“Deep into that darkness peering, long I stood there, wondering, fearing, doubting, dreaming dreams no mortal ever dared to dream before.”
-Edgar Allan Poe
Yesterday was the championship game for college basketball and like most NCAA tournaments, this one was full of its share of surprises. To many (especially Wildcat faithful) the biggest surprise in the tournament was the premature end to Kentucky’s perfect season. (Although after last night’s 5th national victory for Coach K, the Duke basketball faithful probably aren’t too concerned about Kentucky!)
The dream of a perfect season in NCAA basketball begins anew next season. It has been 39 long years since Indiana, under Bobby Knight, last had a perfect season in 1976. That’s a long time for basketball fans to wait for a proverbial “Dream Team”. Luckily for all of you, once a quarter Hedgeye releases our "Dream Themes" and today at 11am ET we will be walking you through our Q2 2015 investment themes (ping if you haven’t already received the dial-in).
Clearly, we are being somewhat facetious in suggesting our quarterly investment themes are perfect. But even if we aren’t perfect, every quarter we endeavor to highlight the top three macro-economic themes that we believe are most relevant. To some investors, quarter-to-quarter thematic investing may seem counterintuitive.
In a globally integrated economy that is increasingly being managed by governments and central bankers, we think nothing could be further from the case. When the direction of the markets can be influenced by the simple changing of a single word in a central bank’s policy statement, frankly it is careless not to stay on top of the real-time changing currents in macro investing.
Back to the Global Macro Grind...
The key themes we will be discussing later this morning are highlighted below and as usual there will be heavy focus on the U.S. economy:
1. LateCycle USA: Employment, Inflation and Earnings follow an archetypic progression over the course of the economic cycle and always look best before the crest. We'll detail where we are in the current cycle, the likely trajectory for this trinity of late-cycle macro indicators from here and how best to be positioned in the twilight of the current expansion.
2. DemographicYields: Year after year in the post-crisis era, investors, economists and policy-makers alike have consistently seen their estimates for GDP growth, inflation and interest rates surprised to the downside. Perhaps there is some merit to the "secular stagnation" thesis most recently highlighted by Bernanke's blog. In this theme, we pull back the curtains on the impact of demographics on the domestic and global economy. The conclusion? Lower-for-longer...
3. Oil's #DeflationDeck:Taking a birds-eye view of oil prices throughout the peaks and troughs in business cycles provides essential context as deflation's dominoes continue falling on a global scale. With the U.S. production machine changing the supply/demand dynamics in global energy markets, a deep-dive of this shift is key to generating sector-specific alpha into 2016 and beyond.
Given the recent disappointment in U.S. employment, the #LateCycle USA is likely to be the most controversial to investors. Specifically, on Friday the Labor Department’s data showed the U.S. added a mere 126,000 jobs in March. The economic bulls of course will tell you, and there is some credence to their argument, that part of the fall in March was a one-time correction in the energy sector as domestic oil drilling adjusts to a new, and much lower, paradigm in oil.
In today's Chart of the Day, we take the longer view of the employment cycle and we show initial jobless claims going back to the mid-1960s. The data in this chart quite clearly shows that if anything we are closer to the peak in the employment cycle than the trough. More interestingly, as the chart also shows, employment improvement peaks, on average, 7 months before an economic cycle does.
With the current expansion getting long in the tooth at 71 months versus a median expansion of 51 months, you probably get very clearly why we think the most important current macro topic is to focus on where we are in the cycle. In as much as we’d like to dream of economic cycles that expand in perpetuity, that’s not how the world works outside of academia.
In typical reactionary fashion, members of the Federal Reserve are now beginning to explicitly push out the so-called “dots”. Yesterday Atlanta Fed President Dennis Lockhart, who is currently a voting member, said he favors a July or September “lift off” instead of June, with the caveat that most of the negative data in Q1 was transitory (which is how most economists classify data that doesn’t agree with their prevailing view).
The irony of course is that to the extent that the Fed doesn’t continue to be wrong on real-time economic data, and does at some point in the next couple of quarters get the chance to raise rates, the Fed will be signaling that we are likely in the longest economic expansions in the history of the U.S. economy. This assumes that the Fed then raises rates through 2017, which would put the U.S. economic expansion at near 100 months!
Sounds like a bit of a dream to you? Well, us too. And as Victor Hugo wrote about dreams in Les Miserables:
“There is nothing like a dream to create the future.”
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.84-1.93%
Oil (WTI) 46.39-52.24
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research