It's nauseating how much the mainstream media talks about Thursday's U.K. referendum.
Takeaway: The most consensus position in macro right now is actually long the S&P 500.
Here’s what Consensus Macro positioning looks like from a CFTC futures and options perspective:
For those of you who are new to following us, we measure current macro positioning across multiple durations relative to where the positioning has been in the past. Anything plus or minus 2x tends to be a great contrarian indicator.
Watch Hedgeye CEO Keith McCullough explain consensus positioning in the video below:
Takeaway: Money Ain't A Thang; General Election Ground Game; Far Worse Than Fundraising; Clinton's Claims
Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email email@example.com.
“Status quo, you know, is Latin for 'the mess we're in'.”
― Ronald Reagan
Really - it’s not an issue for Donald Trump, but despite claims that he’s worth over $10 billion, the same can’t be said for his campaign. His war chest – if you’d even call it that - currently holds only $1.3 million. That’s about the size of a congressional campaign. Hillary Clinton, on the other hand, has outraised him by a long shot, boasting $42 million in cash, and climbing at an even faster rate than the primary, putting the Republican front-runner on ice with less than five months to go. Recent FEC filings also show that Trump’s campaign has rented his own venues, jets, and hotels, and that Trump continues to loan the campaign money – bringing the total amount of Trump loans to $45.7 million. If Republican pockets aren’t deep enough, Trump promises that he will personally fund his own campaign...
Clinton now holds early leads in four key swing states - FL, VA, MI, WI – further underscoring our point that having an organization really does pay off. If Trump wants to stay in it, he’s going to need boots on the ground – and fast. His campaign currently employs only 69 staffers, while Clinton woefully outnumbers him with 685. Trump boasts that he runs a lean, tight-knit campaign, but that won’t cut it. In states like battleground NC, Clinton employs around 100 staffers, while Trump counts 10. Though, with the race looking tighter in PA and OH, Trump has an opportunity to be competitive in two of the most critical states this fall.
When all is said and done, it’s not the money, organization, or events that people remember – it’s the message. “Make America Great Again” was a sturdy slogan during primary campaign – something supporters could hang their hats on - but now, that message appears to be muddled. Though Trump held campaign rallies last week in five states run by Republican Governors (four were potential battleground states - AZ, NV, GA, NC) - not one of them appeared on stage with him. If that doesn’t sound the alarm, then what does?
Clinton cautioned voters of a “Trump recession” in a speech on the U.S. economy, implying that electing Trump, “the king of debt,” would send the economy into a tailspin. In a speech outlining what won’t make America great again, Clinton feels that she’ll be the one to unite the nation, moving the U.S. economy into prosperous times like never before. She’s taking her message to Capitol Hill today to strategize with House Democrats, while Trump is expected to counterpunch in a speech to badly-needed donors this afternoon.
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In this brief except from The Macro Show this morning, Hedgeye CEO Keith McCullough weighs in on a head-scratching moment between Fed chair Janet Yellen and Sen. Pat Toomey (R-PA) during her testimony before the Senate Banking Committee.
This week we've listened to the hand-wringing of Fed, ECB and BOJ officials. And it's only Wednesday. Here's a brief recap:
What was striking about Fed head Janet Yellen's testimony before Congress yesterday was the surprising contrast between fact and fiction.
Fiction: “The U.S. economy is doing well,” Yellen said and continued by reiterating her “expectation is that the U.S. economy will continue to grow.”
Fact: “Considerable uncertainty about the economic outlook remains,” Yellen continued, saying she was watching persistently low productivity growth, pressure from China's "considerable challenges" economically, Brexit risk, and a "loss of momentum" in the jobs market.
Another bit of fiction. Yellen made sure to underscore that this jobs market weakness was "not a deterioration." It was likely "transitory," she said.
As Hedgeye CEO Keith McCullough pointed out in this morning's Early Look, Yellen was asked directly about her favorite labor market indicator, the Change in Labor Market Conditions Index, being negative on an absolute basis for 5 months in a row. She responded with an answer about the importance of “levels" in which she essentially suggested that the rate of change wasn't important.
