4 Uglies, 1 Disaster, and 1.5 Good
What say prices/markets about those macro realities?
In his keynote address to the CATO institute, Jim Grant presaged that a summary analysis of the 2016 crash will sound something similar to the following:
“My generation gave former tenured economics professors discretionary authority to fabricate money…we put the cart of asset prices before the horse of enterprise…we entertained the fantasy that high asset prices made for prosperity, rather than the other way around.”
With hedge fund trailing correlations to beta >0.90 and rampant central bank interventionism starving the alpha from active management, most investors, wittingly or not, have just been along for the five-year ride.
Thumbing for central bank (helicopter) rides….no secular bear market there.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.16-2.26%
Oil (WTI) 60.94-66.99
To chickens & eggs, carts & horses, paying it forward & having it to begin with.
Christian B. Drake
U.S. Macro Analyst
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TODAY’S S&P 500 SET-UP – December 10, 2014
As we look at today's setup for the S&P 500, the range is 32 points or 0.82% downside to 2043 and 0.74% upside to 2075.
CREDIT/ECONOMIC MARKET LOOK:
MACRO DATA POINTS (Bloomberg Estimates):
WHAT TO WATCH:
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
The Hedgeye Macro Team
This note was originally published at 8am on November 26, 2014 for Hedgeye subscribers.
“If we can get you a car in 5 minutes, we can get you anything in 5 minutes.”
Travis, how about a massage? Or some turkey day beers and, bonds?
Everyone who has created an anti-consensus company likes how the CEO of Uber, Travis Kalanick, rolls. If this morning’s headlines about T Rowe’s investment are right, it looks like Uber is going to price its final private round at a $35-40B valuation too!
That’s almost as bullish as I am in 2014… on the Long Bond (TLT). In less than 3 minutes, I can get you anything you need to explain the bull case. As growth and inflation expectations slow, globally, bond yields go lower. Ok, maybe that was less than 1 minute.
Back to the Global Macro Grind…
In less than 1 minute, I can get you a chart (see Chart of The Day) showing the Rate of Change in US growth versus the 10yr bond yield. Unless you are paid to navel gaze at the “Dow”, this macro relationship is obvious to all but the willfully blind.
To most of our “rate of change” fans, the year-over-year rate of change in growth and inflation are pretty basic concepts. To Consensus Macro (and the financial media that dotes on it), not so much…
Yesterday’s Consensus Media headlines on US GDP were classic. Sadly, Bloomberg (who we pay a lot of money to for rate of change data), continued down the all-time-CNBC-ratings-lows-perma-SPY-bull-spin-path by writing:
BREAKING: “SP500 Little Changed Near Record On GDP, Consumer Confidence”
In other real-world news yesterday, “Consumer Confidence” actually tanked (falling to 88.7 in NOV from 94.5 in OCT), and the rate of change in year-over-year US GDP growth slowed (again) to 2.4% in Q3 versus 2.6% in Q2.
#PermaBull says pardon?
Yes. Evolve your process, just a little, and stop staring at a next to useless GDP quarter-over-quarter SAAR (sequentially/seasonally adjusted) report and look at it how you look at the companies you invest in (i.e. on a year-over-year basis).
This isn’t rocket science. I can get you these numbers (and a whole lot more of them) in less than 3 minutes!
Again, to review why US bond yields continue to crash (10yr yield -26% YTD to 2.25% this morning):
Put another way, we still have US GDP growth (year-over-year dammit!) tracking to +2.2% for 2014 – and, magically, that’s exactly where the 10yr US Treasury Yield is trading this morning.
#Tah-dah! Get growth’s rate of change right – and you get bond yields right.
My inbox is fun. I often get forwarded other people’s macro work and, most of the time, I can’t particularly understand what it means. Mostly, I think that’s because I only care about rates of change. And most of that work doesn’t.
It’s not personal. It’s simply my perspective. And it’s this anti-consensus process and perspective that had us as bearish on the Long Bond in 2013 (when the rate of change in US growth was #accelerating) as we are Uber Bullish now.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.22%-2.33%
WTI Oil 73.03-77.04
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
YUM continues to be on our Best Ideas list as a long.
YUM released updated FY14 guidance after the close today, estimating mid-single digit full-year EPS growth, below the 9% growth the street is currently projecting. Perhaps the more disappointing guide, however, was FY15 EPS growth of at least 10%, well below the 17% the street is currently projecting. Specific operating unit commentary was limited, although management noted an anticipated benefit from sales leverage as sales rebound in China.
This release doesn’t change much, in our view, and in fact strengthens our long thesis with what is yet another example of China dragging down the overall business. We continue to believe there is a strong likelihood management either 1) induces significant change from within or 2) is influenced by a group of influential shareholders to make significant changes.
All told, tomorrow’s anticipated sell-off could present a nice buying opportunity for investors, particularly when considering expectations are being reset to reasonable and, we’d argue, easily achievable levels. YUM is a powerful, global brand that has many levers at its disposal in order to immediately drive shareholder value.
We look forward to learning more at the company’s investor meeting on Thursday.
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