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5 CHARTS: A Global #GrowthSlowing Checkup

Takeaway: Investors who avoided #GrowthSlowing equity markets nailed it in the past year.

5 CHARTS: A Global #GrowthSlowing Checkup - World Market No 12.16.14 large large

 

Still don't believe U.S. growth is slowing? Nasdaq investors do...

 

 

Meanwhile in Japan, growth has been neutered for decades. Despite the best efforts of BOJ central planners, macro markets continue to crash.

 

Check out the ramp in the Yen...

 

The Nikkei is still in crash mode, even though the BOJ instituted its negative interest rate policy in January

 

 

Speaking of negative interest rates...  

 

Italy's bank-heavy FTSE MIB index remains in crash mode.

 

And finally, peeling back the onion on the recent reflation trade, take a look at a longer-term chart of much-watched Dr. Copper.

 

Does that look bullish for global growth?

 


INSTANT INSIGHT | Reflation Reversal & How To Play It

INSTANT INSIGHT | Reflation Reversal & How To Play It - Dollar cartoon 04.27.2016 

 

The mother of all reflation trades has inflated equities and commodities off the February lows. Since February 11th, the CRB index of commodities is up 18.8%  while, over that same period, the S&P 500 is up 11.5%.

 

Not so fast.

 

Before buying into the latest permabull narrative that U.S. #GrowthSlowing fears have abated so buy equities now, consider this. Once again, macro markets have already begun letting out some of the rally's hot air. Note: The S&P 500 was down for 4 of the last 6 weeks, meanwhile, net positioning is the most bullish it’s been all year (CFTC data).

 

INSTANT INSIGHT | Reflation Reversal & How To Play It - 05.02.16 Chart

 

So what are we watching? 

 

Top of the list is the U.S. dollar. Here is analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"Down Dollar (again) -2.2% last wk (-5.7% YTD) after both the PMI (50.4) and Consumer Confidence #s slowed (again) on Friday; markets are obviously questioning whether Dovish Fed can replace actual growth with some version of stagflation, but USD is signaling immediate-term oversold inasmuch as Gold is signaling overbought."

 

 

How do you play the oversold U.S. Dollar? Well, indirectly at the moment, McCullough says.

 

"Instead of buy USD (not brave enough, yet!), I sent out SELL signals in both Oil (+5.2% last week) and Copper on Friday; both are signaling overbought inasmuch as USD is signaling oversold; Copper $2.31 is an important macro level for the stagflation vs. #Deflation debate; so far longer-term #Deflation is still winning."

 

 

Here's the sell Oil signal in Real-Time Alerts:

 

 

U.S. #GrowthSlowing has been our call for a while now. We're sticking with it.

 

For more, watch the video below in which Hedgeye Senior Macro analyst Darius Dale explains why the U.S. Economy is entering "the most difficult part of the cycle."


CHART OF THE DAY: Bearish Sentiment = Non-Existent

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Not to be confused with SENTIMENT on long-term US Treasuries where they ramped the net SHORT position (non-commercial CFTC futures & options contracts) in the 10YR last week to -97,876 contracts (-1.5x on a 1yr zscore):

 

  1. SP500 (Index + E-mini) positioning popped to its MOST BULLISH in 2016 at -1,206 contracts = +1.9x (1yr z-score)..."

*Note: +/- 2.0x on a 1yr z-score is considered overbought/oversold

 

CHART OF THE DAY: Bearish Sentiment = Non-Existent - 05.02.16 Chart


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REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.

 

Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)

 

Enjoy!   

 

1. McCullough: What If Amazon & Facebook Can’t Go Higher? (4/29/2016)

 

 

In this brief excerpt from The Macro Show, Hedgeye CEO Keith McCullough and Retail analyst Alec Richards respond to a subscriber’s question about whether companies like Amazon and Facebook can continue to prop up equity markets.

 

2. REPLAY | Healthcare Earnings Takeaways: $ATHN $HOLX $MD $ZBH (4/29/2016)

 

 

After a busy week of earnings, our Healthcare analysts Tom Tobin and Andrew Freedman will provide a recap and takeaways of our top ideas athenahealth (ATHN), MEDNAX (MD), Hologic (HOLX) and Zimmer-Biomet (ZBH).

 

3. About Everything | The Surge in Mental Health Services (4/28/2016)

 

 

In this complimentary edition of About Everything, renowned demographer and Hedgeye Sector Head Neil Howe discusses why "mental health services spending is riding a long-term attitudinal shift that has brought mental health issues out into the open." Howe explains why it's happening and explores the broader societal and investing implications.

 

Click here to read Howe’s associated About Everything piece.

