The Fed Is Up The Creek Without a Paddle

Takeaway: Our Financials team analyzes the disconcerting trend in jobless claims and what the Fed could do about it.

Editor's Note: This is an excerpt from a research note sent to subscribers on Thursday. For more information on our institutional research please email


This week we want to take a step back from the high frequency claims data and take stock of where we are in the cycle, and consider what policy tools the Fed has at its disposal.


Where are we in the cycle?


As the chart below shows, we're now in month 23 of initial jobless claims running at a sub-330k level. The last 3 cycles have seen the expansion last 24, 45 and 31 months at a sub-330k level, with an average of 33 months. Coupled with the slew of weak economic data coming from the industrial/manufacturing/energy side of the economy, we think it's a better than bad bet that economic contraction isn't far away. 


The Fed Is Up The Creek Without a Paddle - Claims18 

What can the Fed do about it? 


We think the cycle being late warrants asking the question: What can the Fed do?


The table below shows that the Fed's average response to the past seven recessions has been a -750 bps rate cut. However, it is facing a significant shortfall in its accommodative ability with the Fed Funds rate currently sitting at around 0.36%. In other words, it's one and done to get back to zero, and then it's QE or NIRP. As we show at the end of this note, the yield spread is already at a post-crisis low (108 bps), which is ratcheting up the pain for banks. 2016 was supposed to be the year when this pressure finally turned tailwind, but instead it's increasingly looking like the opposite is the most probable course for 2016 and beyond. 


The Fed Is Up The Creek Without a Paddle - Claims17

[UNLOCKED] Keith's Daily Trading Ranges

Editor's Note: We've made some new enhancements to Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to view a brief video of McCullough explaining how to use it most effectively.


Subscribers now receive risk ranges for 20 tickers each day -  the last five are determined by what's flashing on Keith's radar screen and what tickers subscribers are asking about. Click here to subscribe.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
1.86 1.61 1.75
S&P 500
1,811 1,937 1,917
Russell 2000
937 1,014 1,004
NASDAQ Composite
4,162 4,564 4,487
Nikkei 225 Index
14,904 16,807 16,196
German DAX Composite
8,640 9,524 9,463
Volatility Index
21.06 29.01 21.64
U.S. Dollar Index
95.34 97.85 96.96
1.10 1.14 1.13
Japanese Yen
111.06 116.11 113.25
Light Crude Oil Spot Price
26.01 33.02 32.73
Natural Gas Spot Price
1.81 2.07 1.85
Gold Spot Price
1,155 1,256 1,231
Copper Spot Price
1.97 2.09 2.07
Apple Inc.
92 98 96
463 553 525
Alphabet Inc.
682 730 717
McDonald's Inc.
114 120 117
Utilities Select Sector SPDR
44.98 47.11 46.51
Deutsche Bank AG
14.21 18.62 17.09

Train Wreck: An Earnings Season Update (And Why Stocks Are Crashing)

Takeaway: No storytelling. Just the ugly truth of earnings and year-to-date sector performance.

Train Wreck: An Earnings Season Update  (And Why Stocks Are Crashing) - earnings cartoon 01.27.2015


So... the Train Wreck most causal to stocks crashing?

> Earnings <


*Note: 7 of 10 S&P Sectors have negative y/y earnings - the narrative that its all Energy = lie


Train Wreck: An Earnings Season Update  (And Why Stocks Are Crashing) - earnings update


A question every investor should have the answer to right now:



Here's where we're at on the Old Wall: Ex-out whatever doesn't fit your narrative - high quality journalism.


And here's the year-to-date reality.


Train Wreck: An Earnings Season Update  (And Why Stocks Are Crashing) - sector performance update


We've been clear as crystal about what we think: Markets are headed for a crash. (Watch the video below.)



Sure, ex-financials the Dow Bro isn't down as much YTD. But that's not risk management. That's fantasy.

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CHART OF THE DAY: A Look At The Fed's Serial Over-Optimism In The Last Half Decade

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.


"Policy makers have serially overestimated growth by ~100bps (i.e. by ~50% with growth only averaging ~2%) every year over the last half-decade (see Chart of the Day below).


Conspicuous forecast error is the post-crisis norm but how can policy be successfully normal-ized or calibrated with normal, conventional models that fail to fit the new, less Panglossian empirical normal?"


CHART OF THE DAY: A Look At The Fed's Serial Over-Optimism In The Last Half Decade - CoD Fed Optimism

Optical Mischief

“I believe the fundamentals of our economy are strong. Very Strong”

-John McCain during his run for President, 6/5/2008 (please enjoy the epic #timestamp on that assertion)


I once got beat up in a parking lot in Iowa on the 4th of July by a bunch of racist white kids … for being white. 


I was the only white kid on our AAU basketball team and, apparently, in an acute bout of misguided ideology, beating up the lone Caucasian for his chosen associations probably seemed like a better option than taking on a whole team.


Misguided … and miscalculated. #RealTeams don’t divide across racial, socio-economic or any other lines and “lone white kid” ≠ alone.  


