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CHART OF THE DAY: Policy Mistakes (Remember Jean-Claude? No, Not Van Damme)

Editor's Note: The chart and excerpt below are from today's Morning Newsletter written by Hedgeye macro analyst Darius Dale. Click here to learn more about how you can subscribe. 

 

...History has spoken loudly for Mr. Greenspan with respect to determining whether or not the Federal Reserve’s actions (or lack thereof in many cases) contributed to the most severe financial crisis since the Great Depression. And while they may not readily admit it, policymakers – like investors – do indeed make mistakes.

 

CHART OF THE DAY: Policy Mistakes (Remember Jean-Claude? No, Not Van Damme) - z Chart of the Day

 


Policy Mistakes

“Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

-Alan Greenspan

 

In a solemn testimony to Congress way back in October 2008, former FOMC Chairman Alan Greenspan had that to say in response to the following question from Representative Henry A. Waxman (D-CA), which was in reference to the low interest rates and lax regulatory oversight of the securitization market which perpetuated the housing bubble:

 

“Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

 

History has spoken loudly for Mr. Greenspan with respect to determining whether or not the Federal Reserve’s actions (or lack thereof in many cases) contributed to the most severe financial crisis since the Great Depression. And while they may not readily admit it, policymakers – like investors – do indeed make mistakes (see: Chart of the Day below).

 

Policy Mistakes - z g1

 

Back to the Global Macro Grind

 

If you’re in the camp that a rate hike(s) would be a dangerous mistake(s) for the FOMC to make at any point over the intermediate term, then you, like us, are definitely not in line with Wall St. consensus which came into the year expecting ~3% real GDP growth, ~2% core inflation and ~3-4% annual wage growth – for the sixth straight year, might we add.

 

If you’re in the aforementioned camp, you probably also agree with our lower-for-longer thesis on interest rates and expect the yield curve to flatten [perhaps materially] if the Fed embarks on what it believes to be a “policy normalization” cycle.

 

Recall that the 10Y Treasury Yield rallied +69bps in the three months preceding the first of 17 rate hikes back in June ’04. It proceeded to retrace all but 2bps of that rally over the NTM.

 

We bracketed “perhaps materially” earlier to highlight our #LateCycle Slowdown theme. As recently detailed in an institutional research note, trends across a variety of economic indicators put the U.S. economy roughly ~12 months away from recession.

 

While that may sound like good news to investors, our predictive tracking algorithm has YoY real GDP growth slowing throughout the balance of 2015. In lay terms, we believe the U.S. economy is past peak in rate-of-change terms and, much like in early 2007, the consistent and fervent missing of expectations for economic data appears set to continue on a trending basis throughout this period.

 

We underline “on a trending basis” to give a sincere golf clap for yesterday’s MAY ISM Manufacturing and APR Construction Spending beats. Additionally, the details of both reports were quite good on an absolute basis.

 

In the interest of not having perma bond bears tune us out, we’ll just ignore yesterday’s miss in Real PCE growth. Who cares about household consumption anyway? It’s only 69% of GDP.

 

For what it’s worth, the Atlanta Fed’s “GDPNow” model revised down its estimate for real consumption growth in 2Q by -50bps to +2.1% on yesterday’s print, but, again, I digress…

 

Another very important reason we consider it a mistake for the Fed to embark on what we believe to be a misguided “policy normalization” cycle is the current entropy of domestic and global demographic trends. Without recreating the wheel, here is the CliffsNotes version of our deep dive on this subject:

 

  1. Aging has a statistically significant inverse relationship to both real GDP growth and inflation.
  2. Both the U.S. and global economy are aging at their fastest rates ever. In the U.S.’s case, the rate of change in aging itself is +172% faster in the five years ended 2017 than it was in the five years ended 2011.
  3. The flip side to accelerated domestic and global aging is slowing growth – and even outright contraction – in the world’s core consumption demographic, which, both empirically and theoretically, happens to be the 35-54 year-old population. In the U.S. in particular, the YoY rate of change turned negative in 2008 and is projected to remain negative through 2019. This compares to growth rates of +3.0% and +0.6%, on average, in 1990-99 and 2000-09, respectively.
  4. As a result of this entropy, we believe both the U.S. and global economy are firmly entrenched in the process of seeing both potential growth and potential inflation – if there is such a thing – decline.
  5. To the extent this hypothesis is indeed correct, we think the aforementioned consensus expectations are materially off base in that they are based off of models which do not take into account the aforementioned demographic changes.

