Reverse Keynes

“If you die in the short run, there is no long run.”

-Larry Summers, offering a little reverse Keynes in discussing hysteresis & secular stagnation



If you stick your arms straight up over your head and hold them there, it’s impossible to stay angry.  Seriously, try it.


I’m not sure what you do with that nugget of empirically derived kindergarten teacher insight, but it may serve as a nice low-intensity therapeutic post this morning’s central planning event or as you puzzle further over the prospects of secular stagnation. 


Most mentions of secular stagnation in the financial press convey some vague notion of protracted ‘sub-trend’ growth due to an amorphous mix of lousy demographics and debt overhang.   


Despite the indefiniteness with which the idea is typically delivered, people find it intuitively appealing and seem willing to (at least partially) accept it simply because it plausibly characterizes our current, collective experience. 


In his 2014 address to the NABE, Larry Summers – who is credited with re-popularizing the term – presents a commonsensical and analytically tractable contextualization of the dynamics underpinning the secular stagnation thesis.   


Notably, Summers argues that the entre into economic purgatory actually began some 15+ years ago and what we had formerly viewed as “normal” growth was largely an unsustainable outcropping of overly expansive policy. 


Summers highlights recent expansionary periods across industrialized economies to illustrate the point:


  • USA 2002-2007“How satisfactory would the recovery have been with a different policy environment, in the absence of a housing bubble, and with the maintenance of strong credit standards.”
  • USA 1:  “there was very strong economic performance that in retrospect we now know was associated with the substantial stock market bubble of the late 1990s”
  • JAPAN 1:  “it is hard to make the case that over the last 20 years, Japan represents a substantial counterexample to the proposition that industrial countries are having difficulty achieving what we traditionally would have regarded as satisfactory growth with sustainable financial conditions.”
  • EUROPE 1:  “It is now clear that the strong performance of the euro in the first decade of this century was unsustainable and reliant on financial flows to the European periphery that in retrospect appear to have had the character of a bubble”


In short, Summers makes the case that the magnitude of growth in recent cycles overstated potential, was footed in a ‘sandy loam’ of loose policy, and would not have been achievable absent the associated increase in financial instability.


The fact that secular stagnation sits at the fore of the current macro discussion is simply because its realities become increasingly tangible at the lower bound in rates where policy becomes impotent in cushioning the blow of the financial instability it helped propagate in the first place. I encourage you  to read and consider Summers proposition for yourself >> HERE


Meanwhile, Super Mario’s on deck with the latest currency war announcement out of the ECB this morning.  With the alphabet soup of Eurozone stimulus programs to-date largely ineffectual in impacting the real economy, consensus sitting on an expectation for ~€600B in QE, and anything short of “unlimited” likely to be underwhelming, is the recent re-crescendo in interventionism more likely to propagate financial stability or volatility?

Reverse Keynes - Draghi cartoon 01.20.2015


…….If Florida is heaven’s waiting room, Frankfurt is fast becoming the central bank triage center for #DeflationsDominoes as the multi-decade policy to inflate reaches its terminal end. 


In other, less dismal news – we still like housing on the domestic macro front.   We don’t like it at every time and price and don’t think the industry goes full escape velocity in the intermediate term but we do think the dynamics are such that it goes from 2014 underperformer to 2015 outperformer. 


We detailed the thesis on our 12/16/14 Conference Call but understanding why we like housing in 2015 is, perhaps, most easily explained by why we didn’t like it in 2014:


  1. Taper + Tighter Credit:  2014 started with a thud as rates peaked into 2013 year-end and the twin terrors of QM (January 10, 2014) and lower FHA loan limits (January 1, 2014) constricted the underwriting box right out of the gate.
  2. Polar Vortex & Major Investor Retreat: Wicked weather capsized early-year demand while the end of the REO-to-Rental trade by private equity firms drove a substantial decline in both total volume and price uplift in select markets like Phoenix, Las Vegas, SoCal and much of Florida.
  3. Decelerating HPI: After rising at 11-12% year-over-year throughout the bulk of 2013, US home prices began to decelerate by March 2014 and continued to decelerate until just recently.


