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#Timestamped: Why The Worst Is Yet To Come For U.S. Growth

#Timestamped: Why The Worst Is Yet To Come For U.S. Growth - GDP cartoon 01.30.2015

 

While Wall Street still expects rainbows and puppy dogs for U.S. growth... our Macro team prefers to deal with economic reality. We have been (and remain) the Growth Bears. Further vindication of our non-consensus economic call arrived just a few short weeks ago, when 1Q16 GDP came in at 0.5%, well below the rosy picture painted by consensus, but nailed by our Macro team.

 

We believe the worst is yet to come. Watch below as Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss why on The Macro Show.

 

1. An Animated History Of U.S. #GrowthSlowing

 

 

In this animated video, Hedgeye CEO Keith McCullough walks through the recent history of the #LateCycle U.S. economy, exploring peak corporate profits in 2014 to today’s lackluster growth.

 

2. McCullough: Why Our GDP Forecasts Are So Accurate

 

 

In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes subscribers “behind the curtain” on our quantitative forecasting model and how we interpret and debate evolving economic data.

 

3. 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.

 

4. Can Fed Stop Recessionary Selloff?

 

 

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.

 

By the way...

 

Like what you see? Click here to watch a complimentary edition of The Macro Show from today, in its entirety. This one's on the house.


[UNLOCKED] Early Look: Sloppy Guesswork

Editor's Note: Below is a complimentary Early Look written by Hedgeye CEO Keith McCullough on 5/4/16. In it, McCullough discusses our process, Wall Street's poor economic forecasting track record, and why our GDP model has been spot on over the last 5 quarters. McCullough also nails the April "jobs bomb" ahead of the BLS's monthly jobs report that Friday. Click here to get the Early Look delivered in your inbox weekday mornings.

 

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“Isn’t it time for such sloppy guesswork drawing to a close?”

-Phil Tetlock

 

Yesterday was a good day. The Long Bond was up big and I spent the day meeting with some of the largest hedge funds in my home state of Connecticut. I absolutely loved the debates.

 

The aforementioned quote (from a great book I’m reviewing called Superforecasting) really nails a common thread we hear from the sharpest institutional investors in the world when it comes to The Establishment’s US GDP forecasting process.

 

In one meeting in particular, the PM (who oversees an entire office of hedge fund PMs) read an excerpt from a sell-side note that said “GDP feels like it’s going to be 2.5% in Q2.” A feel? Really? I don’t feel anything in our predictive tracking algo, but we’re at 0.3%.

 

[UNLOCKED] Early Look: Sloppy Guesswork - GDP cartoon 05.29.2015

 

Back to the Global Macro Grind

 

Let me take that back. I do feel something. I feel really good when A) our GDP forecast is a long way from Old Wall consensus and B) consensus positioning in the SP500 (Index +E-mini futures/options contracts) is leaning as long as it has been for all of 2016.

 

Oh you bombastic Hedgeye boy, you.

 

Yep. I’m proud of both my people and process. We’ve actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).

 

The main reason why we’ve been so much more accurate than any other research department on accurately forecasting one of the most important factors in any economic model (growth) is that, instead of “feeling” it, we use modern-math and machines.

 

“After all, we live in an era of dazzlingly powerful computers, incomprehensible algorithms, and Big Data… isn’t it time for such sloppy guesswork drawing to a close? … The point is that if you have a well-validated statistical algorithm, use it.”

-Phil Tetlock, Superforecasting (pg 20-21)

 

While I am sure our forecasting #process will continue to evolve alongside technology and time, for now I probably sound overly confident that what we do crushes what they keep doing. With statements like this, how do you feel about it?

 

  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday)

 

Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data.

 

I know. I know. You’re probably saying to yourself that the Fed is obviously dovish now (US Dollar at a 16-month low, post Janet Yellen’s recent rate-cutting-of-the-hikes), so this banter from Williams, Lockhart, Bullard, etc. is just popycock and posturing.

 

I don’t disagree with that. Neither would most people I meet with.

 

In modern forecasting, we deal with everything in rate of change terms and then probability-weight surprises vs. expectations.

 

As the rate of change in the economic, profit, and credit cycle continues to slow, the probability continues to rise that the Fed’s latest of #LateCycle indicators (Employment) starts slowing at a faster pace.