 

4. Washington On Wall Street: Handicapping the ‘Acela Primary’ (4/26/2016)

 

 

Potomac Research Group Chief Political Strategist JT Taylor joins Hedgeye Director of Research Daryl Jones to discuss today’s so-called "Acela primary" bringing voters to the polls in Pennsylvania, Connecticut, Rhode Island, Maryland and Delaware.

 

5. Can Fed Stop Recessionary Selloff? (4/26/2016)

 

 

In this animated excerpt from The Macro Show, Hedgeye’s Keith McCullough, Darius Dale and Neil Howe respond to a subscriber’s question about whether the Fed can continue propping up the stock market as economic conditions deteriorate and a recession knocks on the door.

 

6. McCullough: You’re ‘Crazy’ Buying Stocks Now (4/25/2016)

 

  

In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why he’s not going to be the “crazy one” buying U.S. stocks at this point.


This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)

 

Enjoy!

 

1. A Look At U.S. Economic Growth (4/29/2016)

This Week In Hedgeye Cartoons - growth escalator cartoon 04.29.2016

 

We don't believe the permabull's "all is good" narrative about the U.S. economy. Our forecast for the 1st half of 2016 represents the slowest pace of US domestic economic growth since the back half of 2012. 

 

2. High Finance (4/28/2016)

This Week In Hedgeye Cartoons - Easy money cartoon 04.28.2016

 

This one speaks for itself.

 

3. Choppy Waters (4/27/2016)

This Week In Hedgeye Cartoons - Dollar cartoon 04.27.2016

 

Permabulls are desperately hoping and praying that a dovish Janet Yellen will continue devaluing the U.S. Dollar to keep propping up stocks.

 

4. The Elephant In The Room (4/26/2016)

This Week In Hedgeye Cartoons - GDP cartoon 04.26.2016

 

We think U.S. GDP will come in significantly worse than even downwardly-revised macro consensus or the Fed is currently forecasting.

 

5. Earnings Jack-In-The-Box (4/25/2016)

This Week In Hedgeye Cartoons - earnings cartoon 04.25.2016

 

"If the economic (GDP falling to 1%) and profit cycle (SP500 Earnings currently -8.1% year-over-year with 130/500 companies reporting) data wasn’t so bad, those begging for Dovish (Fed) Dollar Devaluation wouldn’t believe in buying commodities/stocks here either," Hedgeye CEO Keith McCullough wrote in today's Early Look.


About Everything: The Great Productivity Slowdown

Believe It When You See It: Productivity Growth is Slipping.

 

Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe explains why the much-debated productivity shortfall – amounting to $3 trillion – is "simply far too vast to pin on mismeasurement." Howe suggests, "It’s time to take the productivity slowdown seriously" and explains the broader implications for investors.

 

About Everything: The Great Productivity Slowdown - stop watch

WHAT’S HAPPENING?

 

For years now, Silicon Valley techno-optimists have been telling us that our dismal productivity numbers are wrong. They’ve said that technological gains are enriching our lives in ways that are simply impossible to measure.

 

On the surface, they appear to have a point. After all, how could innovations like robotics, AI, and the sharing economy not boost productivity? Plus, as tech heavyweight Erik Brynjolfsson likes to point out, Americans have access to ever-more free web services that aren’t counted by GDP. I’ll be the first to admit it: I’m blown away by Wikipedia.

 

About Everything: The Great Productivity Slowdown - neil howe callout

 

Well, the latest in a series of Brookings Institution reports (see especially the paper by economist David Byrne et al.) blows these arguments out of the water. It turns out that the vast shortfall in recent real GDP growth due to falling productivity—amounting to $3 trillion—is simply far too vast to pin on mismeasurement.

 

So yes, those dolorous productivity numbers you see in the media should be taken seriously. With the single exception of the dot-com revival (1995-2004), real worker output per hour has been decelerating ever since the end of the post-WWII American High. 

 

About Everything: The Great Productivity Slowdown - neil howe 4

 

The past few years have been particularly dour. After peaking at over 3% per year in the early ‘00s, productivity growth over the last decade has been closer to 1%, with plenty of quarters of negative productivity growth mixed in.

 

About Everything: The Great Productivity Slowdown - neil howe 5

 

Brookings thoroughly debunks Silicon Valley’s mismeasurement hypothesis. First, the productivity decline has taken place across all industries, not just IT. Additionally, IT employs too small a share of our workforce for mismeasurement to have a large positive impact on real GDP. Further, if the mismeasurement of high-tech creativity were the main story, we wouldn’t be seeing a global productivity slowdown spanning countries at vastly different stages of technological advancement. 

 

About Everything: The Great Productivity Slowdown - neil howe 6

 

The techno-optimists believe that we’ve been wildly overestimating inflation, and that—correctly measured—the “real” living standard of the typical American has actually been rising swiftly in recent years. Really? Try selling that celebratory news to Bernie and Trump supporters. (Personally, I’ve never met a techno-optimist whose income is anywhere near that of the median American adult who never completed college. And these comprise roughly three-quarters of all adults.)

