“This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
The quote above is one of my favorite quotes from Churchill. After all, what exactly is the end? What is the beginning? Certainly for many of us, the start of the year signifies a beginning. In the investment management business, it really is a new beginning in that performance numbers are again set at zero and the race for outperformance begins anew.
We used this same Churchill quote in the conclusion of a recent video we put together on the history of Hedgeye. We showed that video to a new group of analysts that we are onboarding this week. We are officially announcing the combination on Tuesday next week, but suffice it to say we think the group we acquired will dramatically improve our research with their domain expertise in studying government policy. Stay tuned for the official announcement early next week.
There is no question that the next twelve months will be critical in Washington, DC. We will definitely have a new President, we will certainly have a slew of new legislators, and generally speaking the election outcomes at this point are still unknown. It seems likely that Hillary Clinton will get the Democratic nomination and, much to the chagrin of many, Donald Trump seems poised to capture the Republican nomination.
But even these nominations are far from done deals at this point, especially in the broader context of how unhappy Americans are with the government, which is obvious in a few areas:
- President Obama’s approval ratings are dismal at around 44% and disapproval being above 50%;
- In the most recent “Direction of the Country” poll, those believing the country is going in the wrong direction came in at 59%, versus those believing the country is going in the right direction at 27%; and...
- Finally, the worst approval rating is Congressional job approval, with 73% disapproving and a mere 13% approving of the job Congress is doing.
Whoever is elected President is going to have the challenge of winning the country back and the objective is likely to come with a slew of legislative activity. So, as it relates to the governments impact on the economy and markets, we are likely only at the end of the beginning.
Back to the Global Macro Grind …
This has been a busy week at Hedgeye and the month is only going to get busier as our Sector Heads ramp up their idea production. We have a couple of key events to highlight in the coming weeks, but most importantly this past week was our Q1 Macro Themes Conference call. The first theme, front and center, was US #Recession. We were the first to call out the likelihood of U.S. growth slowing more than expected and now we are #TimeStamped making the recession call.
In the Chart of the Day, we highlight ISM Manufacturing data, which contracted for the first back-to-back month since 2009. As the chart highlights going back to the 1980s, this type of contraction typically precedes or coincides with a recession. The same scenario could be said for a slew of data including industrial production, capital investment, durable goods, exports, and the list goes on. In fact, of the 34 key economic data points we track for the U.S., 24 have gotten worse sequentially.
All this is not to say that a recession is a forgone conclusion, but as our colleague and Senior Macro analyst Darius Dale wrote in response to a client question earlier this week:
“Per the preponderance of indicators we track, the U.S. economy has the highest probability of entering into recession somewhere around Q2/Q3 of this year. Recall that a technical recession requires two consecutive quarters of QoQ SAAR contraction, though the NBER’s actual dating of recessions is a bit more nuanced.
Our +1.5% estimate for 2016E is calculated as the average of the four quarterly YoY estimates; this is the same calculus the BEA uses to calculate annual growth rates. Given that distinction, you don’t have to have a full-year number be negative to experience an intra-year recession (or one that spans multiple calendar years). Recall that U.S. Real GDP grew +1.9% during CY1990 in spite of the July ’90 - March ’91 recession and +1% during CY2001 in spite of the March ’01 – November ’01 recession.
Beyond that, the +1.5% estimate doesn’t actually include an outright technical recession. Recall that we run a predictive tracking algorithm that feeds high and low-frequency data into the model to generate a probable forecast range for any given quarter in conjunction with the directional adjustment implied by the base effects. Obviously the C&I data has been recessionary, but given its outsized weight in the GDP calculus, we actually do need to observe further slowing of consumption data to open up the downside in the quarterly forecast ranges throughout 2016E.”
So from a timing perspective, we think Q2 going into Q3 is when growth likely slows the most, but it will require a slowdown in consumption to fully push the economy into a recession. One catalyst for this slowdown in consumption may be the housing market being worse than expected.
In that vein, our Housing team is introducing their view of the U.S. housing market on Wednesday January 13th and are shifting to a negative bias. The call is titled, Less Good is Bad, and they are making the call that key metrics for housing will likely slow in 2016. Housing, of course, has a very high correlation to consumption, so in the world of interconnected research, housing will be a critical determinant in how much the economy slows.
So, is a U.S. recession and housing slowdown the end? No, but it is also not likely the beginning of outsized equity returns.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.24%
Oil (WTI) 32.28-36.26
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research