 

In other words, you’re one NFP (non-farm payroll) jobs bomb away from both Trump and Sanders sounding really right on the economy.

 

I’m sure we have absolutely nothing to worry about if Trump or Sanders becomes President of the United States. But last night’s voting machine in Indiana reveals that it’s more than just Hedgeye (and the Bond Market) that gets what’s really going on in the US economy.

 

Instead of those who were “feeling” US GDP was going to be 3-4% with “falling gas prices” (last year), now they have to spin that into rising gas prices are good for US Consumer Confidence as both the conference board and Univ. of Michigan report hit new YTD lows.

 

It’s either sloppy guesswork or just the conflict of interest ridden cabal of The Establishment consensus doing what they think they have to do before it becomes obvious to The People right before The Election.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.72-1.87%

SPX 2053-2083
RUT 1101-1140

NASDAQ 4711-4844

VIX 14.26-17.83
USD 92.35-94.50

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

[UNLOCKED] Early Look: Sloppy Guesswork - 05.04.16 chart


Retail Sales | Real or Fake?

Takeaway: Numbers don’t lie, people do. But sometimes people control numbers.

Just about everybody is trying to figure out how such a big Retail Sales reading on Friday could coincide with such lousy results from the public companies in the few days prior. I ranted about this, and other key issues, on Hedgeye’s The Macro Show on Friday. CLICK HERE to watch this clip.

Retail Sales | Real or Fake? - retail

 

There’s a few considerations…

 

1. Let’s not lose sight of the big picture. We have a $17.9 trillion economy. Personal consumption is $12.2 trillion, or 68%, and Retail Sales clocks in at ‘just’ $4.7 trillion (ex food). The category that missed so precipitously last week was apparel, footwear and accessories – represented by the Department Stores. This is about a $500bn category represented last week by companies that account for $80bn (or about 2.2% of Retail Sales ex Auto). If you add up the growth in 1Q for the Census Department Store group versus the actual numbers we have the pleasure of talking with management teams about, you’re looking at a decline of -3.6% and 3.9%, respectively.  That’s actually fairly accurate.

Retail Sales | Real or Fake? - 5 16 2016 chart1 2

 

2. One question we hear often is how Amazon is affecting these numbers. We’d answer that a few ways…

 

A. First of all, Amazon is a retailer too. It reports its data to the government the same way Build-a-Bear does.

B. People grossly OVERestimate the importance of Amazon. Sorry AMZN-lovers out there. But it’s true. Amazon’s US General Merchandise business is about $50bn. That’s a whopping 1% share of total retail (just over 2% if you factor in 3rd party sales). We’d need to see colossal swings in Amazon’s top line -- like sales growing 200% -- to have an affect on these numbers. But even then, it would just shift sales from one categorization to another, unless it actually created incremental demand and new consumer expenditures.

 

3. As such, e-commerce retail accounted for 32% of the 3.0% yy growth. Department stores only hurt it by 1.7% -- or 5 basis points.

 

Retail Sales | Real or Fake? - 5 16 2016 chart2

Retail Sales | Real or Fake? - 5 16 2016 chart3


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Getting Paid? Mr. Market Remains Fond of Growth Bears

Takeaway: The S&P 500 is down 3 straight weeks and down 6 of the last 8 as US Consumption and global growth slows.

Getting Paid? Mr. Market Remains Fond of Growth Bears - bear 2

 

Growth Bears have been getting paid. this may is no exception.

 

Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"The Yield Spread smashed to fresh YTD lows last week (10yr minus 2yr = 95bps) keeping the Financials (XLF -4.0% YTD) our fav sector on the short side vs. Utes (XLU +14.1% YTD) our fav on the long side."

 

(We've been the unabashed bulls on the Long Bond via TLT which is up 9% YTD versus flat for the S&P 500.)

 

 

In other words, Utilities (XLU) is the top performing sector year-to-date. We've been recommending it to our subscribers since January.

 

Getting Paid? Mr. Market Remains Fond of Growth Bears - xlu 5 16

 

As growth has continued to slow, there's been an unequivocal bull market in Gold (GLD).

 

  

Meawhile, there are plenty of global #GrowthSlowing barometers out there...

