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:
- Employment: Employment growth peaked in February 2015 and has been slowing since. Employment growth is hostage to the law of large numbers and will invariably slow alongside tighter labor supply and a growing employment base as an expansion matures. A negative inflection in employment growth doesn’t herald an imminent recession but, empirically, it’s a one way street as the cycle progresses past peak and onto eventual recession. The labor trend matters insomuch as it’s the principal driver of all things consumption and investment …
- Income Growth: Income Growth peaked in 4Q14/1Q15 alongside peak acceleration in employment growth and modest gains in earnings. Absent a material acceleration in credit growth, income growth drives the capacity for and trajectory of consumption growth. Indeed, income growth and the change in the savings rate carrying >0.95 correlation to household consumption growth across decades of data. 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.
- Consumption: Consumption growth peaked in 1Q15 alongside the peak in employment and income growth. Again, absent remarkable changes in the savings rate and/or consumer credit growth, consumption growth will follow the slope of aggregate income growth. Indeed, we saw that again in the November consumption data yesterday with household spending growth slowing for a 2nd month as the savings rate held near multi-year highs and income growth decelerated further. Household spending growth will remain “okay” on an absolute basis over the nearer term but will continue to slow alongside slowing income trends and tougher base effects. (Recall – Macro cares about the slope of the line and the 2nd derivative trend will remain negative.)
- Corporate Profitability: Both Corporate Profitability as a % of GDP and S&P500 operating margins peaked in late 2014 and have retreated since. Past peak profitability, persistent strong dollar deflationary pressures, negative growth/inflation revision trends and a broad expectation for higher labor input costs is not the stuff multiple expansion or lazy long allocations are made of.
- Confidence: Consumer Confidence across all the primary series (Conference Board, University of Michigan, Bloomberg) peaked in 1H15 and have since backslid. Confidence peaks late-cycle and, unsurprisingly, peaks alongside the peak in real per capita disposable income growth (i.e. when the most people are realizing their greatest income flow) and Per Capita DPI appears to have peaked in 2Q/3Q15.
- Manufacturing: With the ISM printing in contractionary territory and Durable Goods and Capex Orders growth negative for most of the last year, the domestic manufacturing data has been conspicuously recessionary. Under the headline Durable goods numbers yesterday, Core capex-orders recorded negative growth for a 10th consecutive month and Durable Goods Ex-Defense and Aircraft - which represents the stuff the average household actually buys – saw a 7th straight month of negative YoY growth. The collapse over the trailing twelve months, of course, is now the 2016 comp but given further OUS slowing, another step function lower in oil/energy/commodity prices and another wave of investment and labor realignment across the energy and mining spaces, the trend there is likely to get worse before it gets better.
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