That's sad because, in addition to Yellen's favorite indicator rolling over, the rate of change in jobs growth is rolling over too. Proof? Take a look at the chart below. Non-farm payroll growth has been "deteriorating" since February 2015.
On Tuesday, ECB head Mario Draghi, said that European policymakers "stand ready" to act in the event of a Brexit vote.
In other words, fire up the helicopter?
Yesterday, Bloomberg report that sources familiar with Japan's Ministry of Finance had ruled out unilateral intervention in the event of a Brexit surge in the yen. More likely, sources said, would be a joint intervention via the G7:
"This time, the G-7 probably would issue a statement to address any turmoil on Friday, and if there were joint intervention it would probably make that public, according to the people familiar with the talks. The G-7’s last joint currency intervention was in the wake of the 2011 Japan quake, when a statement was issued."
Meanwhile, BOJ Governor Haruhiko Kuroda (who was at the Ministry of Finance from 1999 to 2003) has warned about the "big" impact that currency gains could have on Japan’s inflation. On Monday, Kuroda said that the BOJ stands ready to add stimulus if needed.
But what makes policymakers so sure the intervention would be successful? The yen is up 13% this year despite the BOJ's negative interest rate policy and all the jawboning out of the Ministry of Finance.
As flummoxed central planners all over the world continue to flounder amidst stagnating economic growth, we continue to reiterate that the central planning #BeliefSystem is breaking down.
Takeaway: If the U.K. votes to exit the EU, the economic effects will likely be much smaller than most gloom and doom estimates.
Editor's Note: Below 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.
I was in Amsterdam recently and listening to news reports of the gloom and doom that would occur if the U.K. voted to exit the EU. The economic motivation for the creation of the EU was that it would permit the free flow of labor and capital among the member nations and would reduce or eliminate restrictions on trade. If this was all the EU did, there would be no rationale for exiting the EU because economic theory shows that the net benefit of removing such restrictions is unequivocally positive. Consequently, any move that would inhibit the flow of labor and capital and reduce trade would be unequivocally negative.
But this is not all the EU does. The EU sets all sorts of regulations, transfers wealth among member nations, etc. These other aspects of being in the EU create winners and losers. But economic theory cannot tell us whether the net benefits of these other aspects of the EU are positive or negative. Consequently, it is essentially impossible to know whether the U.K. would be worse off or better off if it exits the EU.
I have no idea whether the U.K. will be better or worse off, so I don’t have an opinion about how the vote should turn out. Nevertheless, I am very confident that the negative effects of exiting are overestimated by many of those who favor remaining in the EU would like people to believe.
Since it is virtually impossible to know whether the U.K will be better or worse off, those who favor remaining in the EU will have a strong incentive to overestimate the economic consequence of exiting. Of course, those in favor of exiting have the same incentive in the opposite direction. But they have a weaker economic argument. They have to argue that the net benefits of reduced regulations, wealth transfers, and the like are not only positive but more than offset the negative effects from the reduced mobility of economic resources and more trade restrictions. This is much more difficult because there is no fundamental economic theory that says this must be so.
Proponents of staying understand this advantage. Moreover, they can use standard economic models to provide estimates of the effect of exiting the EU on income, employment, trade, etc. It is not surprising that many of these estimates are very large. The more uncertainty and fear they can create, the more likely it is that those who are uncertain whether they should vote remain or leave, will decide to vote to remain.
There is another reason to believe that the effect on economic activity will be smaller than many proponents of remaining in the EU suggest. While the movement of labor and capital will be less free and trade more difficult if the U.K. exits, economic forces will tend to mitigate these negative effects. Specifically, trade between the U.K. and other EU members that has been mutually beneficial will remain mutually beneficial. Consequently, governments and firms will have an incentive to maintain those relationships. While some countries might retaliate against the U.K., this is unlikely to persist so long as the continuation of these relationships is in the longer-run economic interest of all parties.
I predict that if the U.K. votes to exit the EU, the economic effects will be much smaller than most of the estimates I have heard. I don’t expect this will happen. I expect the U.K. to vote to remain in the EU on June 23 because two powerful forces—fear of the unknown and inertia—will push the vote in that direction.
However, should it happen, I will write a follow up essay in a year or two to see whether my prediction is correct.
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