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U.S. Economy Enters Most Difficult Part of Cycle

 

In this brief excerpt from The Macro Show, Hedgeye Senior Macro analyst Darius Dale discusses how the U.S. economy has entered the toughest part of the cycle and why our growth estimate remains so bearish.


Reading Between The Lines: China's Cryptic Commentary

Reading Between The Lines: China's Cryptic Commentary - China growth cartoon 11.19.2015

 

Truth out of China? 

 

If only the truth were black and white.

 

Here's analysis in a note sent to subscribers this morning in which our Macro team pieces together recent comments from the PBoC and the country's state-owned news agency Xinhua to arrive at some interesting conclusions:

 

"The Shanghai Composite Index dropped -2.3% overnight despite the PBoC injecting 250B of liquidity into the banking system, which represents the largest such injection since February 26th. Weighing on sentiment was a Xinhua report that monetary policy will likely be more prudent in 2016 than it was last year, according to sources close to the PBoC, as well as PBoC Chief Economist Ma Jun commentary about future monetary policy needing to guard against financial risks.

 

With Chinese corporate leverage high and getting higher (166% of GDP) and property prices running up 30% YoY in first tier cities, we expect the PBoC to rein in the liquidity provision meaningfully from here now that economic stabilization is in the rear view mirror."

 

More from China's state-owned news agency Xinhua:

 

"China will continue to implement a prudent monetary policy this year, and, in the context of the economic slowdown, top officials have described the prudent policy as one 'with a slight easing bias.'

 

As the economy is yet to fully restore its strength, China will not shy away from using the ample tools at its disposal to bolster the economy. But it will be more careful to prevent the easing from going too far."

 

HEADS UP!


CHART OF THE DAY: What More Can Fed Jawboning Accomplish?

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Senior Macro analyst Darius Dale. Click here to learn more.

 

"... With respect to Equities: Simply put, we do not think Janet Yellen can authorize QE4 without another leg down in domestic credit and equity markets – which, if prescient, calls into question the sustainability of this rally. As such, we believe the late-cycle sectors (i.e. Financials, Healthcare and Consumer Retail) are in the earlier innings of pricing in the depths of the cycle, while reflation sectors have clearly priced in some version of approaching the ninth inning; it’s not at all clear that the latter sectors will make lower-lows on the next leg down. Given our bearish outlook for the domestic equity market from here, we still want to be short the opposite of our preferred style factors on the long side – i.e. low beta, high quality, capital return stories like GIS and MCD."

 

CHART OF THE DAY: What More Can Fed Jawboning Accomplish? - Chart of the Day 4 20


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Eye on Earnings: Brinker International $EAT

 

Hedgeye's Restaurants team shares their three conclusions from Brinker's earnings report.


Cartoon of the Day: A Holy Mess

Cartoon of the Day: A Holy Mess - Brazil cartoon 04.19.2016

 

Amid the impeachment process of Brazilian President Rouseff, Brazil's Bovespa Index is up +39.4% over the past 3 months. Setting aside widespread corruption in the country, Hedgeye Senior Macro analyst Darius Dale had this to say about Brazil in this morning's Early Look, "We think Brazilian capital and currency markets are priced to perfection and anticipate another flush down alongside other reflation assets over the intermediate term."


The Central Planning #BeliefSystem Continues To Break Down

Takeaway: A bitter reality check is around the corner for easy-money addicted investors.

The Central Planning #BeliefSystem Continues To Break Down - bear cartoon 01.26.2016

 

About a month or so ago, hawkish regional Fed heads made the mainstream media rounds (see Fork-Tongued Fed Needs To Get Its Story Straight), talked up the U.S. economy and called for three or more rate hikes this year. Then, a week later, a dovish Yellen dialed back the rhetoric, sounding a cautionary tone on the economic outlook, while reiterating the headwinds we faced would "gradually dissipate."

 

Investors, addicted to easy-money and Fed soothsaying, took these dovish comments in stride, jamming equity markets higher, while the U.S. dollar weakened and rate hike expectations all-but evaporated. Notice, in the table below, the implied rate hike probability for this year doesn't get above 50% again until December:

 

The Central Planning #BeliefSystem Continues To Break Down - fed rate hike prob

 

Following that line of thinking, A few questions:

 

  • What happens when U.S. economic growth and S&P 500 company earnings brush up against the toughest comps of the cycle in Q2 and Q3?
  • Will U.S. investors finally spiral back to reality, understanding that the Fed's impotent monetary tool kit has failed to arrest economic gravity?

 

We continue to believe it is going to get nasty in equity markets... 

 

Click video below to watch.

 

Evidence?

 

The central planning #BeliefSystem is already breaking down in Japan where, since the announcement of negative interest rates in January, the Nikkei has declined in fairly short order while the yen has strengthened.

 

The exact opposite of what they intended.

 

The Central Planning #BeliefSystem Continues To Break Down - nikkei yen

 

It's worth noting that central planners are keenly aware of this macro market breakdown. Over the weekend, BOJ governor Haruhiko Kuroda told the Wall Street Journal:

 

“If excessive [yen] appreciation continues, that could affect not just actual inflation, but even the trend in inflation through its impact on business confidence, business activity, and even through inflation expectations."

 

Kuroda reiterated "if necessary to achieve 2% inflation target" the BOJ would "not hesitate to take further easing measures."

 

Okay.

 

But what makes him so sure anything the BOJ does will actually work?

 

stay tuned. 


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