Looking forward, 2015 is essentially setting up as the obverse: 


  1. Easy Comps: 2014’s collapse is the 2015 comp
  2. HPI stabilization:  Housing related equities follow the slope of home price growth and HPI is stabilizing
  3. Expanding Credit Box:  Lower FHFA down payment requirements, lower FHA premium costs, housing as a 2015 policy focus
  4. Lower Rates:  Rates are nearly a half point lower than the 2014 avereage already.   A 1% reduction in rates equates to ~10% increase in affordability
  5. Labor Market Improvement:  Improvement remains ongoing and is picking up in key housing demand demographics. 


Yesterday’s housing data offered further confirmatory evidence of firming demand and the trend toward improving rate of change as we head into the new year. 


  • Purchase Applications:  Purchase demand registered a second week of positive year-over-year growth - the 1st weeks of positive growth since December of 2013 – accelerating to +3.7% in the latest week from +2.6% prior.  Growth is currently tracking +9.2% on a QoQ basis. 
  • Housing Starts:  Total Housing Starts rose +4.4% to 1.089MM units in December with both October and November estimates revised higher. Notably, single-family starts rose +7.2% sequentially to +782K, the highest level since March of 2008.   The Chart of the Day below shows the (improving) TTM trend in Housing Starts. 


To close, the current challenges faced by policy makers remain acute.  Investors tasked with front-running reactionary policy measures and discounting their prospective impacts and collateral damages remain equally challenged.  Neither condition is particularly amenable to a proverbial raising of the arms type remedy.  


“You don’t really know how tall you are until you have your back against the wall”


….that’s another axiomatic gem I picked up along my short stint on the kindergarten teaching circuit.  It seems fitting.


Our immediate-term Global Macro Risk Ranges are now:



VIX 16.66-23.07

EUR/USD 1.15-1.19

WTI Oil 44.96-49.85

Gold 1

Copper 2.48-2.64 


To (sustainable) growth,


Christian B. Drake

U.S. Macro Analyst


Reverse Keynes - Starts Total   SF TTM

January 22, 2015



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Nonrandom Patterns

This note was originally published at 8am on January 08, 2015 for Hedgeye subscribers.

“All fixed patterns are incapable of adaptability. The truth is outside of all fixed patterns.”

-Bruce Lee


For those of us who embrace the non-linearity and uncertainty of Global Macro markets, how good is that quote? I can’t believe it took me this long into my career to find it. The more I read, the less I realize I really know.


Non-fixed market patterns. They are dynamic and constantly testing consensus narratives. Some of the best Bayesians in our profession get this. While they aren’t in the business of providing us their #process, they do make a lot of money front-running market truths.


“In 1993, Renaissance Technologies hired away from IBM a Bayesian group of researchers… searching for nonrandom patterns that will help predict markets, RenTech gathers as much information as possible. It begins with prior knowledge about the history of prices and how they correlate with eachother…”The Theory That Would Not Die (pg 237)

Nonrandom Patterns - 99


Back to the Global Macro Grind


What an excellent start to 2015! It’s been years since I’ve seen so many great long and short ideas across the Global Macro universe. If your portfolio mandate is diversified and flexible (across asset classes), I think you can have a crusher of a year!


Pardon? Yep, those who have been chasing single-factor #MovingMonkey models aren’t quite down with my optimism. But hey, I’m an optimistic guy – I’ve always thought that those who evolve their #process and adapt the fastest will ultimately win.


At 1PM EST today I’ll review our Global Macro Themes for Q1 of 2015 (ping if you’d like access). In customary hash-tag style, our current themes are as follows:

  • Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds (TLT, EDV, ZROZ, etc.)
  • #Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.
  • Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex. 

While commercializing my research and risk management process will continue to take time, after 7 years of doing this from an independent research provider perspective, I think we’ve made significant progress.

They key word in that statement is we.


Our Macro Team is not only up to 6 analysts at this point – they have matured into a very cohesive unit of selfless grinders who not only work very well together, but question one another’s premise, so that we keep finding ways to front-run consensus market truths.


As legendary Macro maven Ray Dalio likes to ask, “what is the truth?”


Well, on yesterday’s US stock market bounce:


  1. Healthcare (XLV) led the rally +2.4%
  2. Consumer Staples (XLP) wasn’t far behind at +1.7%
  3. And Energy Stocks (XLE) continue to suck wind (+0.2%)


And, if all you do is US Equities, that’s precisely the Macro Playbook (ask sales for our daily note on that with Top/Bottom 5 ETFS, long/short) we have for you while we are still in #Quad4 reporting season (December and Q4 GDP data all gets reported in January).