WHY IT’S HAPPENING: DRIVERS

 

It’s time to take the productivity slowdown seriously. Here are some possible explanations.

 

Declining investment. Companies aren’t spending on capex like they used to—and it shows. A quick look at BLS aggregate hours and BEA capital stock data shows that, since 2010, capital intensity (the ratio of capital to hours worked) has actually declined.

 

About Everything: The Great Productivity Slowdown - neil howe 7

 

Former Fed Vice Chairman Alan Blinder attributes a whopping 70 percent of the productivity slowdown since 2010 to weak investment.

 

Baumol’s cost disease. Industries with slow productivity growth are making up an ever-greater share of employment. Health care, education, and retail have together ballooned to roughly a third of total U.S. worker hours—roughly five times greater than the manufacturing share, which continues to shrink.

 

A lack of true innovation. Prominent analysts like Tyler Cowan and Robert Gordon (check out the latter’s new best-seller, The Rise and Fall of American Growth) say that the technological innovations we’re seeing today are much less impactful than the foundational discoveries of the late-19th and early-20th centuries. After all, what’s Facebook, Twitter, or Tinder compared to electricity, automobiles, hydraulics, or refrigeration?

 

If you think your kids pout when you take away their mobile phone, try taking away any processed foods, any hot water, any illumination after dark, and any motorized help getting to school. They may yet come around to Robert Gordon’s point of view.

 

About Everything: The Great Productivity Slowdown - neil howe callout 2

 

Waning business dynamism. Many economists suspect that the American economy is also suffering from declining “dynamism,” as measured by a variety of risk-taking and mobility indices.

 

For example, startup activity is down. The U.S. firm entry rate is barely half of what it was in 1978, and over the last decade, for the first time ever recorded, more firms disappeared than were created. 

 

About Everything: The Great Productivity Slowdown - neil howe 8

 

We’re also seeing a stagnant job market. The job reallocation rate (job creation plus job destruction) has fallen steadily since 1990.

 

About Everything: The Great Productivity Slowdown - neil howe 9

 

Workers of all ages are also moving between jobs a lot less than they used to.

 

Some economists suggest that declining dynamism may be symptomatic of a deeper problem—declining competitiveness. Indices of market concentration by industry have risen substantially over the past 15 years.

 

About Everything: The Great Productivity Slowdown - neil howe 10

 

Exhibit A: The total number of listed companies has dropped by half over the past 20 years, while the Fortune 500 (or the Fortune 100) account for an ever-growing share of total U.S. corporate revenues.

 

Demographic aging. An aging society is inherently less dynamic, since older adults work less—and aren’t as entrepreneurial—compared to their younger counterparts. What’s more, the youth generation that should be starting its own businesses, Millennials, simply aren’t. For better or worse, Millennials are risk-averse. Most would rather take a secure, benefit-laden “position” at a large firm than go it alone and risk abject failure.

BROADER IMPLICATIONS

 

Silicon Valley is waiting for productivity gains to “kick in”—but that’s no sure thing. Techno-optimists cite a “lag” between the time when a new technology arrives and the moment it starts boosting productivity. It took 40 years for electricity to result in productivity gains, after all.

 

So is it just a matter of time? Not if you believe the markets. The real yield-to-maturity on a 30-year Treasury bond sits under 1 percent today, meaning that the outlook of long-term investors on productivity is every bit as bearish as the economists.

 

Work culture is growing ever-more inclusive. American corporations don’t hire outsiders like they used to, instead preferring to send their own to corporate universities and promote from within. The business world’s new emphasis on “cultural fit” may help explain why worker churn is lagging.

 

Declining dynamism may reflect declining competitiveness—and explain a central paradox of today’s ZIRP/NIRP era. When you consider that businesses and workers are stuck in place, it suddenly makes some sense why we’re seeing the unprecedented combination of near-zero interest rates, soaring valuations, high ROR on book-value assets, and tepid investment. It doesn’t pay to fight your way into a market where only a few privileged incumbents dominate—no matter how little it costs to borrow.

TAKEAWAYS

  • Recent research vindicates the nerdy economists over the “next big thing” techno-optimists in the productivity debate. The slowdown is happening. It’s a serious threat to our economic future.
  • Long-term market expectations: The real yield on 30-year bonds (nominal minus expected inflation) may be a rational long-term assessment—not just a spasmodic and temporary reaction to global QE. Feeling lucky, kid? Go ahead, short those bonds.

  • Investors should assess how weak productivity growth may depress the long-term return on their portfolios—and elevate the popularity of radical political programs among voters who have lost patience with stagnant living standards.

Early Look

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