The New Frontiers

“There exists limitless opportunities in every industry.  When there is an open mind, there will always be a frontier.”

-Charles Kettering


Charles Kettering may be one of the most accomplished men you’ve never heard of before.  He passed away some 60 years ago, but his ingenuity lives with us today.   As Wikipedia describes him, he was an inventor, engineer, businessman, and holder of 186 patents.  The last point is what got me: 186 patents!  Now that’s a lifetime of work.


His handwork and ingenuity touched a number of industries– he was responsible for the Freon refrigerant for refrigeration and air conditioning systems, he developed the first aerial missile, and the electric starter for the automobiles.   To the point of his quote, Kettering was not afraid of new frontiers.


Speaking of new frontiers, tomorrow the FOMC gives us their rate decision.  We aren’t expecting any surprises. We continue to stick with our view (as emphasized in the Hedgeye cartoon below) that economic growth will remain lower for longer, which in turn means that the Fed is likely to be dovish for longer. 


The new frontier in monetary policy of course is the Fed’s decision to remain at effectively zero percent interest rates for the last, oh, seven years.   Not only has the Fed been more accommodative than any time in its history, but it has been accommodative longer than at any point in its history.   In exploring this new frontier, though, the question we should ask ourselves is whether the Fed has completely missed the economic cycle.

The New Frontiers - Growth cartoon 11.10.2014


Back to the Global Macro Grind...


In the Chart of the Day below, we show the Federal Funds rate versus the unemployment rate going back to the 1950s.  We don’t need an advanced degree in mathematics to see that this period is different than many others.  Despite the unemployment steadily coming down (albeit unemployment is not necessarily the best measure of the health of the employment market domestically), the Fed has, well, not moved.


The challenge now with potentially starting to increase interest rates is that we are very near the top of the business cycle.   As we highlighted in our Q2 Themes deck, we are at month 74 of the current expansion.  This is in comparison with a mean expansion of 59 months and median of 50 months over the past century. 


As it relates specifically to the employment market, initial claims are probably one of the best leading indicators.  Currently, jobless claims are in the 300K range, which are literally as good as they get.  Historically, going back to the mid-1960s, jobless claim improvement has peaked 7 months before the economic cycle peaks.


So, as it related to a new frontier, we are certainly in one.  In fact, we would submit that never before has the perceived plan been to tighten monetary policy into the peak of an economic cycle!  Of course, maybe the Fed will actually stay dovish longer than expected...


But if you need any insight of where consensus is on interest rates, look no further than a poll from CNBC (as consensus as consensus gets) this morning.  According to the poll, 92% of respondents see a rate hike this year, which is up from 84% in the April survey.   The only poll we’ve seen this morning with more certainty is the poll of whether July follows June (93% of respondents believe that to be true). 


Other than the FOMC decision tomorrow, the other topic that is dominating global macro market headlines this morning is Greece.  Some are calling it a tragedy, some are calling it a victory, and some may even see it as an opportunity.   Back in small town Canada, they would probably call it a gong show, but here we are . . . on the brink of another Greek default.


As U.S. centric equity investors, the central question of course is whether Greece defaulting or leaving the Euro really matters.  The short answer is probably not.   As it relates to Europe, the answer is much less clear.  Setting aside the actual financial implications, perhaps the most significant fact is simply that the ECB has provided 118 billion euros in loans to the Greek banking system, which is equivalent to 2/3rds of Greece GDP.  That, my friends, is a lot of euros!


The larger issue though is one of confidence- confidence in the euro by outside investors, confidence in the economies in the peripheries such as Italy, Portugal and Spain, and confidence in a European sovereign debt market that is all but priced to perfection.  It seems like an elixir for sustained weakness in the euro.


Certainly, though, it is possible that the proposed emergency summit on Greece tentatively scheduled for this Sunday may forge some cooperation between Greece and her creditors.  Of course, the reality of that happening is, well, not very realistic.  Or as John Lennon said:


“Reality leaves a lot to the imagination.”




Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.11-2.48%

SPX 2070-2095

Nikkei 20032-20661

VIX 14.20-15.93

Oil (WTI) 58.01-61.90

Gold 1167-1199 


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The New Frontiers - z 06.16.15 chart

Policy Mistakes

This note was originally published at 8am on June 02, 2015 for Hedgeye subscribers.

“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,



Darius Dale



Policy Mistakes - z Chart of the Day

June 16, 2015

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The Macro Show, Live with Kevin Kaiser at 8:30AM ET

Don't forget to tune in to The Macro Show at 8:30am ET each weekday morning. This week the Macro Team will be joined by a number of special guests. See the full schedule below.


Today Energy Sector Head Kevin Kaiser will deliver a high-level summary of his latest short call on Chesapeake Energy (CHK) and answer questions from viewers. Click here to watch and interact with Kevin and Senior Macro Analyst Darius Dale.


  • Tuesday: Energy Sector Head Kevin Kaiser and Macro Analyst Darius Dale
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The Macro Show Replay | June 16, 2015


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A Must-See Edition of The Macro Show: Hedgeye Energy Analyst Kevin Kaiser's Latest Short Call - Kaiser


Maverick Energy Sector Head Kevin Kaiser will be featured on The Macro Show, Hedgeye's live pre-market global macro analysis, Tuesday morning at 8:30AM ET.


Kevin will deliver a high-level look at his latest short call on Chesapeake Energy (CHK) and answer questions from viewers.


CLICK HERE to subscribe and join us live at 8:30am ET.



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