This note was originally published at 8am on December 10, 2014 for Hedgeye subscribers.
“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:
- Quits & Hires: Yesterday’s JOLTS data showed voluntary separations (Quits) held above 2.7MM for a second consecutive month – the highest level since February 2008 – while total hires held above 5MM for a second month for the first time since December 2007.
- Available Workers per Job Opening: Available Workers (the sum of Unemployed + those Not in the Labor force but Want a Job) per Job Opening (JOLTS reports) dropped to 3.21 in October – marking a new cycle low and dipping below the pre-recession average of 3.31.
- Short-term Unemployed, % of Total: The share of short-term unemployed - those unemployed for less than 5 wks – made another new cycle high, increasing to 27.6% of total in November. While the share of total has typically ranged between 40-50% at peak in prior cycles, the trend in the current cycle remains one of ongoing improvement.
- NFIB Hiring & Compensation: The Small business optimism data for November, released yesterday, showed hiring plans, compensation, and difficulty in filling positions all remain positive with each increasing sequentially and sitting jut below recent cycle highs.
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?
- Nominal Wage growth over the last 3 cycles (1982-2007) has peaked at just north of 4% and has averaged 3.3%. Real Wage growth, however, has been largely a phantasm – particularly for the median and lower income quintiles.
- The lone long-term data set on realwage growth – which focuses on production and nonsupervisory workers - shows real wage growth has been flat/negative for most of the last 4 decades. The current post-recessionary progression in real wage growth actually compares favorably with those observed over the last half century.
- Labor’s share of National Income only rises at the tail end of an expansion and after growth and profits have been strong for a protracted period.
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:
- United States: Good - but slowing from a rate of change perspective
- China: Ugly - Growth slowing, Disinflation rising (printed 5Y low last night), central bank easing
- India: Good - growth improving & inflation worries ebbing with Dr. Raj doing a credible job at the helm of the RBI
- Japan: Ugly - Yen crashing, economy slowing, Abe/Aso scrambling
- Germany/Eurozone: Ugly – deceleration growth and disinflation prevailing, Incremental CB easing imminent
- Russia: Disaster – Ruble is crashing, GDP is looking like -6-8% at current oil prices, risk of a banking crisis is rising
- Brazil: Ugly - perhaps some interesting upside in another quarter or so but, for now, Brazilian policymakers/economy (still) can’t get out of their own way
If you’re keeping score that’s: 4 Uglies, 1 Disaster, and 1.5 Good
What say prices/markets about those macro realities?
- Global Growth and Inflation Revisions = negative
- 10Y Yield = -27% YTD, Bearish Formation, immediate-term downside to 2.16%
- Yield Spread (10’s -2’s) = 52 Week Low
- Inflation Expectations = Crashing
- Energy Equities & Commodities = Crashing
- Style Factor Performance = Low Beta, High Yield, Large Cap Outperforming (across durations)
- High Yield = Breaking Out and holding at 52-wk highs.
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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In this brief excerpt from this morning’s Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough notes the similarities between today and earlier bubbly periods and highlights two momentum stocks in particular which are representative of the current climate.
Tickers: MPEL, PENN, H
Today's Headline Story
MPEL – MPEL has repurchased about ~1.5% of its ordinary diluted shares outstanding (1.656 billion) in December so far. YTD, MPEL have repurchased ~2.2% of its shares. For all the transactions , see HERE.
Takeaway: At least the company feels the bottom is near
577.HK – Louis XIII said in an HKSE regulatory filing the slowdown in Macau's gaming revenue over the six months to September 30 was “primarily” caused by a decline in telephone betting.
Takeaway: Seems like a reach to us, since proxy betting only ceased at Wynn Macau and Sand China and is only a small portion of GGR.
PENN – Hollywood Casino Bangor will be open 24 hours a day between Dec. 26 and Jan. 3 as a trial run to determine whether a round-the-clock operation in Eastern Maine might be viable long-term. Normally, the casino, which has about 400 employees, closes daily at 3 a.m. and reopens at 8 a.m.
Takeaway: An initiative to compete with Oxford casino
H – announced plans to offer free Wi-Fi at all Hyatt hotels worldwide, providing connectivity and convenience regardless of booking method or loyalty program participation. Free Wi-Fi will become available to Hyatt guests around the world in February 2015. Travelers will be able to access free Wi-Fi on an unlimited number of mobile devices or laptops in Hyatt-branded hotel guest rooms and social spaces.
Takeaway: Hyatt ups the WiFi game with free WiFi for all guests, not just loyalty members.
RCL - will retrofit 19 of its ships with advanced emissions purification (AEP) systems. Installation will begin on Jan 2015 with 13 RCI ships and 6 Celebrity ships. Most of the installations will take place between 2015 and 2017. Each installation will take ~8 months.
