Recession? Yes. 4 Cartoons Lay Out Our Call

Our Macro team continues to highlight the increasing likelihood that the U.S. slips into recession sometime in the next three quarters. The Fed, Wall Street economists and most investors are missing the mark on this risk.


Below are four cartoons from our cartoonist Bob Rich compiled since we started warning subscribers about this risk late last year, accompanied by analysis from Hedgeye CEO Keith McCullough .


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1. Ebenezer Screwed (12/24/2015)


Recession? Yes. 4 Cartoons Lay Out Our Call - Recession yet to come cartoon 12.24.2015


"Given that they called neither the cycle peaking nor #GrowthSlowing to begin with, Consensus Macro seems to be unbelievably precise in telling you what the “probability of a US recession” is."


2. Recessionary Rumblings (12/22/2015)


Recession? Yes. 4 Cartoons Lay Out Our Call - recession cartoon 02.04.2016


"Those growth bulls were delivered a big blow this week with US Consumer Confidence making a lower-low at 92.2."


3. Recession Risk Rising (2/4/2016)


Recession? Yes. 4 Cartoons Lay Out Our Call - recession cartoon 02.22.2016



"Calculating a precise percentage “chance of a recession” is poppycock. What matters to markets and your returns are expectations and rates of change." 


4. Recession Knocking? (2/22/2016)


Recession? Yes. 4 Cartoons Lay Out Our Call - recession cartoon 12.22.2015


"As critical rates of change continue to slow (see Consumer Confidence, Corporate profits, Jobless Claims), the probability of a US #Recession continues to rise."

Initial Claims | 99 Problems

Takeaway: Weakening labor data coupled with compressing yield spreads is a poison pill for lenders.

Initial Claims | 99 Problems - Claims1 normal  2


Below is the breakdown of this morning's labor data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact 


99 Problems

Buried like an Easter egg at the end of each of our weekly claims notes are a few charts showing the 2-10 yield spread quarterly back to 2008. For anyone not paying attention, the spread has been compressing steadily since its 4Q13 peak of 2.41%. As of today, the spread stands at 99 basis points (the 1Q16TD average is 113 bps).


This is a problem for banks. First, this is far and away the tightest spread environment seen in the post-crisis period so it simply hurts in absolute terms. Second, in RoC terms, if we hold the current 99 bps flat through quarter-end, the 1Q16 average spread will be down ~28 bps vs the 4Q15 average, which will be the second fastest rate of compression since 2011. Banks obviously feel the pain, even if it flows through on a lag. The point is that with global macro pressures growing, expect spreads and the read through to US and Global banking businesses to continue compressing/darkening.


Initial Claims | 99 Problems - Claims15 normal  1


Initial Claims | 99 Problems - Claims16


The Labor Market

The Labor Data is again less good this week. Seasonally adjusted claims rose 10k week over week to 272k, while claims continue to grow year-over-year in energy states, as the following three charts show.


Initial Claims | 99 Problems - Claims12 normal  2


Initial Claims | 99 Problems - Claims13 normal  2


Initial Claims | 99 Problems - Claims14 normal  2


The Numbers

Initial jobless claims rose 10k to 272k from 262k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -1.25k WoW to 272k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.7% lower YoY, which is a sequential improvement versus the previous week's YoY change of -2.8%.


Initial Claims | 99 Problems - Claims2 normal  3


Initial Claims | 99 Problems - Claims3 normal  3


Initial Claims | 99 Problems - Claims4 normal  3


Initial Claims | 99 Problems - Claims5 normal  3


Initial Claims | 99 Problems - Claims6 normal  3


Initial Claims | 99 Problems - Claims7 normal  3



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT




The Big Bang Theory: What Happens When The Central Planning Edifice Collapses?

Takeaway: Economic gravity continues to best central planners.

The Big Bang Theory: What Happens When The Central Planning Edifice Collapses? - planet


A quick question for perma-bulls. After 600-plus rate cuts globally, what do we truly have to show for it? Sluggish growth, deflating asset prices, and a central planning edifice on the brink of collapse? 


That sounds about right. 


Here's another question. What happens when it all implodes?


We're getting a glimpse of that now in Japan. In late January, the BOJ announced it would pursue negative interest rates. Macro markets didn't like that. In direct opposition to the BOJ's intent, the Yen has strengthened 5.2% and the Nikkei has fallen -5.3%.




The response from central planners is getting a little desperate. Last week, then came BOJ members calling for “greater cooperation among G7 partners in order to ‘soothe’ market jitters.” That's unlikely. The ECB added that it “is ready to do its part” while Fed officials have been making the media circuit rounds parlaying the idea that "all is well."




What does this all mean? Hedgeye CEO Keith McCullough has been grappling with this same question, about what happens when the last ounce of central-planning credibility is finally exhausted. In the Early Look this week, McCullough wrote:


"We have a social “science” experiment (or ideology) called central-market-planning (or QE)… which could easily implode if the #BeliefSystem that humans can bend and smooth economic gravity crashes."


Here's what the Fed's crashing credibility looks like via analysis from our Macro team sent to subscribers this morning:


"Gold loves nothing more than down dollar and interest rates. With consensus positioned for a stronger USD and a series of rate hikes into 2016, gold has sniffed out growth slowing data and market turmoil. In consequence, Gold and Silver are leading CRB divergences YTD at +16.6% and +10.3% YTD against a weaker USD (-1.3% YTD).


