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"Being unemployed has really helped to lower my carbon footprint."

- Comedic tree-hugging enthusiast 


I couldn’t remember the meaning of the word ‘spendthrift’ until I was probably 21 yrs. old.  It’s one of those anti-onomatopoeia words that means the exact opposite of what it sounds like. 


How about its venerable cousin of the same ilk, #gainsay … any convicted guesses on that bad boy?


And since its Friday, let’s up the investment irrelevancy another notch:  


Write this word down, show it to the person next to you and tell them to pronounce it: Quinoa


(for reference, it’s: keen-wah)


If it’s the 1st time they’ve seen it = 99.9% chance they get it wrong.


Co-worker bike to the office this morning wearing a hemp jumpsuit and leaving early for an Earth Day planning committee meeting?   …. No worries, still 50/50 chance they get it wrong.


Take some of those TLT gains and see if anyone is willing to take the other side of a virgin Quinoa pronunciation bet. 


Drinks on you tonight!


Quinoa Probabilities - Euro cartoon 05.18.2015


Back to the Global Macro Grind ….


If it’s the 1st time your favorite policy maker has seen a global balance sheet recession characterized by global overleverage, oversupply and negative global consumption demographic trends = 99% chance they don’t get the sustainable real growth Rx correct. 


Granted, and as our visual macro distillation jedi Bob Rich illustrates above, when the available tool set is limited, sometimes it doesn’t matter what the question is.  If all you have is a hammer, everything looks like a nail and all that ….


Fed policy doctrine says that the outside lag on policy is something on the order of 6-18 months.  In other words, because a variable lag exists between the time policy is implemented and the time its impact flows through the real economy, the Fed’s forecast for growth and inflation 2-6 quarters out should dictate policy action today.


Here there are two (major) problems:


1.    Data Dependence:  For a self-described Data Dependent Fed, this represents a fundamental conflict.  Policy action can’t be simultaneously dependent on reported data (which, itself, is 1-3 months old) and also on a variant forward projection of how the data will have evolved 0.5-1.5 years from now.

2.   Serial Over-optimism:  Forecast risk has been real and serially biased towards overestimation alongside a persistent expectation for a return to “trend-line” growth.  On average, Fed forecasts have overestimated growth by ~100bps every year over the last half-decade. With GDP averaging just 2% over the same period, that magnitude of over-optimism is not insignificant.      


Now, with the Fed again grazing blissfully in the panglossian forecasting fields in 2015, the domestic data train continues to onboard negative second derivative trends.


As review, from a rate-of-change perspective, we are past peak across the following:


·         Payroll Growth:  Peaked in Feb at +2.34% YoY.  While past peak employment growth doesn’t herald an imminent recession, it does consistently typify an expansion in its twilight.


·        Consumption Growth: Household Spending growth peaked in 1Q15.  Consumption Comps get more difficult from here and, while reported growth will again be “good” on an absolute basis in 3Q, the slope of the line will be negative.  With credit growth still muted, consumption growth is all about income trends and the accelerating growth in aggregate personal and salary and wage income over the last two years has supported an improving capacity for household spending.  With lower growth in aggregate hours and flat earnings growth (remember: aggregate income is simply a function of # of people working * hours worked per week * earnings per hour) in August and September, income growth is flirting with a negative inflection as well. 


·         Confidence:  Consumer Confidence (University of Michigan) peaked in 1H15.  Unsurprisingly, confidence and real per capita income move concurrently.  If income trends flag, a recovery to new highs in confidence becomes increasingly improbable. 

·         Profitability:  Corporate profitability across both the S&P500 and the national aggregate has crested and moved past peak. 


Indeed, as the market cap collapse in WMT signaled earlier this week, the profitability cratering observed across the energy and industrial complex is conspicuously creeping its way into the retail space.  


Our Retail Sector Head, Brian McGough, aptly contextualized the Walmart release and the broader readthrough to retail in an institutional note on Wednesday.  Since I remain perma-bearish on wheel re-creation, here’s an unedited reprint of the highlights:


1) WMT set the bar so low with its guidance today that we have to wonder how the rest of retail is not quaking in its boots. The mid-point of the guide implies that earnings will be off 10% this year and another 6-12% in FY 17 AND we won’t see 2015 earnings levels again until at least FY19. If anyone is questioning what end of the economic cycle we’re in, it’s not the end you give a kiss at bedtime. While a struggling WMT is a terrible barometer for all of retail, it’s even more troubling when you consider what WMT is investing in. Wages and Price. That will be a significant headwind on the gross margin and cost side. Any peers (ranging from TGT to CVS to COST to KSS to Albertson’s [winner of “most poorly timed IPO of the decade”]) who think they can sidestep this reality are delusional. 


2) Wages – by the end of FY17 WMT will have invested $2.7bn or $5,400 per each of its 500,000 eligible US employees. It will account for -4.5% to -9% of EPS change in FY17 or 75% of the aggregate earnings decrease. That type of deleverage for a company like WMT who in the US employs 1.4mm workers and accounts for 16.5% of workers in the Food & Beverage, Health/Personal Care, Clothing, and General Merch categories that’s a game changer. Anyone who has not proactively managed their expense line will have a tough time. It’s a good thing for KSS that it does not have to pay higher wages because it’s employees love to come to work (that statement will come back to haunt CEO Mansell). 


3) Retail growth expectations are overly bullish.  The Chart of the Day below says it all…it shows the consensus EPS growth rate for a basket of bellwether names in the retail sector. After bottoming in FY15 (WMT FY16) consensus has numbers accelerating to 10% and 12% in FY16 and FY17 respectively. Compare that to WMT guiding to -10% in its FY16 (calendar ‘15), -9% at the midpoint of the guide in FY17 (calendar ’16), and flat in FY 18 (calendar ’17). Bottom line…either WMT sandbagged, or growth for others will come down. Such a significant gap has not sustained itself for any more than a few quarters.

Dost thou gainsay the acceleration in retail spendthriftery?


Reality, Rates & Rhetorical Questions: How many times has the Fed raised rates into a slowdown and with headline inflation at +0.0%?  … what’s that quinoa pronunciation success rate, again?


Could inflation percolate as we lap the energy collapse comps and a weaker dollar drive price inflation in things priced in dollars?


Sure, but the internals driving that reflation are delusory (remember why the dollar is weaker).  It’s akin to a drop in the labor force driving the unemployment rate lower.  The positive headline is simply an antithetical symptom of the underlying reality.  


Keith has been harping on this point but it bears harping as it’s about as unambiguous a Macro market signal as it gets:  Down Dollar + Down Rates ≠ Growth Accelerating. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.06%

RUT 1108--1177
DAX 96

VIX 15.51-22.44


Prepare. Perform. Prevail.


Christian B. Drake

U.S. Macro Analyst


Quinoa Probabilities - WMT CoD2