The Iowan boys got a bigger fight than they were looking for. It didn’t end well for them.


Cross-walking that experience to a metaphor around misguided policy ideology and a potential end game for markets as the belief system around it crumbles is almost too obvious so I’ll just let it hang there in pregnant pause for a moment…


Optical Mischief - Stocks crash test dummies cartoon 02.18.2016


Back to the Global Macro Grind …


Interpretation and contextualization of macro data is duration specific and very much sensitive to the level of zoom. 


Some argue that smaller-scale, short-term distortions in the reported data don’t matter. 


Others argue that perception = reality, so “optics” are relevant and to the extent some meaningful percentage of market participants are unaware of existent underlying distortions, that collective ignorance – right or wrong – carries real consequences for market prices.


The reality is that both camps are probably right. And, again, it’s largely a matter of duration specificity. 


To make this more tangible, consider the most significant recent example of pervasive, recurrent distortions in the reported domestic econ data. A phenomenon we previously termed “Lehman’s Ghost” that permeated through the fundamental data from 2009-14.


To review: Seasonal distortions became ubiquitous across the reported domestic macro data following the Great Recession as accelerated employment loss and the collapse in economic activity were, at least in part, captured as seasonal variation rather than as a bonafide shock.


Because many government statistical models use a 5-year look back to calibrate seasonal adjustments, that distortion echoed forward. The net effect was that seasonal adjustments acted as a tailwind augmenting the underlying data from September – February while reversing to a headwind depressing the reported, seasonally-adjusted data over the March-August period.


That shifting seasonality was perhaps most visible in the initial claims and NFP numbers but the impacts were pervasive with the reported macro data, equity market performance, investor sentiment and analyst estimates all following a similar annual, temporal pattern. 


Neither were policy makers immune to the optical mischief of the distortion. Was it completely incidental that every QE initiative was announced in the Sept-Nov period in the wake of the peak negative impact of that distortion?


Back to the present: Due to severe weather in February of each of the last two years and the BEA’s attempt to resolve “residual seasonality” problems in the 1st-quarter data (recall: GDP was negative in the 1st quarter in 3 of the last 5 years), there’s a good chance seasonal adjustments serve to upwardly bias the reported macro data for February. Any prospective distortion will be nothing like the magnitude of “Lehman’s Ghost” but it’s worth a highlight. 


At the same time, easier comps beginning in February will also act as a support to reported growth. Recall, Durable Goods, Capital Goods Orders and PPI growth (to name a few) all went negative in February of last year and have languished since. On CPI, where we’ll get the January update this morning, the energy price collapse saw its largest acceleration to the downside in Jan/Feb of last year, driving the easiest rate of change comps in both headline and core consumer inflation.


So, the hereto recessionary macro data looks set to collide with some interesting statistical/comp dynamics in the coming month(s). What do you do with that?


Rocks & Hard Places: Fortunately, the medium-term investment implications are largely the same under the competing scenarios.

  1.  If the data continues to deteriorate, in spite of favorable seasonal and comp dynamics, lower-and-slower-for-longer and its associated allocations continue to work.
  2. If the data gets an optical boost – edifying policy makers conviction around their hawkish lean - we’d expect the further attempts at policy normalization to perpetuate the same deflationary and growth prohibitive forces that have characterized the last 8-months.  


While the ultimate destination is the same under either scenario, the shorter-term investment path would probably be variant. Specifically, in the 2nd scenario, you’d likely see us get more active in risk managing the markets attempt at front-running the policy implications of the reported data for a data reliant Fed. 


I was hoping to update our bearish view on housing a bit this morning but the macro musing above surreptitiously hijacked my time allotment.


I’ll probably provide that update next time but the punchline on the recent data is this: Less good is bad and the data flow across housing continues to weaken on the margin. 


To close, I’ll leave you with our new colleague, former Fed Vice Chairman and Potomac Research Group Senior Economic Strategist Don Kohn’s, insider contextualization of the “increasing downside risks” reported in the latest Fed Minutes:


“In Fedspeak, downside risks often mean "I think I probably should lower my forecast."”


Policy makers have serially overestimated growth by ~100bps (i.e. by ~50% with growth only averaging ~2%) every year over the last half-decade (see Chart of the Day below).   


Conspicuous forecast error is the post-crisis norm but how can policy be successfully normal-ized or calibrated with normal, conventional models that fail to fit the new, less Panglossian empirical normal?


Policy makers are smart and well intentioned and villainizing them is partly a literary tool. After all, to invoke emotion and elevate myself to macro protagonist one needs a ready and capable antagonist … but that doesn’t change the realities highlighted above.  


For now, proactively front-running Fed forecast error, its policy implications and flow through impact to prices remains alpha’s new normal. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.61-1.86%

SPX 1811-1937

VIX 21.06-29.01
Oil (WTI) 26.01-33.02


Good luck out there today.


Christian B. Drake

U.S. Macro Analyst


Optical Mischief - CoD Fed Optimism

The Macro Show Replay | February 19, 2016


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