This note was originally published at 8am on November 28, 2014 for Hedgeye subscribers.
“I wish you [turkey] didn’t have to die, but a bunch of white people put on sweaters.”
- Peter Griffin, Family Guy
Tryptophan – the amino acid in turkey responsible for the Thanksgiving post-gluttony coma - has to cross over the blood brain barrier in order to elicit its stuporous effects. And it can only do that in the presence of sufficient amounts of insulin/carbohydrates.
Without digressing into the underlying (paradoxical) physiological mechanics, the relevant peri-Thanksgiving takeaway is that if you only eat turkey & no carbs alongside it, you won’t get tired.
You can weigh the psycho-social cost-benefit of that biochemical reality for yourself as you ferret through the leftover’s fridge.
Back to the Global Macro Grind….
To attempt to crosswalk that holiday anecdote over the relevancy barrier to the investment space, the tryptophan paradox could be viewed similarly to the de-couplers fallacy.
Sure, you could go to Thanksgiving dinner and just eat some turkey and nothing else, but I’d probably only make that bet…with someone else’s stomach.
The U.S. could ramp into full, escape velocity de-coupling mode while the balance of the global economy harmoniously converges to a state of disinflation and decelerating growth but, right here, we’d probably only get long that improbability via high-beta, early cycle exposure…with someone else’s money.
The first chart of the day below is our global macro summary table which consolidates global estimate trends for growth and inflation.
I know you can’t really see the table detail but that’s not really necessary here - one need only observe the ubiquitous red, which represents negative growth and inflation estimate revisions, to see the global transition to Quad 4 manifesting in real-time.
Oil’s expedited descent to sub-$70 and the massive underperformance in the XLE are acute examples of the stuporous deflationary realities of Quad #4 as the duo of disinflation and decelerating growth remains the scourge of energy assets and inflationary leverage.
Given the pervasive, negative revision trends and the re-crescendo of the currency wars and central bank interventionism, both the market and policy makers are discretely acknowledging the deceleration in growth.
Extending the logic chain, an investor overweight and long of high growth (global) equities would then seem to fall into two broad categories:
Wrong: in terms of a fundamental forecast (why would one be levered long into slowing growth?)
Having & Eating Cake: Long under the premise that if growth accelerates you’ll be along for the ride and if it slows equities will (again) get juiced by a global “central bank put”
Given the frequency and magnitude of policy intervention over the last 5+ years and the near-Pavlovian, positive response in market prices, copping to strategy number 2 is somewhat defensible as it amounts to “playing the game that’s in front of you” and not the one you think you should be playing.
The binary nature and exogenous dependency (i.e. the fulcrum thesis driver being completely external to economic or company fundamentals) of that strategy, however, kind of divorces it from true “investing” in an organic sense. It’s also akin to Nassim Taleb’s Turkey problem.
To review Taleb’s popular probability parable:
“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race…On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.”
It doesn’t take a lot of imagination to extend that metaphor to the equity market farm and envisage who’s the turkey and who’s the farmer.
Anyhow, getting back to the domestic decoupling…..
Inclusive of the crush of pre-holiday data on Wednesday, decelerating growth appears to be the emergent main course for 4Q.
Initial Claims deteriorated for a 3rd week. Peak improvement in claims has been a consistently solid lead indicator of the economic cycle. Are we pushing past peak?
Durable and Capital Goods spending softened (again). We expect the ISM/mfg data to soften alongside declining export demand, shifting seasonals, and middling domestic capex
Household Spending and Income saw tens of billions of dollars of income and savings revised away.
To delve into the last point a bit deeper.
Estimates for personal income were revised for the April-to-September period and the adjustments were remarkable as total disposable personal income saw some $200+ billion (SAAR) shaved away vs. prior estimates.
Alongside a meaningful downward revision to the savings rate in recent months, a net effect of the revision was a complete shift in the trajectory of salary and wage growth.
Whereas, prior to revision, the slope of aggregate wage growth in 2Q/3Q was one of acceleration, after the revision, it shifts to one of flat-to-modest deceleration.
Specifically, private sector salaries and wages were initially reported to be growing +6.1%, +6.0%, +5.9% over the July-to-September period. With the revision, those growth rates were marked down to +5.0%, +4.9%, +4.9%, respectively.
So, prior to revision, wage income was accelerating to a new cycle high alongside higher highs in savings. Thus, the capacity for incremental consumption growth continued to improve even if increased savings was muting the translation to actual spending growth.
The step function revision lower in both wage growth and the savings rate constrain the upside for consumption growth relative to that prior to the revision.
As the 3-D scatterplot below shows, the multiple regression between Disposable Personal Income growth and the change in the Savings Rate (independent variables) vs. the change in Consumer Spending (dependent variable) has an R-square of 0.95 across decades of data. More simply, growth in Disposable Income and the change in the Savings Rate explains ~95% of the change in aggregate household spending.
As we distilled it in our institutional note on Friday:
If ya don’t have it (no savings), ya ain’t gettin it (wages), and ya ain’t borrowing it (credit)…ya can’t spend it (PCE).
Macro forecasting can be complex and confounding but, every once in a while, it’s worth re-remembering that the strength and prospects for an economy boil down to some simple and very common sense realities.
To close the holiday Friday with some meditative macro invocation,
Grant me the serenity to accept a global entre into Quad #4.
The insight to understand the lagged benefit of lower energy prices.
And the wisdom to know (& time) the difference.
Christian B. Drake
U.S. Macro Analyst