“Insanity: doing the same thing over and over again and expecting different results.”
Was Einstein complexity deficient and wrong?
His well-worn colloquial definition of insanity may carry the caveat of scale dependence.
In describing complex systems, Jim Rickards uses the example of snowflakes accumulating on the mountainside: ….for long periods of time the same thing can happen with no discernible change in result - the snow just keeps accumulating and growing higher.
This happens until some critical threshold is breached and the incremental snowflake catalyzes the avalanche or what is termed a “phase transition” in the local environment.
There was nothing particularly special about that last, individual snowflake. It’s the inherent complexity of “the system” that drives the dynamism and end result.
In biochemistry, many times you need “X” amount of substrate to hit an enzymatic trigger point. You can keep adding “chemical ingredients” but you won’t catalyze the desired reaction until enough of the necessary compounds are present.
In many experimental situations doing the same thing over and over and expecting (at some point) a different outcome may, in fact, be the most rational course of action.
An inherent and principal problem is that repeated trial & error approaches are generally employed in situations of uncertainty and with outcomes that can be binary … you don’t know if you’re “insane” or not until you hit the level of system criticality and see a positive or negative phase transition.
If that phase transition is negative, too late. Kind of like a bank run…gradually, then suddenly…and completely nonlinear.
When does the incremental QE snowflake catalyze a financial market phase transition and is unconventional monetary policy action heading towards a binary phase transition outcome catalyzed by a change in market confidence, unintended consequences, accumulation of latest risks, etc.?
Are global central banks insane in their repeated easing initiatives and failures to print real sustainable growth or have they simply not yet done enough?
If the former and if the rationale for prevailing policy is flawed, the likelihood that the phase transition is negative goes up.
Here, increasing the scale (more debt/devaluation/etc.) on a (monetary policy) system built on a misguided ideology is doomed to fail – while the incremental easing initiative may be the negative trigger, the actual, absolute level of the debt/QE/etc. would largely be a random variable - it’s the construct and scale of the system itself that ensures the implosion.
If the latter – with the BOJ announcing negative interest rates overnight (response: YEN >120, 10Y JGB’s dropping as low as 0.09% ... as in “nine” basis points) and China floating more stimulus rumors - we remain on the path to finding out.
In the secular fight against overleverage, oversupply and negative demographics, Abe’s quiver is getting light and the remaining tools in the global central bank policy chest are few and duller.
The probability that the developed market NIRP train continues to onboard central bankers is rising, not falling.
Back to the Global Macro Grind ….
Yesterday’s Durables Goods data (-5.1% MoM, -0.6% YoY) was a train wreck as the headline and all the sub-aggregates declined both sequentially and year-over-year.
The mini implosion in December capped off a year which saw orders decline -3.5% and post the largest annual decline outside of a recession in 24 years.
Notably, Durables Goods Ex-Defense and Aircraft – which is the aggregate most closely associated with what actual households buy – declined -1.2% MoM and accelerated to -2.8% YoY, marking an 8th consecutive month of negative YoY growth.
Core Capital Goods Orders (i.e. business capex), meanwhile, declined -4.3% MoM and accelerated to -7.5% YoY – marking an 11th consecutive month of negative year-over-year growth and the worst growth print since November 2009.
But bad is good because 11 straight months of negative growth now = easy comps …. Right?
Here’s the current score on recessionary domestic data:
- Industrial Production: -1.8% YoY in Dec following a -1.3% YoY reading in Nov = 1st negative readings since 2009. This series also carries the distinction of throwing off almost zero false positive vis-à-vis recession signaling over the last half-century
- ISM/PMI: Contractionary prints (<50) in each of the last two months. With inventories still elevated and both backlogs and new orders in contraction, the headline Index reading should stay sub-50 in the near-term.
- Exports: Export growth has been negative in 6 of the last 7 months. The -4.0% growth recorded in the latest month = worst since 2009.
- Durable Goods: Negative growth in 9 of the last 11 months and down -3.5% YoY for 2015.
- Capex: 11th consecutive months of negative year-over-year growth and worst since 2009.
- Capex Plans: Forward Capex plans as measured by the Fed Regional Surveys made another new low in January, suggesting the negative trend in investment spending is unlikely to ebb in the coming quarter(s).
- Producer Prices: Headline PPI inflation negative for 11-straight months with Core PPI at just 0.30% and falling. Another step function move lower in energy prices in Jan and one of the worst import price growth #’s (-3.7% YoY, ex-petroleum) since 2009 in the latest month say the trend will continue.
- Corporate Profits: Earnings growth and corporate profits across S&P500 companies have been negative QoQ for two consecutive quarters as of 3Q15 and are tracking at -3% with ~37% of constituents having reported for 4Q15.
- Stocks: Russell 2000 is down -22.6% off the July 2015 highs. In other words, the majority of publically listed equites have already crashed.
And just to make it a Macro (Not) Top 10 list:
- Slowing: Employment Growth, Income Growth, Consumption Growth and Credit growth are all slowing currently. Yes – many of those measure remain good on an absolute basis but … & I feel like I say this 100X a week … it’s about better/worse, not good/bad and less good is bad when adopting a slope-of-the-line perspective of the data.
This morning we’ll probably get a 0-handle on GDP for 4Q15 (QoQ, SAAR).
On a year-over-year basis – which is how we model it, how companies are modeled, and the lens through which almost all other data is interpreted - 4Q15 will mark a 3rd consecutive quarter of slowing (& comps get tougher in 1Q16).
Whether we fall into technical economic recession from here may be largely beside the point (although that risk is rising, not falling)
- Earnings and Profit recessions are followed by significant, subsequent drawdowns in equities regardless of whether we actually go into economic recession.
- Common sense: Is slowing growth, falling inflation, rising volatility, expanding credit spreads and rising uncertainty and reactionary central bank interventionism a fundamental factor set you want to be over-exposed to?
Nature manages physiological complexity via redundant systems and controls.
Slowing growth puts us in Quad #3 (slowing growth & Inflation) or Quad #4 (stagflation) in our GIP model. $USD’s, Bonds and Utilities win under either scenario. #Redundancy
We’ll side with Mother Nature … she’s traversed a global cycle or two.
Christian B. Drake
U.S. Macro Analyst