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Hedgeye Guest Contributor | Thornton: My Scary Chart

Editor's NoteBelow is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. 

 

A brief note on our contributor policy. While this column does not necessarily reflect the opinion of Hedgeye, suffice to say, more often than not we concur with our contributors. In the piece below, Thornton writes "I believe that some unforeseeable event will prick the bubble, perhaps this year. The result will be recession which will, unfortunately, be accompanied by more misguided monetary and fiscal policies."

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - Bubble bear cartoon 09.26.2014  1

 

I published the graph below in a recent essay titled, Why the Fed’s Zero Interest Rate Policy Failed, but the graph deserves special attention because of what it seems to imply for the economy going forward. The graph shows household net worth (wealth) as a percent of personal disposable income. Household net worth as a percent of disposable income increased dramatically in the mid-1990s. Its collapse precipitated the 2000 recession. It increased even more dramatically during the subsequent expansion only to collapse again, precipitating the 2007 – 2009 recession.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton1

 

Once again, household net worth has increased dramatically. Since the end of 2012 it has increasing by nearly 100 percentage points to 640% of disposable income. This is scary; not just because it is an incredibly large rise in wealth in a short period of time, but because it happened twice before with very bad consequences.

 

The first rise in household wealth ended because of the bursting of what is known as the Dot.com bubble. It is called the Dot.com bubble because the NASDAQ composite index rose dramatically in the mid-to-late 1990s only to fall even more dramatically beginning in 2000Q1. The graph below shows that the rise and fall of household net worth was accompanied by the rise and fall of the NASDAQ.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton2

 

The NASDAQ and household net worth reached their respective peaks at exactly the same time, 2000Q1, after which they both fell precipitously. Household net worth recovered quickly during the expansion, but the NASDAQ didn’t. Indeed, the NASDAQ didn’t reach its 2000Q1 level again until 2014Q3. In contrast, household wealth as a percent of disposable income rose quickly, increasing by 125 percentage points from 2002Q3 to 2006Q4 before declining even more precipitously.

 

The large increase in household wealth was largely driven by an equally large and, as it turned out, unsustainable rise in house prices, as shown in the graph below. Not surprisingly, house prices and household net worth both peaked in 2006Q4.

 

Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton3

 

By 2015Q1, household wealth had surpassed its 2006Q4 peak. This time the rise in wealth was fueled by both equity and house prices. The relevant question is: Is the 100 percentage point rise in household net worth sustainable, or will house and equity prices fall dramatically again?

 

The latter answer seems most likely. One reason is behavior of household net worth has been unusual since the mid-1990s. The graph below shows the level of household net worth over the period 1952Q1 to 2015Q4. The graph also shows a quadratic trend line estimated over the period 1952Q1 to 1994Q4 and extrapolated to 2015Q4.

 

 Hedgeye Guest Contributor | Thornton: My Scary Chart - thornton4

 

During the entire period from 1952Q1 to 1994Q4, household net worth tracks the trend line very closely. Since 1995Q1, however, household net worth has been consistently above the trend line and the gap has been getting progressively larger. Such behavior would be a concern in any circumstance, but it is particularly troubling because we know that the previous two boom cycles were followed by busts. The recent rise in household net worth has not been accompanied by a correspondingly large increase in output or the price level. Hence, it too does not appear to be supported by economic fundamentals—it appears to be unsustainable.

 

The Fed’s monetary policy has contributed to this problem. First, by keeping the federal funds rate below its own estimates of the normal or natural rate for much of this time and way below the normal rate for nearly a decade. The second, by unnecessarily purchasing a massive amount of government and mortgage-back securities, which Fed Chair Yellen and her colleagues are reluctant to sell. I don’t see the Fed doing anything different anytime soon.

 

I predict that the current level of household net worth is not sustainable. I believe that some unforeseeable event will prick the bubble, perhaps this year. The result will be recession which will, unfortunately, be accompanied by more misguided monetary and fiscal policies. I call this monetary and fiscal policy insanity: Keep doing the same thing and expect a different result! I would love to be wrong, but I doubt I will be.


Initial Claims | Back to Back Weakness

Takeaway: Claims rose +20k to 294k this week, beating last week's +17k record for the largest W/W rise so far in 2016.

Initial Claims | Back to Back Weakness - Claims1

 

 

How many data points does it take to make a trend? That's a question worth asking, in light of the fact that the last three weekly initial claims prints have been sequentially higher. At the low end of the spectrum, some argue that a simple plurality (two) of datapoints constitute a trend. Most seem to think it takes three data points (i.e. 2,4,6) to conclude a trend is occurring. At the other end of the spectrum there are those who argue it takes at least four data points to have the requisite conviction needed for forecasting/extrapolating recent data into the future.

