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Takeaway: In today's edition of the Macro Playbook, we dissect the trend in U.S. GDP growth in the context of the economic and stock market cycles.


Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. iShares 20+ Year Treasury Bond ETF (TLT)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares Russell 2000 ETF (IWM)
  2. SPDR S&P Regional Banking ETF (KRE)
  3. iShares MSCI European Monetary Union ETF (EZU)
  4. iShares MSCI France ETF (EWQ)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)


Q&A On U.S. Economic Growth: Last week we got a very good question from one of our long-time subscribers regarding the slope of U.S. real GDP growth. In the prose below, we answer the question the only way we know how: with facts, figures and charts, topped off with a heaping helping of #process.

Q (client): “It seems that your view has been that the US economy has been weakening as we move through CY14, yet there is data that is pretty good (see below). No rush, but I am curious if you think the data is wrong or if there is some other way to reconcile your view and the data:


Data earlier this week from the Bureau of Economic Analysis (BEA) showed the economy grew 5% last quarter. Excluding the weather-related -2.1% plunge in Q1; real GDP growth has averaged 4.4% over four out of the last five quarters. More importantly, the latest spending data point to another strong quarter of output growth as real consumer spending in November was up 5.2% annualized relative to its Q3 average.”

A (us): The ultra-bullish summary you highlighted below is indeed accurate with respect to the headline GDP growth rate, which is reported on a QoQ SAAR basis. We instead focus on the YoY growth rates for three reasons:

  1. Easier to model using base effects and high-frequency economic data
  2. Akin to microeconomic analysis in the sense that fundamental analysis tends to focus on YoY growth rates, not sequential growth rates
  3. More indicative of the underlying trend in the sense that sequential rates may deviate (often substantially) from the trend; for example, neither the -2.1% QoQ SAAR growth rate recorded in 1Q14 nor the +5.0% QoQ SAAR growth rate recorded in 3Q14 are anywhere in the area code of the +2.3% YoY growth rate the economy is actually tracking at for CY14

In the table below, we contrast the headline QoQ SAAR growth rate (1st row) with the YoY growth rate (2nd row). What you should note are two things:

  1. As highlighted above, there’s not a tight relationship between the QoQ SAAR figures and the YoY figures.
  2. With the advent of the final [positive] revision to 3Q14 real GDP, growth has now been accelerating for two consecutive quarters on a YoY basis. Recall that the penultimate revision showed growth actually slowing -20bps to +2.4% YoY in 3Q14. Very rarely is a revision to GDP material enough to move the U.S. economy from one quadrant to another in our GIP chart, but that’s what happened with this latest revision (i.e. from #Quad4 to ever-so-slightly in #Quad1).


CLICK HERE to review our latest summary of the broad preponderance of key high-frequency economic data. At best, the picture is mixed, but the [long-awaited] uptick in consumption growth in November is something to monitor to the extent it develops into a sustained trend of accelerating growth – especially in the context of very positive labor market trends and broad-based disinflationary tailwinds.

Obviously labor market strength is late-cycle by nature, though it could be strongly argued that we’re a full ~18 months away from a U.S. recession per the trend in jobless claims. Specifically, a recession has ensued an average of 19 months after the rolling 6-month average in initial jobless claims hit 300k for each of the last three economic cycles.


1.5 years would appear to be a very long time for any growth bear to risk manage this raging U.S. equity bull market, as the current level of deterioration at the single stock level is dramatically shy of what is typically seen at major peaks in the stock market.


All told, with both domestic small-caps (IWM) and regional banks (KRE) representing two of our top-five global macro SHORT ideas, we remain defensively postured with respect to our preferred U.S. equity market exposures on the LONG side (i.e. healthcare, staples, REITs and utilities). Our internal discussions continue to center around the market pricing in a potential move from #Quad4 to #Quad1 domestically – a move that would undoubtedly warrant a reconfiguration of our thematic investment conclusions as listed above. Stay tuned for our Q1 macro themes call.

***CLICK HERE to download the full TACRM presentation.***


#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.

Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)


#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.

Moscow, We Have a Problem (12/16)

#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.

#Bubbles: “Hedge Fund Hotel” Edition (Part II) (12/8)

Best of luck out there,


Darius Dale

Associate: Macro Team

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.