About Everything | Q&A with Neil Howe: Everything Must Go

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses why department stores are slowly fading away. "The downward arc started well over a decade ago—long before the Great Recession," Howe writes. "In fact, you need to go back to the Clinton ‘90s to find a really healthy growth year for department stores... Those days are long gone."


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

CHART OF THE DAY: What To Watch Ahead Of Today's Jobs Report

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by U.S. Macro analyst Christian Drake. Click here to learn more.


"... As we’ve highlighted, just because we’re charged with generating high-frequency macro commentary doesn’t mean the slower, temporal progression of the cycle ceases to exists. As the Chart of the Day below illustrates, our larger, late-cycle point is simply that once we roll past peak rate-of-change in payroll growth, it’s a one way street towards convergence with 0%. The period of the cycle is years and historical precedents suggest some further runway in the present employment expansion but the slope of the line has now been negative for 15 months and the baseline expectation should be for that to continue to play itself out in autocorrelated fashion to the downside."


CHART OF THE DAY: What To Watch Ahead Of Today's Jobs Report - CoD employment Growth

Strength In Numbers

"Fate whispers to the warrior 'You cannot withstand the storm.', the warrior whispers back 'I am the storm.' "


With the bench scoring 45 points and Klay and Curry only dropping 20 combined in last night’s Game 1, the Warriors stormed the Cavs with their “Strength In Numbers” mantra turned strategy. 


The “numbers” in Macro land, on the other hand, may be less about “strength” and more about “stories”. 


Reported April data showed some of the largest sequential increases in years, from New Home Sales to Retail Sales to PCE. Is it because April had 5 weekends this year instead of 4 in addition to the Easter shift, giving it 5 effective weeks relative to 3 in March – a 40% difference and the first such instance since 2005?


Or maybe, after 85-months, the escape velocity stars aligned and decreed April, precisely, was the month of durable emergence.


Back to the Jobs Day Macro Grind ….


The narrative foil for a poor payroll print this morning is the Verizon strike which involved 36K workers and ran from April 13th to May 30th, including the reference period for the Establishment Survey.


Strength In Numbers - jobs pig cartoon 02.05.2016


In principle, the impact to headline NFP should flow through lower employment in telecom and potentially drag on any measure derived from the Establishment Survey, including average hourly earnings and aggregate hours worked. 


In practice, it probably just adds to the noise and mania of the day and provides anecdotal ammo for bulls and bears to both claim victory on a soft-to-middling number.


If it’s soft, the bears were right on growth and the labor cycle slowing. But, but … goes the bullish rejoinder … it doesn’t really matter because it was negatively distorted so it should be discounted and looked past.


The lone loser scenario given prevailing expectations is for bears on a blowout number. 


But then, of course, they can just say that the strength raises the probability of a policy blunder as strong dollar deflation and declining growth/inflation expectations drive asset price deflation on the other side of misguided hawkishness. 


If that’s difficult to follow, it breaks down to something like this:


  • Bad = good
  • Middling = great
  • Good = bad (…or maybe good, depending on your duration)


That’s not to say that neither argument is credible, it’s just that the narrative parading is proactively predictable. Much of what we do is engaging and impactful but, at times, sophistry, spurious activity and silliness predominate.


I’m not sure where I’m going with this so let’s just turn it back to today’s data:


OMG, deceleration is so Trend-y right now! Inclusive of whatever we get in terms of the Verizon distortion, the rate-of-change slowing in the labor cycle will continue. By the numbers, unless we get something >278K (consensus is at 160K vs 160K prior) then employment growth will register another sequential deceleration. And unless we get something >698K then the peak rate-of-change recorded in February of last year will remain rearview.


Dude, quit getting your pro-cyclicality on my portfolio! Labor economists, FOMC Chairwoman included, expects NFP gains to slow to ~75K as labor market slack diminishes and moves towards just needing to absorb new entrants. Implicitly then, a crawl to sub-100K NFP is part of the medium-run forecast and embedded in the calculus around the “probable” continuation of the tightening cycle – despite such a dynamic confirming the late-cycle’ness of it all. Countercyclical positioning should complement procyclical policy action.   


Godot’s Cycle: As we’ve highlighted, just because we’re charged with generating high-frequency macro commentary doesn’t mean the slower, temporal progression of the cycle ceases to exists. As the Chart of the Day below illustrates, our larger, late-cycle point is simply that once we roll past peak rate-of-change in payroll growth, it’s a one way street towards convergence with 0%. The period of the cycle is years and historical precedents suggest some further runway in the present employment expansion but the slope of the line has now been negative for 15 months and the baseline expectation should be for that to continue to play itself out in autocorrelated fashion to the downside.   


Inside Out: We care about the headline Payroll number to the extent it’s a focus for policy makers. Internally we care about the internals of the employment report because it gives us a preview of what the official income growth data (& consumption growth by extension) will look like when its reported later in the month and because it provides some insight to a preview of the ISM data in the subsequent month. Look at the sum of aggregate hours growth and hourly earnings growth in the NFP release for the directional read on income and consumption growth and look at aggregate hours worked in manufacturing for the directional read on industrial production in the manufacturing sector (the biggest industry component in the Industrial Production report).


Mix Matters: Wage inflation has shown some modest mojo in recent months but has broadly disappointed expectations and conventional Phillips Curve modeling for years. Thinking about structural dynamics, I think there are a couple factors to keep in mind, both of which are modest-to-moderately deflationary.

  • Demographic: Compositional change in the labor force is as pronounced as it’s been since Boomers matriculated through prime working age. The turnover associated with the replacement of higher wage, Boomer retirees with younger, comparably lower-wage full-time workers is disinflationary – even if total hiring is strong and the labor market conditions are taut by historical standards.
  • Labor Participation: To the extent discouraged workers become encouraged and the cyclical gap in the labor force participation rate closes, the impact will be disinflationary. Collectively, the skill-sets of sidelined and long-term unemployed workers are not those driving the marginal change/acceleration in wage growth.   


