The Dance with Deflation

“Yes my life is better left to chance,

I could have missed the pain but I’d have had to miss the dance.”

-Garth Brooks

 

Back when Keith, our President Michael Blum, and I were undergrads at Yale, we used to sing Garth Brooks tunes late into the night over a keg of warm beer.  Things were much simpler on college campuses back then.  In fact, I’m not even sure we dressed up for Halloween.

 

The most recent controversy on the grounds of our alma mater has gained national attention.  Inasmuch as I can discern, the debate is over whether Halloween costumes are offensive or are examples of free speech.  Also, whether the proverbial, and literal, adults in the room have any right to comment on any of this or should be focused on creating “safe places.”  Heady issues to be sure.

 

Since we tend to stay away from both social and political opinions at Hedgeye, we will stick with that path on this controversy as well.  We should submit, though, that this episode does offer an interesting , albeit anecdotal, view into the mind of the Millennial.

 

Speaking of which, we are pleased to have Neil Howe, the man who actually coined the term “Millennial,” speaking  next week at Macrocrosm: The Dock Debates, our first conference.  On the topic of demographics, we asked Neil to discuss the impact that the super-connected 75+ million Milllenials will have on the upcoming Presidential election.

 

As it relates to the Yale “controversy,” Neil had this to write:

 

“When it comes to controlling misbehavior, Millennials insist that the institution step in with rules where earlier generations (Xers, Boomers) would have pushed peer pressure or peer-on-peer intervention. In the "Animal House" era, you *never* punished a jerk by going to the dean--you did it yourself, when the dean wasn't looking!”

 

Indeed.

 

Please email if you’d like to reserve a spot for the conference as we expect to be at full capacity by the end of the week.  Full details on Macrocosm (full lineup of speakers, topics, etc) can be found here.

 

The Dance with Deflation - z macrocosm

 

Back to the Global Macro Grind...

 

Inasmuch as college administrators are doing the dance with Millennials, the more interesting dance for those of us with an interest in the real economy is the dance with deflation.  Part of our macro team is in Texas this week meeting with prospects and clients and of course experiencing the epicenter of energy deflation.

 

Interestingly, Texas has so far largely shaken off the impact of substantially lower oil prices on employment.  Other than March of this year, in which Texas lost 24,500 jobs, the state has continued to add employees.  This is a much better scenario then when WTI was at the same level in 2009 and Texas lost almost 340,000 jobs that year.

 

The bigger challenge for Texas is related to the government’s budget.  With WTI -1.1% this morning to $43.02, the 4.6% tax the state imposes on the value of all oil produced in the state is not going to add up to much this year.  As a result, there is no question that Texas will be running a budget deficit for the forseeable future.  And an even greater likelihood is that a Fed interest rate hike pushes Texas (and other oil producing areas) into recession.

 

North of the border, Canada is faring much worse.  In Alberta, the "Texas of Canada," it is expected that 185,000 oil and gas jobs will be lost in 2015.  This is a substantial number of jobs to lose on Alberta’s population base of only 4.2 million.  In aggregate, Canada employs 720,000 people in the oil & gas industry with a full 2/3 located in Alberta.  The loss of these jobs has had a broad impact on Canada. Since 2014, Alberta was responsible for 90% of the new jobs created in Canada.

 

Unlike Texas and the United States, this Dance with Deflation has already impacted Canada.  After two quarters of negative growth, Canada is officially in a recession.  As a result, the Canadian central bank has cut rates twice this year.  The next shoe to fall in Canada is likely to be deflating residential real estate prices.  

 

To add fuel to the fire, the newly elected Canadian Prime Minister has pledged to raise taxes on those making over $200,000 per year.  This move is only likely to accelerate home price declines in markets like Calgary, Toronto, and Vancouver. 

 

Nonetheless, Canadian housing cheerleaders point to the fact that home prices nationally were up 6.1% in September.  To a point, this is fair.  So far, the Canadian housing market has shrugged off the recession.  But economic gravity will eventually prevail and while the Canadian central bank will do everything it can to protect home prices.  This is all likely to end very poorly for the Loonie and Canadian banks.

 

On the topic of commodities and deflation, Hedgeye is launching its new "Materials" sector tomorrow November 12th at 1:00pm led by two stalwarts of our research team Jay Van Sciver and Ben Ryan.  Their initial presentation will be on gold and their proprietary supply and demand model will attempt to answer this question:

 

“Gold prices in dollars have declined since 2011, despite two incremental rounds of quantitative easing and perpetual zero interest rates.  US long bonds have performed well in a similar environment.  What are the gold bugs missing?“

 

Before signing off today on this Veteran’s Day, I wanted to salute the men and women in uniform.  We all thank you.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.09-2.38%

SPX 2055-2094

VIX 13.74-18.87 
USD 98.15-99.98 
Oil (WTI) 43.02-45.73 

Gold 1069-1113 

AAPL 116-123 

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research 

 

The Dance with Deflation - zz COD


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