“Memes propagate themselves in the meme pool.”
Born in Nairobi, Kenya, 73 year old Richard Dawkins is a well known evolutionary biologist who wrote The Selfish Gene in 1976. He developed a gene-centered view of evolution and has plenty of interesting writings on one of my main market focuses, #behavior.
“Examples of memes are tunes, ideas, catch phrases, clothes, fashions … leaping from brain to brain via a process, in the broad sense, can be called imitation.” –Dawkins (The Medici Effect, pg 17)
Do Global Macro Themes propagate themselves into consensus narratives? You bet your Madoff they do. But timing them matters. You really get paid by front-running them by 3-6 months. “So” (good #OldWall meme word right now), let’s keep trying to do that.
Back to the Global Macro Grind…
For anyone with an objective (Bayesian) research process of analyzing the prior in order to probability weight the next posterior, the fundamental trends of global #GrowthSlowing and #Deflation have been plainly obvious for the last 3-6 months.
To be fair, you didn’t have to call the top in big things like long-term bond yields (12 months ago) or other major macro things like Oil, the Euro, and the CRB Commodities Index (6 months ago) to protect your client moneys against these major macro risks.
In the last 3 months however, you’ve had multiple opportunities to sell your Emerging Markets, High Yield/Junk Bonds, Energy stocks, etc. – even in the major US equity meme chasing indices, you had fantastic selling opportunities at the:
- Late SEP top
- Late NOV top
- Late DEC top
As always, market performance propagates consensus macro memes, so I highly doubt you get another lay-up JAN high to sell into like you had in SEP, NOV, and DEC… but doubt is where the short-squeezes are born, “so” I try to never say never!
At 1.94% on the US 10yr Treasury Yield this morning, most American mainstream financial “news” memes are picking up on the simple reality that the US A) is not a “closed” economy B) US economic data slowed in December and C) #deflation is a risk to the jobs market.
Amidst the epic storytelling of why the “market was up” on December 29th, there’s one big thing the perma-growth and inflation bulls have left - the ongoing “booming 5% economy with wage growth and capex cycles” meme that is about to appear like a castle in the air…
“So” what if the data goes something like this for the next month instead?
- US Jobless Claims Rise (think Texas, the Dakotas, etc)
- Late-cycle indicators (like inflation and employment) both slow, at the same time
- Q414 GDP slows to 2% (or less)
Since the politicized, and to some extent ignorant, description of US GDP Growth is a sequential (not an annualized, year-over-year rate of change) number, that doesn’t mean that come February that headline-meme-news won’t be that US GDP in 2014 was actually closer to 2% year-over-year than 3, 4 or 5%.
Then the Consensus Macro Meme might just get why a 10yr bond yield of around 2% reflects an economy whose rate of year-over-year change was tracking in line with 2% (or lower). If real year-over-year GDP was accelerating > 3%, I think the 10yr yield would too (that was our call in 2013 though, when we wanted you to buy every dip in US stocks and short the Long bond, TLT).
Front-running predictable #behavior in both mainstream newsflow and macro market reactions by central planners is not easy, but we have proven that it is doable. Humor me for another minute and tell me what the US Federal Reserve does if the following three face cards show up in the flop:
- #Deflation (as in collapsing oil, commodities, breakevens, headline CPI, etc.)
- Slowing monthly (December and January data) and slowing Q414 GDP
- Rising jobless claims and risks to the labor market
Alex, I’ll take “what is pushing out the dots?” on a June rate hike for my entire asset allocation. And the 10yr yield goes lower on that. TLT Tizzle. Yep.
I’ll outline our scenario analysis on our Q1 Macro Themes Conference Call tomorrow (ping if you’d like access). Probability weighing phase transitions in macro consensus memes – that’s my job. That’s also risk management.
Our immediate-term Global Macro Risk Ranges (I publish 12 of these with our intermediate-term TREND view in our Daily Trading Range product) are now:
UST 10yr Yield 1.87-2.14%
Oil (WTI) 45.42-53.22
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
This note was originally published at 8am on December 24, 2014 for Hedgeye subscribers.
“Twas the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse;
The stockings were hung by the chimney with care,
In hopes that St. Nicholas would soon be there.”
-Major Henry Livingston Jr.
Whether you celebrate Christmas or not, undoubtedly many of you are familiar with the poem “Twas The Night Before Christmas”. It is the classic story of children waiting for the mythological character Santa Claus to show up on Christmas Eve.
A side note on this poem is that there is some serious controversy surrounding the author. The poem was originally published anonymously in 1823, but then attributed to Clement Clarke Moore, who acknowledged authorship in 1837.
A graduate of Columbia University, Moore was an interesting character. Among other things, his father officiated at the inauguration of George Washington, he was opposed to the abolition of slavery, he was also a vocal opponent to Thomas Jefferson for mostly religious reasons, and, ironically enough, founded the Chelsea area of New York City.
Despite claiming authorship, Professor Donald Foster of Vassar, who is considered of the top forensic linguists in the world, has concluded quite definitely that true author was Henry Livingston, Jr. Livingston was also a New Yorker, though primarily a gentleman farmer as opposed to being a political and religious activist, and wrote the poem for his seven children.
