"Success isn't owned. It's leased and rent is due every day."
- J.J. Watt
Most nights the last couple months I’ve been renovating my house.
Hanging drywall … by yourself … at midnight … on the ceiling … without a lift = bull market in irritation … and Advil.
And with fingers scraped & sanded, I also haven’t been able to sign into my Bloomberg “white collar” Terminal for like 5-months (if you’re unfamiliar, the Bloomberg Terminal requires you to swipe your finger for authentication and access).
I don’t know if it’s a disproportionately finance industry specific phenomenon, but I’ve met a remarkable number of people over the last 8-years who take discrete pride in knowing as few “life skills” as possible … and doing even less.
None of those people work at Hedgeye.
Back to the Global Macro Grind ….
Last night, I finally started painting.
Back when I was a contractor:
1st rule of #PaintClub = don’t talk about Paint Club
2nd Rule of Paint Club = see rule #1
3rd Rule = Always be yourself. Unless you can be Brad Pitt. Then always be Brad Pitt.
4th Rule = Always keep a wet edge.
In other words, forget about what you already painted – you can’t back brush through a partially dried section or you just end up with more problems.
In other other words, Paint Club and Macro Club employ the same axiomatic strategy – “everything that matters happens on the margin”.
Remember, in managing macro risk or contextualizing any cyclical or periodic function, it’s all about better/worse, not good/bad.
Don’t be an absolutist.
In my eclectic journey to adulthood I also happened to be a teacher. There aren’t any punchy TeacherClub rules, but conventionally, Socratic dialogue variants remains a staple in the pedagogical arsenal.
Going with the Jobs Day theme, I’ll describe a statistic or Trend dynamic and you tell me what Macro Fundamental I’m describing:
Q: 2.34% - February 2015
A: Cycle Peak in Payroll Growth
A: The NFP number in October needed to match the rate-of-change peak in payroll growth recorded in February. Not going to happen.
Q: 3-Month Ave < 6-Month Average < 2015 Ave < 2014 Ave
A: Net monthly change in Non-Farm and Private Payrolls. So, not only are we past peak from a growth perspective, the trend on an absolute basis is clearly one of slowing.
Q: Toughest in 5-years
A: Payroll Comps over the next few months. Again, no (Trend) acceleration for you! (soup nazi voice)
Q: +/- 90K
A: The standard error on the monthly NFP figure. In other words, if the NFP print is 90K, the BLS is 90% sure we gained between 0 and 180K jobs on the month. Seeing as how the monthly market mania revolves around whether we beat or miss consensus (on an unpredictable number) by some few thousand, it’s easier to understand why Hedgeye typically takes an amusingly detached view of a middling number in any given month. 1st Rule of Manic Media Club = Our Brand is (fabricated) Crisis
A: High Wage Jobs as % of total payroll gains in September. Well below the trailing 3M and 12M average of 49%. Positive mix has supported rising income growth with wage growth flat in recent quarters.
A: Aggregate Income Growth (month-over-month) in September. Decelerating growth in aggregate hours and flat wage growth in the September employment report translated into a deceleration in income growth. Income growth anchors the capacity for consumption growth and given the slowing trend in payrolls and progressively steeper income and consumption comps, it looks increasingly likely that aggregate income growth is now past peak.
A: Energy Sector Job-Cuts in October – 6-month high. Energy-related job losses ramped at the beginning of the year as the commodity price cratering rolled through on a short lag. After a mid-year respite, we’ve expected a re-ramping in employment adjustments into year-end as hedges roll off and hedge protection fails to buttress profitability in the same way it did previously. Direct energy sector employment – as classified by the BLS – only represents ~50bps of total NFP employment but those workers make ~2X the average wage, so energy employment represents ~1% of the labor force on an effective worker basis.
A: This one isn’t employment related, but it’s worth a highlight. It represents the net % of banks tightening C&I lending standards in 4Q15 (Fed Senior Loan Officer Survey). This is only the second time since the last recession that a net positive percentage of banks tightened standards. Lending is pro-cyclical and, historically, C&I lending standards have been a strong coincident to lead indicator for equity prices and the broader economic cycle. There have been occasional false positives, but willfully ignoring the signal in a late-cycle expansion ≠ fiduciary feasance.
Q: Anything >0
A: Basically any positive number = “some further labor market improvement” and would meet the Fed’s amorphous qualitative threshold. Slowing improvement still equates to improvement but completely ignores a 2nd derivative consideration of the data. Is it likely we get something <100K, probably not but the dollar and yields have clearly already discounted the rhetorically hawkish commentary from the FOMC and most of our conversations have focused on the “upside risk” to the jobs report.
A Q&A format like this, while instructive, is a data cherry-pickers playground. Here’s a couple to help keep the bull-bear balanced.
Q: March-April 2015 (+153K), Dec’13-Feb’14 (154K ave), March-April 2103 (151K ave).
A: Slowdown Headfakes. In each of the above instances, payrolls hit a multi-month soft-patch only to recover and re-accelerate.
A: The number of months from the peak in payroll growth to the peak in the economic cycle. Looking at this indicator, in isolation, suggest some investible runway left in the expansion.
In reality, any number of statistics can be trotted out to support a given narrative. It should not be a secret that our late-cycle narrative expects further deceleration.
Is a recession immediately imminent? … the balance of lead labor market data doesn’t suggest that, but we are in the twilight of the current expansionary cycle and the slope of the line across a growing number of indicators has gone negative. Today’s employment report for October won’t change the trend in payrolls.
Keith is on Fox from 6-9am this morning covering the employment release and will anchor the SportsCenter of Global Macro – the @Hedgeye Macro Show - at 9am.
Alpha is leased and rent is due everyday. Keep your macro edge wet and mind the margin.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.98-2.31%
Oil (WTI) 43.02-48.15
Christian B. Drake
U.S. Macro Analyst