 

So it’s up to you whether or not you choose to overweight the steep increase in the Prices Paid component of yesterday’s ISM Manufacturing report or the deceleration in the YoY rate-of-change in Core PCE, which is the Fed’s preferred inflation gauge; you can’t do both:

 

  • MAY ISM Prices Paid: 49.5 from 40.5 prior. While still in contraction territory, 49.5 represents the highest reading since OCT ’14 and the +9pt MoM increase represents the fastest MoM increase since AUG ’12.
  • APR Core PCE: +1.24% YoY from +1.32% prior. The +1.24% increase represents the slowest rate of inflation since FEB ’14 and marks the 38th consecutive month below the Fed’s +2% target.

 

Here are three more lines in the sand investors must draw if they are to effectively handicap interest rate risk from here:

 

  1. Do you side with the Fed’s [on-target] 5Y-Forward Breakeven Rate of 2% or do you believe the TIPS 5Y Breakeven Rate of 1.6% to be a more prescient indicator of inflation?
  2. Do you side with the +34bps back-up in the 10Y Treasury Yield since its April 3rd higher-low at 1.84% or do you believe the -1bps decline in the DEC ’15 Fed Funds Futures Implied Yield over that same time frame to be a more prescient indicator of the Fed’s likely path of policy? It’s worth noting that since April 3rd, the implied probability of “liftoff” has declined -420bps, on average, across the five remaining FOMC meetings in 2015 with the December 16th meeting being the highest at 53%.
  3. Do you side with Bloomberg Consensus real GDP growth estimates which call for acceleration in QoQ SAAR terms throughout the balance of the year or do you believe Hedgeye Risk Management’s real GDP growth estimates which call for deceleration in YoY terms throughout the balance of the year to be a more prescient indicator of the direction of interest rates?

 

All told, the Hedgeye Macro Team reiterates its intermediate-to-long term bullish bias on bonds and bond-like equities.

 

Regarding the latter, we think the $3.5B in YTD redemptions from REITS and Utilities funds is somewhat reminiscent of investors broadly selling the 2009 lows in the broad equity market – specifically in the sense that we believe such selling is predicated on consensus fear (rate hikes now vs. Great Depression redo then) and not on thoughtful analysis of the underlying fundamentals (i.e. the economic cycle).

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.99-2.28% (bearish)

SPX 2098-2122 (bullish)

USD 94.65-98.19 (bullish)
EUR/USD 1.08-1.12 (bearish)

Oil (WTI) 58.09-61.49 (bullish)

Gold 1175-1214 (bullish)

 

Keep your head on a swivel,

DD

 

Darius Dale

Associate

 

Policy Mistakes - z Chart of the Day


Non-Idle Easing

This note was originally published at 8am on May 19, 2015 for Hedgeye subscribers.

“Trouble springs from idleness, and grievous toil from needless ease.”

-Benjamin Franklin

 

Not to be confused with Eurocrats who have recently returned from their monthly vaca, I’m pretty sure Ben Franklin was talking about lazy Americans who spend their time doing nothing.

 

They’re back! This morning’s macro market moves have nothing to do with central planners standing idle. Needless easing, you say? Who cares what we say? They say they need moarrr cowbell!

 

With both the European and Chinese economies now slowing, at the same time, there is only one play in their gravity-smoothing playbook for that. Must ease, faster.

 

Non-Idle Easing - Draghi cartoon 03.31.2015

 

Back to the Global Macro Grind

 

On The Macro Show yesterday (new daily video product we’re launching on Thursday) I kept asking my man Darius Dale, “where’s Draghi?” With both European stock and bond markets under pressure, I figured he’d re-appear…

 

I figured wrong…

 

Instead of Draghi coming back from the beaches with a bazooka, he sent in the Frenchman. Who’s the French guy? As in The Lefty Economist, Benoit Coeure. This guy hails from L’Ecole Polytechnique and the Paris Club de creditors. He’s big time.

 

And a big time headline he provided, indeed!

