The warning signs are all there. Hedgeye's Macro team has been highlighting the increasing probability that the U.S. economy tips into a recession during the second half of 2016.
Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.
"... Aggregate wage and salary income remains a particularly pronounced driver of consumption in the present cycle with credit growth remaining modest and the long-term capacity for consumer re-levering to drive incremental consumption growth remaining constrained.
Both disposable personal income and aggregate Salary and Wage Income growth decelerated on a 1Y and 2Y basis in November as employment and comp dynamics continue to define the 2nd derivative trend. Aggregate income growth will remain positive over the nearer-term but will continue to slow against steepening comps."
This decision has come not from fear, but from a clarity of judgement – free from the cloud of terror that surrounds us and obscures our view. I can say only one thing to Columbians in this time of peril. There will be a future!
-Cesar Gaviria, Narcos (s1, e5)
Cesar delivers that line as part of an epic speech supporting extradition of drug traffickers in Colombia – a landmark decision which would indelibly shape the future of Colombia and ensure his own attempted assassination.
The decision was born of objective mental clarity, moral conviction … and cojones.
If you haven’t yet watched the series (Narcos, Netflix original), I’d recommend it.
The downtime around holidays provides a natural opportunity for introspection and life-contemplation – this year, perhaps more than ever, as peril and serial terror attempt to obscure our national and global history of humanism and acceptance with a cloud of fear and knee-jerk protectionism.
Immigration and refugee policy is invariably complex and wrought with competing interests and compelling intellectual, emotional and ideological arguments.
We're largely politically agnostic @Hedgeye but our process is rooted in objective analysis and common sense – and I’m fairly certain we can do better than a “cold shoulder” policy prescription.
The world our children will inherent is not static and sterilized and everyone doesn’t get a trophy just for showing up.
Collectively, we need to be the change we want to see and an aspirational model for the first generation of a flat world.
Don’t wait for it to come. Be-come it.
Back to the Global Macro Grind …
The change (as in rate-of-change) panglossian equity optimists want to see in the domestic data flow is not what Mother Macro delivered yesterday.
Alongside detailing yesterday’s deluge of Income, Spending, Industrial and Confidence data, let's quickly review the 2nd derivative (i.e. slope of the line) state of some key macro metrics.
We highlighted these in an institutional note yesterday, but they’re helpful in contextualizing the cyclical slowdown currently characterizing our late-cycle reality. So, to recapitulate:
Cycles cycle and our current cyclical march is one of deceleration. There will be a future filled with positive inflections and accelerations but between here and there exists a stocking full of P&L to risk manage.
We’re looking forward to chasing the peri-holiday gluttony with some rest then helping you chase down some early, non-consensus new year alpha.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.12-2.32%
Oil (WTI) 34.94-38.08
Merry Christmas and Happy Holidays to you and your loved ones,
Christian B. Drake
This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.
Down Dollar is what that ole “reflation” hope is built on and you’re seeing some follow through there this morning with the EUR and YEN up +0.4-0.5% against the USD. But a bullish TREND in the USD remains firmly intact, the risk range is 97.13-99.41.
Oil up +4.8% in a straight line yesterday led the rally in oversold #Deflation equities – that move does not a bullish TREND make with the immediate-term risk range for WTI now at $34.94-38.08 (sell at the top-end of the range).
Japan doesn’t like this whole up Yen (Down Nikkei for the 5th straight day), so BOJ’s Kuroda opts for the Draghi “whatever it takes” speech overnight saying they’ll even “buy ETFs” (equities!) directly, LOL.
|FIXED INCOME||17%||INTL CURRENCIES||12%|
Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.
In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.
In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.
We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.
But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.
Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.
Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:
INSTANT INSIGHT | The Coming #Recession? https://app.hedgeye.com/insights/48235-instant-insight-the-coming-recession… cc @KeithMcCullough $CAT $XLI $WAB #Economy #Yellen
Let your life lightly dance on the edges of time like dew on the tip of a leaf.
Amazon spent 11.7% of revenue on shipping costs in the third quarter this year.
A nice little 3-day rally (+2.9%) for the S&P 500 for Christmas, and the Fed (Atlanta) cuts its Q4 GDP forecast to 1.3% after raising rates!
In other financial market news, Down Dollar is what that ole “reflation” hope is built on and you’re seeing some follow through there this morning with EUR and YEN +0.4-0.5% against USD, but bullish TREND in U.S. Dollar remains firmly intact – risk range = 97.13-99.41 US Index.
Meanwhile, Oil was up +4.8% in a straight line yesterday and led the rally in seemingly oversold #Deflation equities. That move does not a bullish TREND make with the immediate-term risk range for WTI now = $34.94-38.08 (sell at the top-end of the range).
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