The 10-Year Treasury yield continues to price in slower growth, backing off -51bps on the year, at 1.74% this morning. While the Fed continues to play hardball on the direction of policy in 2016, the market trades skeptical."  


Take a look at the significant compression of the 10yr-2yr Treasury yield spread (i.e. #GrowthSlowing):


The Big Bang Theory: What Happens When The Central Planning Edifice Collapses? - 10yr 2yr spread


... Or (crashing) market-based measures of future inflation expectations (i.e. macro markets don't believe Fed rhetoric that #Deflation is "transitory"):


The Big Bang Theory: What Happens When The Central Planning Edifice Collapses? - 5yr forward inflation expec


No matter. We're sticking with our process and we'll continue to front run the Fed's and Wall Street's delusional forecasts.


While we're on the subject, here's an excerpt of Keith on The Macro Show...

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W | Investing to Build an Empire that Should't Exist

Takeaway: W continues to build an infrastructure for a TAM that does not exist. Our research contends TAM for W is $27bn today, not $90bn.

Investing to Build an Empire that Does Not Exist

The top line growth is impressive with the direct business up 98% with delivered orders up 82% and average ticket up 9%.  That’s great at face value. But the company added $339mm in revenue year/year, and only $9mm in incremental EBIT. AND it still put up a negative EBIT number. Also, we’re starting to see customer acquisition costs go up on the margin, and advertising efficacy go down. At the same time the company continues to build an enormous infrastructure of people (employee growth accelerated to +17% sequentially vs 14% in 3Q) for a Total Addressable Market that does not exist. Our research contends that the TAM for W is $27bn today, compared to management’s assertion that it’s market is $90bn. That is absolutely unrealistic.  That might not matter today, given that Restoration Hardware’s miss is making Wayfair look like a champ. But we continue to believe that this company will never run a profitable business. All the signs are there.



Performance Metrics:


Customer Growth

Sequential customer growth accelerated in Q4 , and grew 67% in 2015, faster than the 54% growth last year.

However if we look at ad spend per incremental customer, and incremental advertising per incremental customer, both metrics weakened significantly in Q4.

W | Investing to Build an Empire that Should't Exist - 2 25 W chart1

W | Investing to Build an Empire that Should't Exist - 2 25 W chart2

W | Investing to Build an Empire that Should't Exist - 2 25 W chart3


Growing Average Order

Average order growth accelerated to 8.8% against a tougher comp.  This is a clear positive for the company.  Since it is unlikely the average price of merchandise assortment has changed materially, this means customers are spending more at Wayfair.

W | Investing to Build an Empire that Should't Exist - 2 25 W chart4


Ad Efficiency Slowing

Looking at revenue dollars generated per advertising dollar, it grew 12.8% yy, but slowed significantly from 3Q and was the lowest growth rate in 2015.

W | Investing to Build an Empire that Should't Exist - 2 25 W chart5



On today’s Macro Show, Senior Analyst Darius Dale expanded upon our multi-duration outlook for the U.S. Dollar, which is best summarized as follows:


  • Immediate-term TRADE: Bearish (for more information, please review Keith’s 2/23 Early Look titled, “Big Bang Theory)
  • Intermediate-term TREND: Bullish
  • Long-term TAIL: Bullish


CLICK HERE to access the video replay.


CLICK HERE to download the associated presentation (12 slides).


In summary, our multi-duration outlook for the USD would seem to suggest the counter-TREND bounce that’s been distributed across various reflation sectors and assets (e.g. materials, industrials, gold, gold miners, EM) is likely to peter out at some point over the next 4-6 weeks.


While there is likely still money to be made on the long side for traders and high-turnover funds, we think long-term investors would do well to avoid getting sucked into the aforementioned reflation head-fake ahead of a likely crescendo.




Darius Dale


This Economic Indicator Slips For First Time Since Great Recession

Takeaway: Recent data releases bolster our call. U.S. growth is slowing.

This Economic Indicator Slips For First Time Since Great Recession - fed rainbows


The chorus of market prognosticators loudly proclaiming "all is good" in the U.S. economy seems to swell almost daily. (Overly optimistic Fed presidents are often the loudest in the bunch.) But the data continues to confirm otherwise.


It's interesting. Four or five months ago, virtually no one was talking about the prospect of recession. Now, at a bare minimum, it's at least a highly-clickable headline for the media to question growth slowing deniers about. 


This Economic Indicator Slips For First Time Since Great Recession - recession media


Each day the economic data continues to bolster our U.S. #GrowthSlowing call. (In January, we signaled that the likelihood of a U.S. #Recession sometime in the next one to three quarters is rising.) Here's the latest growth slowing indicator and analysis from our Macro team sent to subscribers this morning:


"Amazingly, the Markit Service Sector PMI falling into contraction for the 1st time since the Great Recession got almost zero media coverage yesterday. Services Consumption represents ~65% of household spending and ~45% of GDP and has hereto been held out as the bullish foil for the ongoing industrial recession.


The ISM Services Index has shown a similar trend – slowing in each of the last 3 months and, at the current index reading of 53.5, sits at its lowest level since the polar vortex lows of February 2014."


It's yet more evidence of our Macro team's gloomy economic outlook and perhaps the clearest indication yet that the biggest financial risk is believing Wall Street/Fed perma-bull consensus. 


Keep your head on a swivel out there.