As we roll out of that into Q1, we think you should be tilting to early-cycle (LONG) and late-cycle (SHORT). I’ll explain both asset-class-rotation and catalysts/timing as best I can on our 1PM call today. We hope you can find the time to dial in.


If I’m wrong on the timing and patterns of behavior born out of my macro calendar catalysts, I’ll do the only thing a humble servant to Mr. Macro Market knows – adapt to the prior, so that I can best position for the next posterior.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.91-2.12%

SPX 1195-2046

Nikkei 16884-17488

YEN 118.11-121.27

Oil (WTI) 47.22-52.63

Gold 1195-1225


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Nonrandom Patterns - 01.08.15 chart

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P: International Opportunity?

Takeaway: Prohibitive costs + lower monetization potential = unprofitable opportunity for an unprofitable company sitting on a powder keg.


  1. PROHIBITIVE COST STRUCTURE: One of the major reasons why P hasn’t expanded internationally past Australia/New Zealand comes down to cost.  There isn't a royalty-setting board internationally, meaning P would need to negotiate on an individual label/country basis on licensing rates, which the company currently deems as "prohibitively expensive".
  2. LOWER MONETIZATION POTENTIAL: Much smaller international ad budgets vs. a much larger internet population means each International user is worth considerably less than a domestic user.  In short, sell-through would prove more challenging, and Ad RPM would be inherently limited.
  3. TOO MUCH RISK AT HOME: We don’t believe there is a viable and material international opportunity for P outside of potentially Australia/New Zealand.  But even if there was, any further expansion would be dependent on a favorable outcome on Webcaster IV.  As we’ve mentioned previously, anything short of a best case scenario on that front could derail P’s entire business model.  



The international opportunity is something the sell-side has been touting for some time, but has yet to come to fruition for P outside a small venture in Australia & New Zealand.  One of the major reasons is cost.  According to P’s filings, the company suggests that international expansion could be prohibitively expensive and not commercially viable. 


One of the major reasons is that is there is no statuary licensing entity comparable to the CRB internationally.  That means P would have to enter into direct license agreements with performing rights organizations/copyright owners in order to stream music; something it hasn’t been able to do domestically that would likely prove more difficult/costly on a individual label/country basis.  We can debate the merits of whether P will ever be able to negotiate reasonable royalty rates, or we can point you to the bigger issue… 



We initially published this analysis for TWTR, but it applies to P as well.  In short, the international user is worth considerably less in terms of per-capita advertising spend, which is the source of ~80% of P’s current revenues. 


The math is fairly simple.  International digital advertising spend is considerably lower than that of the US, but there are considerably more international internet users.  In turn, the ad monetization potential is considerably less for each international user than it is for domestic users; making sell-through on those listener hours tougher to achieve, and the ultimate RPM (revenue per thousand listener hours) that much lower. 


P: International Opportunity? - Advertising   Per cap digital by region 



It’s important to remember that P is a marginally profitable company (at best), that hasn't been able to achieve operating leverage to date.  P’s model can barely support its domestic operations, so any further international investment would just lead to heightened cash burn.


P: International Opportunity? - P   Operating Leverge CF


More importantly, Webcaster IV remains a overhang into 2016.  The major point of contention is P’s ad-supported royalty rate, which applies to roughly 90% of its listener hours, of which, P is monetizing less than half of them.  P and SoundExchange are worlds apart on what they are seeking, so anything short of a best-case scenario for P could derail its entire business model.  That likely means P would have to to curb usage, either through more stringent listener caps or market exits altogether.  See the note below for more detail.


P: Webcaster IV = Powder Keg

01/13/15 02:49 PM EST

[click here]


P: International Opportunity? - P   Web IV proposals


We don’t believe there is a viable and material international opportunity for P outside of potentially Australia/New Zealand.  But even if there was, P isn’t likely to expand internationally unless it receives a favorable outcome on Webcaster IV.  And even if that were to happen, expansion would be a slow process that wouldn’t start until 2016 at the earliest, with monetization more likely a 2017 event at the very earliest.  Long-story short, we wouldn’t bet on the international story.



Let us know if you have any questions, or would like to discuss further.


Hesham Shaaban, CFA


Cartoon of the Day: Draghi vs. Deflation

Cartoon of the Day: Draghi vs. Deflation - Deflation cartoon 01.21.2015

Is Draghi preparing to act against deflation? Or is deflation preparing to act against Draghi?

Keith's Macro Notebook 1/21: Japan | #Deflation | Swiss

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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