 

Take a look at Italy:

 

 

... And China:

 

 

Here's the global equity drawdown map:

Click image to enlarge

Getting Paid? Mr. Market Remains Fond of Growth Bears - drawdown

 

 

While global growth slows we're sticking with what's worked all year...

  • Utilities (XLU)
  • Gold (GLD)
  • Long Bonds (TLT)

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS

Takeaway: Retail earnings cratered last week on weakening consumption, just as employment trends are flashing yellow.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM11

 

Key Takeaway:

There were three notables in the latest week. First, retailers collapsed due to weak consumption. As per our retail team, every department store aside from JCP put up its worst comp since 2009. The migration to online alone is not the culprit here; rather, there has been a recent, rapid and material decline in consumer spending. Second, Chinese steel prices fell 9.6% in the latest week, continuing the unwind of the mid-Februrary to mid-April artificial reflation trade. Third, US employment trends showed further signs of emergent weakness with a third consecutive week of rising initial jobless claims coming on the heels of a weaker-than-expected April NFP report. 

In spite of these factors, investors seem to be ebullient, ignoring both the risks of slowing consumer spending and weakening employment. Last week, most of the risk measures we track were positive, especially U.S. financial CDS, which tightened significantly by -4 bps to 90. Additionally, global measures of counterparty risk tightened week over week. The TED spread tightened by -7 bps to 36, the Euribor-OIS spread tightened by -1 bps to 8, and the CDOR-OIS spread tightened by -2 bps to 41.

 

Our heatmap below is more positive than negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged
• Intermediate-term(WoW): Positive / 5 of 13 improved / 4 out of 13 worsened / 4 of 13 unchanged
• Long-term(WoW): Positive / 3 of 13 improved / 2 out of 13 worsened / 8 of 13 unchanged

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM15

 

 

1. U.S. Financial CDS – Although poor retail earnings last week should have inflamed investor concerns, swaps tightened for 12 out of 13 domestic financial institutions; the median swap came in by -4 bps to 90.

Tightened the most WoW: JPM, AXP, C
Widened the most WoW: COF, AON, UNM
Tightened the most WoW: PRU, MET, BAC
Widened the most MoM: HIG, AIG, WFC

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM1

 

2. European Financial CDS – Financials swaps in Europe also defied poor data last week. While GDP was revised lower and Industrial production came in lower than expected, bank CDS mostly tightened in Europe last week.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM2

 

3. Asian Financial CDS – In Asia last week, Chinese bank CDS mostly tightened, Japanese bank CDS were mixed, and Indian bank CDS all widened.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM17

 

4. Sovereign CDS – Sovereign swaps mostly tightened over last week. Portugal, however, was an outlier, widening by 8 bps to 261.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM18

 

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM3 2


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week, led by Brazil, whose swaps tightened by -12 bps to 329.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM16

6. High Yield (YTM) Monitor – High Yield rates fell 6 bps last week, ending the week at 7.40% versus 7.46% the prior week.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index fell 1.0 point last week, ending at 1891.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM6

8. TED Spread Monitor  – The TED spread fell 7 basis points last week, ending the week at 36 bps this week versus last week’s print of 43 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM7

9. CRB Commodity Price Index – The CRB index rose 1.5%, ending the week at 183 versus 180 the prior week. As compared with the prior month, commodity prices have increased 5.1%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread tightened by 1 bps to 8 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index was unchanged last week at 2.00%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM10

12. Chinese Steel – Steel prices in China fell 9.6% last week, or 281 yuan/ton, to 2634 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM12

13. Chinese Non-Performing Loans – Chinese non-performing loans amount to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM4

14. Chinese Credit Outstanding – Chinese credit outstanding amount to 148.7 trillion RMB as of April 30, 2016, which is up +11.9% year over year. Note: this data is only updated monthly.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM20

15. 2-10 Spread – Last week the 2-10 spread tightened to 95 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM13

16. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread tightened by 2 bps to 41 bps.

MONDAY MORNING RISK MONITOR | TURNING A BLIND EYE TO CONSUMERS - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


Daily Market Data Dump: Monday

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: Monday - equity markets 5 16

 

Daily Market Data Dump: Monday - sector performance 5 16

 

Daily Market Data Dump: Monday - volume 5 16

 

Daily Market Data Dump: Monday - rates and spreads 5 16


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