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Takeaway: Don't blame China (or energy); the U.S. consumer is slowing markedly; and QE4 likely won't form an investable bottom in equities or credit.

Today, Keith and I dove head first into the usual gauntlet of marketing that follows our Quarterly Macro Themes presentation. Having started with a full slate of meetings NYC, he and I will then be visiting clients and prospective clients in Boston, San Francisco, LA, Chicago, Dallas, Austin, Houston and ultimately back in NYC and southern Connecticut over the next ~3 weeks.

Besides the opportunity to build lasting relationships, my favorite part about meeting face-to-face with clients is learning where our economic and market views are generally most differentiated from buyside sentiment. This is where Keith and I learn what calls to press, what themes to do more work on and what topics we need to start doing work on if we are to stay 1-2 steps ahead of macro consensus. To everyone we have met or will soon meet with, we are truly grateful to have such open and honest dialogues. We are hopeful that each of you finds value in this reflexive feedback loop.

Aggregating buyside consensus is a far more difficult task. It’s nearly impossible to disassociate the macro views we hear from how a particular investor(s) might be positioned – either out of desire or mandate. Moreover, since not every buyside shop has a institutionalized process to contextualize meaningful trends and inflections across the macroeconomic and policy landscape, we’ve been known to spend a decent amount of time just agreeing on a platform upon which to have such debates.

That is most certainly not to say we are smarter; we have and continue to learn a great deal from the collective knowledge and experience of our client base. We thank each of you for that as well. It’s humbling to consistently learn what you didn’t know you did not know.

Having said all that, when we hear the same premises or similar lines of questioning meeting-after-meeting, it is easy to interpolate that sentiment upon a much larger collection of investors.

In meetings today, I consistently heard three conclusions that we [very respectfully] disagree with:

  1. The narrative fallacy that China and/or energy deflation is the root cause of the economic and financial market malaise we are experiencing domestically.
  2. The narrative fallacy that the U.S. consumption economy is good.
  3. The narrative fallacy the U.S. equity market will form an investable (read: not short-lived) bottom if/when the Fed announces QE4.

Regarding #1: We put out a research note back in mid-November titled, “Can Beijing Maintain Exchange Rate Stability Or Is the Chinese Yuan the Next Thai Baht?” in which we detailed why a rising U.S. dollar is the root cause of the aforementioned problems. China’s economic downturn and subsequent currency debasement are merely symptoms of a broader disease. To the extent you disagree with our view, we encourage you to review the second half of that note starting with the following passage:

“All told, while we are comfortable reiterating our explicitly dour outlook for Chinese economic growth, it bears repeating that we continue to view the Chanos “economic collapse” view as misguided given that the “Beijing Put” continues to largely offset that outcome. China’s trending GDP growth deceleration just feels like a collapse to the rest of world given China’s outsized contribution to global growth.”

Regarding #2: We put out an extensive chart book on the state of the U.S. consumer last night [appropriately] titled, “U.S. #ConsumerSlowing”. It’s worth reviewing if you, like many investors, hold a sanguine outlook for domestic consumption growth and consumption-oriented assets.

Regarding #3: While ZIRP and LSAP have proven to be powerful tools in perpetuating income-inequality generating asset price inflation throughout this economic and corporate profit expansion, the Federal Reserve has yet to demonstrate the effectiveness of monetary easing during concomittant recessions in economic activity and corporate profit growth. If our bearish call on the domestic business cycle continues to resonate with the data, investors will have to adjust their expectations for a pending market bailout accordingly. Assuming QE4 is, in fact, introduced (the presidential election cycle is big risk in terms of popping the bubble in U.S. monetary policy), we think it will only work to produce a lasting bull market to the extent it is introduced at/near the depths of what we view as a likely #USRecession and bearish #CreditCycle.

Sentiment Update: Three Things I Learned Today (and Three Weeks From Now) - SPX Early 90s Recession

Source: Bloomberg; Hedgeye Risk Management

Sentiment Update: Three Things I Learned Today (and Three Weeks From Now) - SPX Early 2000s Recession

Source: Bloomberg; Hedgeye Risk Management

Sentiment Update: Three Things I Learned Today (and Three Weeks From Now) - SPX The Great Recession

Source: Bloomberg; Hedgeye Risk Management

Sentiment Update: Three Things I Learned Today (and Three Weeks From Now) - U.S. Household Net Worth as a   of DPI

***To the extent either of the hyperlinks above do not work, please email and they’ll get the referenced materials over to you.***

Enjoy the rest of your respective evenings and best of luck out there tomorrow.


Darius Dale