On this day last year, my kids pulled the fire alarm at the town hall and forced a 2-hour evacuation of the building … in the rain. On this day next year we’ll be 12 more months into the payroll growth slowdown, the black line in the chart will be lower and the red bar more ominous.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.75-1.90%

SPX 2045-21214


VIX 12.51-16.82
USD 95.01-96.04 


Best of luck out there today, 


Christian B. Drake

U.S. Macro Analyst


Strength In Numbers - CoD employment Growth

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The Macro Show with Keith McCullough and Neil Howe Replay | June 3, 2016

CLICK HERE to access the associated slides.


JT TAYLOR: Capital Brief (formerly Morning Bullets)

Takeaway: Ryan Relieves Republicans, Clinton's Critique, Libertarian Leverage

JT TAYLOR:  Capital Brief (formerly Morning Bullets) - JT   Potomac banner 2


RYAN RELIEVES REPUBLICANS: Speaker Paul Ryan endorsed presumptive Republican nominee Donald Trump in an op-ed published to his hometown newspaper late Thursday afternoon. In his note, Ryan explains that he and Trump have more common ground - than not - highlighting that Hillary Clinton represents the exact agenda that Republicans aim to fix.  We think Ryan’s move may have more to do with projecting a united Republican front in an all out effort to save the Senate and ensure the House doesn’t come close to being imperiled.


CLINTON’S CRUSHING CRITIQUE: Hillary Clinton spent her Thursday afternoon in San Diego casting the presumptive Republican nominee as a “historic mistake.” Clinton went on to bash Trump’s foreign policy plan as not even a plan. Or an idea. Or a thought. She feels Trump has thrived on a series of bizarre rants, personal feuds, and outright lies – making him unfit for office. Clinton laid out her own agenda as well - all the while clinging to a slight lead over Bernie Sanders ahead of the CA primary this Tuesday.   


LIBERTARIAN LEVERAGE: Gary Johnson may not be a household name, but he’s sure made headlines over the past few days.  In order to make the debate stage with the Republican and Democratic nominees, a candidate must be polling at 15 percent or above. As of now, Johnson lies below the threshold hovering around 10 percent - not a bad start as he’s only been the nominee for a little over a week and is just starting to raise money.  The 2013 VA gubernatorial race is still on the minds of many pundits, where current Governor Terry McAuliffe edged out Republican Ken Cuccinelli - while the third-party, Libertarian challenger racked up a modest six percent, handing the Governor’s mansion over to McAuliffe.


“DEBT TRAPS”: The Consumer Financial Protection Bureau has proposed a rule that could ultimately kill the payday-lending industry. Although the industry has thrived over the past decade, critics have accused lenders of unfairly targeting low-income workers and minorities. The proposed rule aims to limit how frequently borrowers can get loans and requires lenders to verify the borrowers can repay the money without taking on new debt, escaping the so-called debt trap.


LOOK FOR THE UNION LABEL: In most elections, Unions lean Democrat, but this year, some are expected to be caught in the gravitational and protectionist pull of Donald Trump. Trump, if not effectively countered, may draw an unusually large number of union voters in a general election matchup. This could, in turn, bolster the Republican vote in swing states like OH, PA, MI and WI - all of which President Obama won twice.


EXECUTIVE OVERREACH: The Department of Justice has independently dished out funds to activist groups to provide financial counseling to victims of the financial crisis through legal settlements with big banks –  it mandates that penalty money is “donated” to nonprofits that allegedly aid consumers and bolster neighborhoods. House Judiciary Chairman Bob Goodlatte and Republican lawmakers have backed a bill to prohibit the DOJ from doing so – the bill was marked up last month with a two-thirds vote. It’s opposed by Democrats, but garners support from members of the Appropriations Committee – expect fireworks in the coming months.


IRAN IS BACK - MORE SUPPLY COMING TO THE MARKET: Saudi Arabia's new Energy Minister was the first to arrive in Vienna on Monday for yesterday's OPEC meeting while Iran's oil minister was the last to arrive walking into his hotel near 11 pm on Wednesday. Our Senior Energy Analyst Joe McMonigle was at the hotel along with the press corps to greet the minister who announced that Iran's May production was 3.8 million b/d and expects to be at 4 million b/d "very soon.” The minister also reported that crude exports were now at 2 million b/d which translates into 800,000 b/d since nuclear sanctions were lifted and in line with Joe's forecast. The minister added that Iran's production goal is to get to 5 million b/d. Iran may have been the last to arrive in Vienna but it wants to be the first OPEC member to bring most spare capacity to the market.


BREXIT: SHOULD I STAY OR SHOULD I GO?: Join us for a call next Wednesday with Alexander Nicoll, a consulting member of the UK-based International Institute for Strategic Studies, as he discusses the events leading up to the UK vote and what the outcome of the vote spells for the UK and EU. Please email us for dial-in information.

Cartoon of the Day: Today's OPEC Meeting

Cartoon of the Day: Today's OPEC Meeting - Saudi cartoon 06.02.2016


Nothing like $50 oil to create a positive atmosphere at the OPEC meeting in Vienna.


Our Senior Energy Analyst Joe McMonigle, who attended the meeting, has said for months not to expect any big action at the June meeting. But Joe said he was looking for signs of potential action at the next OPEC meeting in December after continued reductions in non-OPEC production.


Joe believes the Saudis offered up such a sign on Wednesday when a "senior gulf official" said the Kingdom was "open" to some action to stabilize prices. As a result, for the first time in two years, we think a policy change could be under consideration at the end of the year.

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