 

“Ze ECB is going to front-load ze QE” -Coeure

 

That’s code for we’re going to get back to Burning Euros and buying bonds, so you, little yield chasing man, better get out of your idle bed and start buying stocks, fast! Here’s what Global Macro markets did on that:

 

  1. Euro -1.1% (vs. USD) to $1.11 after tapping the top-end of our $1.10-1.14 risk range last week
  2. EuroStoxx50 +2.1% in a straight line off last week’s oversold lows
  3. German Stock market (DAX) +2%, leading gainers, after a -2.2% drop on Up Euro last week
  4. US Dollar up +1% (from 1-month lows)
  5. Commodities mostly down on the inverse correlation move to USD

 

Oh, and not to be confused with centrally planned markets, there was the actual European economic news:

 

  1. German ZEW sentiment for April fell to YTD lows of 41.9 vs. 53.3 last
  2. Eurozone inflation for April clocked in at 0.0% y/y; wow was that Policy To Inflate successful!
  3. UK CPI -0.1% year-over-year in April (PPI -1.7%) was the 1st deflationary report since 1960

 

That would be the year 1960, not some moving monkey level in the SP500.

 

Ah, wasn’t local life in America grand back then. That’s when the front-page of the NY Times would trumpet a young President by the name of John F. Kennedy and his #StrongDollar, Strong America message…

 

Newsflash: this is not the 1960s

 

This is a worldwide growth slow-down. It’s getting more volatile by the day, week, and month as central planners struggle with realizing the output of their currency devaluation policies to inflate – economic stagnation.

 

In other gravity-bending news, China’s slowdown continues and so does the “policy response” to “stimulate. The Shanghai Comp Casino ripped another +3.1% overnight to +36.7% YTD on “easing requirements for corporate bond issuance.”

 

You don’t have your 401k or clients in “China” as Chinese growth slows at a faster rate than its population is aging? What is wrong with you? Don’t stand idle. Get a Chinese broker and a margin account already. This is easy. Grievous toil be damned.

 

Our immediate-term Global Macro Risk Ranges (with intermediate term TREND views in brackets) are now:

 

UST 10yr Yield 1.96-2.32% (bearish)

SPX 2107-2139 (bullish)
RUT 1236-1259 (bullish)
Nikkei 19589-20056 (bullish)
VIX 11.97-15.44 (bullish)
USD 92.99-95.61 (neutral)
EUR/USD 1.10-1.15 (neutral)
YEN 118.81-120.78 (bearish)
Oil (WTI) 55.99-61.39 (bullish)

Natural Gas 2.78-3.10 (bullish)

Gold 1203-1238 (bullish)

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Non-Idle Easing - z 05.19.15 chart


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TODAY AT 1PM: JUNE CRUISE PRICING CONF CALL - CCL F2Q PREVIEW

Takeaway: Is Carnival's brand resurgence in the Caribbean enough to counter softening prices in Europe?

The Hedgeye Gaming, Lodging, and Leisure team will host a conference call TODAY AT 1PM to discuss the latest findings from our proprietary cruise pricing database.  

 

Watch the presentation live below or contact your Hedgeye salesperson for the dial-in details.

 

Points of discussion include:

  • Pricing pivots (RCL,CCL, NCLH) for June 2015
  • Europe softer again
  • CCL F2Q preview and FY 2015 outlook:
    • Stronger Caribbean 
      • Carnival brand exhibiting strength
      • Can the momentum extend into the fall/winter season? 
    • Soft Europe summer pricing could impact earnings 
      • Costa discounting: is it a delayed reaction to Tunisia or something else?  
      • Germany: TUI vs AIDA
      • River Cruise pressures
      • Blame MSC?
      • And more...
  • New ship premiums

The Macro Show Replay | June 2, 2015

 


VIDEO: Let's Make a Deal! A Healthcare Acquisition Discussion with Tom Tobin | $ATHN $HOLX $MD

Hedgeye Healthcare Sector Head Tom Tobin and Analyst Andrew Freedman hosted a live Q&A session Tuesday at 11:00AM ET, watch the replay below. 

 

They discussed key takeaways from our conversation with a Teleradiology Industry Executive about MD's recent acquisition of vRAD. They also provided updates to our HOLX and ATHN trackers.

 

 


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