 

Three weeks ago, claims rose by 9k. Two weeks ago, they increased by 17k, and last week they rose by a further 20k. There are no holidays or distortions in the last few weeks of data that could account for the rise and we're not yet into the automotive furlough season. 

 

I would suggest that the last 2-3 weeks of data are significant; the last two weeks especially, as they've shown the largest back-to-back weekly increases in initial claims YTD, and they've come consecutively (+17k, +20k). Moreover, they come directly on the heels of the weaker-than-expected April NFP report, which was measured in the week prior to the most recent 3 weeks of rising claims. In other words, taking the April NPF in conjunction with the last 3 weeks of claims data, you have ~7 weeks of weakening labor market data.

 

We'll see what the next few weeks bring, but I would argue that if the "trend" in initial claims continues higher over the next two weeks, the early innings of a labor recession trend are afoot. 

 

 

Initial Claims | Back to Back Weakness - Claims4

 

The Data

Prior to revision, initial jobless claims rose 20k to 294k from 274k WoW. The prior week's number was not revised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 10.25k WoW to 268.25k.

 

The 4-week rolling average of NSA claims, another way of evaluating the data, was -1.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -6.9%

 

Initial Claims | Back to Back Weakness - Claims2

 

Initial Claims | Back to Back Weakness - Claims3

 

Initial Claims | Back to Back Weakness - Claims5

 

Initial Claims | Back to Back Weakness - Claims6

 

Initial Claims | Back to Back Weakness - Claims7

 

Initial Claims | Back to Back Weakness - Claims8

 

Initial Claims | Back to Back Weakness - Claims9

 

Initial Claims | Back to Back Weakness - Claims10

 

Initial Claims | Back to Back Weakness - Claims11

 

Initial Claims | Back to Back Weakness - Claims19

 

Yield Spreads

The 2-10 spread fell -3 basis points WoW to 100 bps. 2Q16TD, the 2-10 spread is averaging 104 bps, which is lower by -4 bps relative to 1Q15.

 

Initial Claims | Back to Back Weakness - Claims15

 

Initial Claims | Back to Back Weakness - Claims16

 

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Fed Watch: Next Rate Hike In April 2018???

Editor's Note: In an institutional research note, entitled "Reflation Reversal Risk Part II," Hedgeye Senior Macro analyst Darius Dale shows in granular detail how investors have priced-in a shockingly dovish Fed.

 

In other words, a look at the Fed Funds futures curve suggests "the next rate hike isn't being fully priced into the curve until April of 2018!" Below is an excerpt and chart from that note. (To access our institutional research email sales@hedgeye.com.)

 

Fed Watch: Next Rate Hike In April 2018??? - Fed cartoon 06.17.2015 dove

 

"... That in conjunction with a dramatically compressed Fed Funds futures curve (2nd chart below) leads us to believe the Fed’s dovish pivot has been largely priced into the most affected markets and it’s likely that nothing shy of outright monetary easing will compress the forward rates expectations any further. Specifically, the next rate hike isn't being fully priced into the curve until April of 2018 (out from October 2016 at the start of the year)!”

 

Fed Watch: Next Rate Hike In April 2018??? - Implied Yields on Select Fed Funds Futures Contracts

Click image to enlarge 


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Daily Market Data Dump: Thursday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, and rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Thursday - equity markets 5 12

 

Daily Market Data Dump: Thursday - sector performance 5 12

 

Daily Market Data Dump: Thursday - volume 5 12

 

Daily Market Data Dump: Thursday - rates and spreads 5 12


CHART OF THE DAY: A Sneak Peek At Our Big Macro Themes Calls

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 that we like to #timestamp and hold ourselves to account on our big macro themes calls or anything, but in our Macro Themes Deck (see Chart of The Day) we make our best ideas, across durations, very clear. Here are our Best TREND Shorts:

  1. Financials (XLF)
  2. Retail (XRT)
  3. Russell 2000 (IWM)
  4. SP500 (SPY)
  5. Spain (EWP)"

 

CHART OF THE DAY: A Sneak Peek At Our Big Macro Themes Calls - 05.12.16 EL Chart


Downward GDP Dog

“We have what it takes to take what you have.”

-Suggested Federal Reserve Motto

 

Recently promoted to Senior Hedgeye Partner, Kevin Kaiser (MLP analyst who called the Linn Energy bankruptcy which was filed last night), and I spoke at one of the world’s largest investment bank’s High Net Worth division’s dinner last night in NYC…

 

So I’m running a little late this morning. But I do want to thank everyone who has supported us since starting the firm in 2008. Our audiences continue to grow. And, instead of getting complacent, we need to work harder than we ever have to earn your respect.