Admittedly, this story of disputed authorship, jolly men in suits bringing presents and a red nosed flying rein deer leading the way, remind us a little of the global stock markets. On Nasdaq, on Dow, on Yen and on Ruble ! (Ok, not on Ruble.)
Back to the Global Macro Grind...
Yesterday, the market mildly cheered on not the arrival of St. Nicholas, due to a meaningful upward revision in GDP for Q3. The most prominent area of revision from the initial GDP estimate was a +0.70% increase in consumption to +3.2% from last quarter. But across the board, the other key components were revised higher as well.
The challenge with GDP for stock market operators, of course, is that it is often rightfully considered a lagging indicator. Case in point is that we are just now getting the final GDP number for Q3 when we are seven days before the end of Q4 2014. The key questions from here to ask are: a) Did GDP just peak? and b) How is Q4 and beyond shaping up?
On the first point, to us it certainly looks like Q3 GDP was the peak, or close to it. On a sequential basis, GDP was up +5%, which was the best sequential increase since Q2 2011. On a year-over-year basis, it was the second best print since Q2 2011. Most importantly, on a two and three year average basis this was the best year-over-year growth rate since Q2 2011. The question from here, of course, will the rate of change accelerate or decelerate, on the margin?
Staying on the theme of consumption as a big driver of Q3 GDP, our Retail Sectorhead Brian McGough circulated a chart of “ICSC (International Council of Shopping Centers) YTD Comp Sales Trends”, which is in the Chart of the Day, and according to McGough:
“A big rebound in sales for the week, but this follows two big weekly declines in the context of an intermediate term downtrend. The point there is that with sales trending down so much into the biggest holiday week, it makes sense that retailers would really turn the discounting machine into overdrive to have any shot at hitting numbers and prevent a glut of inventory in January. Online sales trends per Channel Advisor are downright sobering.”
Certainly, this data doesn’t guarantee that Q4 GDP will slow from Q3, because it is still possible that old St. Nicholas has some last minute shopping to do!
It won’t all be coal in our stockings heading into 2015. One area that we recently highlighted as likely to see improvement and outperformance in 2015 is U.S. housing. A headwind to housing has been the inability, by some, to get credit. Aside from the potential easing of down payment rules, another key area that might provide a credit tailwind is the improvement in subprime mortgage market.
According to an analysis by Barclays, subprime mortgage bonds have gained 12% this year, which is more than 6x the return of junk rated corporate debt. In aggregate, subprime bonds have returned more than 75% since 2010. To be fair, 30% of the subprime mortgages tied to these bonds are more than 60 days delinquent, but that too is an improvement from 41% in 2010.
Certainly, we aren’t hoping for a return to the days when mythical characters like Santa Clause took out mortgages with no paperwork, but incremental improvement in the ability to get financing for the younger and less wealthy demographic is a real positive.
As it relates to real-time data on housing, my colleague Christian Drake wrote a note yesterday that looked at new home sales and recent pricing data. While in his words new home sales was still a bit muddling, on the pricing front FHFA Home Price Index accelerated to +4.4% in Oct from +4.2% in Sep. All three primary price series are telling the same (2nd derivative) stabilization story.
So really what we are saying is that if your loved ones were really well behaved in 2014, this is probably a very good time in the cycle to buy them a house!
Our Global Macro Risk Ranges are now:
UST 10yr Yield 2.04-2.27%
WTI Oil 52.87-59.23
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
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Takeaway: ISM reflects the broader slowdown in December Macro. Labor gets more interesting from here.
In reviewing the domestic December PMI data (see: (HEDG)EYE-CANDY | SURVEY SAYS...) we noted that the underlying Macro reality probably stood somewhere between the ongoing slowdown reflected in the Markit PMI measure (which slowed for a 6th consecutive month in Dec) and ongoing peak strength reported in the ISM survey.
We posited that alongside a reversal in here-to favorable seasonals and a deceleration in global growth and export demand, the reported ISM/IP data would follow the Markit reading lower in the coming months. With both the ISM mfg and services surveys slowing in December, it looks like that trend is playing out.
The U.S.’ s world share of trade and GDP may be in retreat but its glacial transition towards global interconnectedness is not. Is anyone particularly surprised that export orders (export orders don’t directly feed into the ISM index calculation but they obviously impact total activity) have slowed or domestically based global conglomerates remain hesitant to materially accelerate capex into OUS disinflation and discrete growth deceleration?
The ISM employment sub-indices remain good on balance and the domestic labor market remains insulated from the broader global reality, for now. Historical cycle precedents suggest labor market strength/improvement still has some runway before inflecting negatively.
The acute collapse in energy prices and any associated (negative) flow thru to capital spending and net hiring introduces some significant uncertainty, but represents a risk that can be largely monitored and managed in real-time with the high frequency labor data.
Bond yields and capital flows, meanwhile, continue to confirm the economic gravity of a global entre into Quad #4.
We wouldn’t be incremental buyers of the long-end on weakness but TLT/EDV remains one of our favorite global macro positions. Consensus disagrees (see net spec positioning), but #MacroMisfit has repeatedly proven to be profitable profile.
Christian B. Drake
the macro show
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