Takeaway: Expect more dry dock days in 2015
- China started to probe into alleged corruption of Ling Jihua, a former senior aide to former president Hu Jintao. Ling is vice chairman of the Chinese People's Political Consultative Conference National Committee and head of the United Front Work Department of the CPC Central Committee. Ling is investigated for "disciplinary violations". Ling was demoted in September 2012 after sources said his son was involved in a deadly crash involving a luxury sports car. Article HERE
- Hong Kong's Former Chief Secretary Sentenced for Corruption – Hong Kong's former chief secretary Rafael Hui was sentenced by the High Court on Tuesday to seven-and-a-half years for corruption and misconduct convictions. Hui was ordered to pay the government of the Hong Kong Special Administrative Region (SAR) a fine of 11.182 million HK dollars ( about 1.437 million U.S. dollars). Hui was convicted of five counts of misconduct and corruption, making him the highest-ranking official in Hong Kong's history found guilty of taking bribes. Article HERE
- China's CPC Reprimands Officials in Austerity Sweep – November saw 7,308 officials reprimanded for violating the central government's austere working practice policies. The Communist Party of China's (CPC) Central Commission for Discipline Inspection (CCDI) issued its monthly report regarding its fight against extravagance, saying that those punished were involved in 5,699 violations uncovered last month. Violations included dereliction of duty; overseas travel and personal entertainment financed by public funds; negligence and lazy work practices; excessive spending on receptions, buildings and vehicles; extravagant weddings and funerals; and sending or accepting gifts, the CCDI said on its website. Article HERE
- China Business Leader Investigated – Sun Zhaoxue, former general manager of China's top aluminum producer, is being investigated for allegedly accepting bribes. Sun, also former member of the Communist Party of China (CPC) committee of the state-owned enterprise Aluminum Corporation of China (Chinalco), has been placed under "coercive measures". According to China's criminal procedure law, coercive measures include summons by force, bail, residential surveillance, detention and arrest. The CPC Central Commission for Discipline Inspection (CCDI) announced earlier Tuesday that Sun had been expelled from the CPC and public office following its own investigation. The CCDI investigation found that Sun took advantage of his post to seek profits for others, asked for and accepted "a huge amount in bribes," and committed adultery.Article HERE
Macau Outbound Tourism Increase – The president of the Travel Industry Council of Macau, Andy Wu, expects Macau people to take 30 percent more tours abroad this holiday season than a year ago with Japan and South Korea as the most popular destinations among Macau tourists. Because the closely spaced public holidays in Macau between the handover anniversary and New Year fall this year on weekdays, many resident’s took extended holidays to more distant locations.
Deflation in Singapore – The Republic is experiencing deflation for the first time in five years as the consumer price index (CPI) went into negative territory, the first negative reading since December 2009. The CPI fell to -0.3% year-on-year in November, down from 0.1% in October, according to the Department of Statistics.
Takeaway: A slight bump up for mass gaming?
McCarran Airport Traffic in November – The Clark County Aviation Department on Tuesday reported 3.4 million passengers for the month, a 2.3% increase over November 2013. The number of international passengers increased 12.8% for the month to 279,860. For the year to date, passenger traffic is up 2.5% to 39.5 million and international travelers are up 12.8% to 3.1 million. Based on historical traffic patterns and trends, McCarran should surpass 42 million passengers in 2014 — more than the number recorded in 2013, but short of the 47.7 million reported in record-setting 2007.
Takeaway: McCarran passenger traffic has now grown for 15 consecutive months.
25 to Watch in 2015 – Global Gaming Business Magazine named its list of "25 People to Watch in 2015"
Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.
Takeaway: European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.
Takeaway: FHFA accelerated to +4.4% in Oct from +4.2% in Sep. All three primary price series are telling the same (2nd deriv) stabilization story.
Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.
Today's Focus: November New Home Sales & October FHFA HPI
FHFA HPI accelerated to +4.4% in October from +4.2% in September. All three primary price series are now telling the same (2nd derivative) stabilization story.
November New Home Sales
- New Home Sales were down -1.6% on both a MoM & YoY basis. Meanwhile, New Home Sales are up just +0.7% YoY on average YTD vs. the Jan-Nov period last year and at +438K in November they sit just above the TTM average of +434K. New Home Inventory was flat at +214K sequentially, and is up +15.7% YoY. Existing Home Sales continues to dominate with the EHS to NHS ratio still at 11.3x vs the long-term average of 8.6x. Note that in contrast to most demand measures (purchase apps, EHS, etc) the comps for NHS are actually (somewhat) hard over the Oct-Jan period with NHS averaging +449K and 13% YoY Growth.
About New Home Sales:
Each month the Census Department releases the New Home Sales report, which measures the number of newly constructed homes that have been sold in the month. The difference between the New Home Sales report and the Starts and Permits report is that New Home Sales only includes single family spec homes built and sold by builders, and does not include condos, apartments, or owner-built units. This is why New Home Sales typically run at roughly half the rate of Starts.
Joshua Steiner, CFA
Christian B. Drake
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