 

While I do not like to make a habit of being late, fortuitously that is working in the favor of our #ConsumerSlowing call this morning as one of our favorite non-MLP-ponzi shorts, Kohl’s (KSS), is imploding. There’s always a bear market somewhere.

 

Downward GDP Dog - weak consumer cartoon 10.16.20141

 

Back to the Global Macro Grind

 

While it should surprise no one who has been on the right side of the US economic, profit, and credit cycle call that the #LateCycle Sectors of the US Economy (Financials, Consumer Discretionary, Tech, Healthcare) are the biggest dogs for the YTD, the pace of the decline in the US Retail (XRT) sub-sector of consumer has caught many off-side this week.

 

Taking a step back, don’t forget where US Consumers (70% of GDP) were at this time last year:

 

  1. US Employment Growth (NFP) was putting in a cycle peak
  2. US Consumer Confidence was putting in a cycle peak
  3. US Consumption Growth was putting in a cycle peak

 

Peak. Peak. #Peak!

 

And what happens when you start to lap the cycle peak? Well, instead of crappy Baby Boom capacity putting up mediocre (barely positive) same store sales at the peak, they look even crappier on the back side of the cycle.

 

Not to pick on Kohl’s (KSS), but now that LINE is a bagel, I have to pick on something with market cap. KSS missed the top-line (same store sales were DOWN -4% year-over-year) and EPS came in at $0.31 vs. an Old Wall “expectation” of $0.37/share.

 

Ah, but “it’s cheap.” Yep. Getting cheaper. And no they can’t turn themselves into a “REIT.”

 

What happened?

 

  1. Was it fantastic East Coast weather that kept people from buying Spring inventory?
  2. Was it the competition “taking share” when Macy’s (M) and Gap (GPS) comped down -6-7%?
  3. Or was it that “Ex-Energy”, rising gas prices didn’t stimulate the consumer?

 

I know Ed, it’s getting real tough to follow the narrative drift that “falling gas prices” were going to be a US consumption panacea in the 2H of 2015… and now rising gas prices are going to keep the stock market up.

 

Not that we like to #timestamp and hold ourselves to account on our big macro themes calls or anything, but in our Macro Themes Deck (see Chart of The Day) we make our best ideas, across durations, very clear. Here are our Best TREND Shorts:

 

  1. Financials (XLF)
  2. Retail (XRT)
  3. Russell 2000 (IWM)
  4. SP500 (SPY)
  5. Spain (EWP)

 

You won’t hear this from many guys/gals who were trying to push these US Retailers as “value” and/or “real-estate plays”, but reality is that US Retail (XRT) is on the precipice of #crash mode at -18.4% since we went bearish on Consumer and SPY in July of 2015.

 

Nope. Instead, I’ll hear a lot of whining. But why? Why is it so hard for everyone at SALT and SOHN to just belly up to the bar and short “cheap”? Mr. Market is telling you these stocks aren’t “cheap”, if you have the analysts who can price the stocks on the right #ConsumerSlowing Cycle numbers.

 

I spent a whole day in NYC yesterday hearing about why Utilities (XLU) are “too expensive.” That’s code for “I missed it and I’m not long it.” But why? Why is it so hard for so many smart people to understand that expensive Low Beta Slow Growth exposures get even more “expensive” during the #GrowthSlowing surprise part of the cycle?

 

Does consensus realize how #GrowthSlowing => Down Dollar => Up Oil => Down Consumer flows to our Street low US GDP forecast?

 

It puts downward dog bias to our forecast as there’s currently an upward bias to what is called the GDP Deflator. In Q1, the US government got away with using 0.7% as the Deflator (you subtract that from nominal GDP to get Real GDP).

 

The Fed’s own preferred calculation of inflation = +1.6%. If the BEA used that in the official calculation, Q1 GDP wouldn’t have been as negative as Kohl’s or Costco’s traffic, but it would have been negative. And #Recession would be knocking on The Big O’s door.

 

Like any other tax, devaluing the purchasing power of The People (US Dollars) is an obvious tax on consumption. The un-elected Fed and their Old Wall cheerleaders have whatever it takes to take away whatever savings consumers have left.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.70-1.79%

SPX 2040-2088
RUT 1096-1141
USD 92.52-94.99
YEN 105.39-109.33
Oil (WTI) 42.59-46.93

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Downward GDP Dog - 05.12.16 EL Chart


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