The Folly of Fed Central Planning & Unintended Consequences

The Folly of Fed Central Planning & Unintended Consequences - Fed dunce cap cartoon 12.23.2015


As we've been noting in the past few days, the market is not assigning a more than 50% probability of a Fed rate hike until the beginning of 2018. 


That's right... a year and a half from now.


Meanwhile, rate CUT expectations have spiked and the market marches higher. Here's analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:


"Watching the Old Wall (and it’s media) shift to “Fed on Hold, buy stocks” is funny – but a friendly reminder that this is not funny if you are a bank; 1.44% 10yr Yield minus 0.62% 2yr = fresh YTD low (and low for #TheCycle) as trending US employment growth continues to slow ex-Brexit."



Below is a chart of 10s/2s yield spread. Notice that the last time it was at its current level the U.S. economy was in recession:


The Folly of Fed Central Planning & Unintended Consequences - yield spread 6 29


In short, the compression of the yield spread means pain for bank net interest margins... which is why bank stocks look like this year-to-date: 




The Folly of Fed Central Planning & Unintended Consequences - xlf financials


Take a look at the U.S. equity market sector scorecard.


Note: Our favorite sector long Utilities (XLU) continues to outperform Financials (XLF) by a wide margin:



What to do?


Stick with what's working in 2016. Long Utilities, Short Financials

Daily Market Data Dump: Wednesday

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




Daily Market Data Dump: Wednesday - equity markets 6 29


Daily Market Data Dump: Wednesday - sector performance 6 29


Daily Market Data Dump: Wednesday - volume 6 29


Daily Market Data Dump: Wednesday - rates and spreads 6 29


Daily Market Data Dump: Wednesday - currencies 6 29

CHART OF THE DAY: A Closer Look At Housing Cost Burdens

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


"... As can be seen in the Chart of the Day below, almost half of all renter households make less than $75K so the incidence of moderate and severe cost burdens is the prevailing reality for over 20 million households.


And as housing’s share of wallet grows, capacity for other discretionary consumption declines proportionally.  Indeed, severely cost burdened households spend more on transportation costs and significantly less on Food, Healthcare and retirement savings."


CHART OF THE DAY: A Closer Look At Housing Cost Burdens - 06.29.16 Cost Burden CoD

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Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top

Takeaway: Global equities have lost $12 trillion in market cap since peaking last June. That's a 19.9% decline!

Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - Stocks crash test dummies cartoon 02.18.2016


Don't believe that the global economy is slowing?


Since peaking last June, global equities have lost $12 trillion in market cap as of this morning. Take a look below at the Bloomberg World Exchange Market Capitalization index.


Yep. That's a 19.9% hair away from full-blown crash mode.


Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - bloomberg world market cap


Here's a look at select equity markets around the globe and their drawdowns since then:


Eviscerated ... $12,000,000,000,000+ Erased Since Global Equity Top - global equities 6 29


What's the big message here?


For starters, global demand hasn't bottomed ... and the outlook remains unequivocally bearish.

Cartoon of the Day: Eject!

Cartoon of the Day: Eject! - EU cartoon 06.28.2016


Who's next? Grexit? Spexit? Frexit?

The Filter: Hedgeye's Take On Today's Financial News

The Filter: Hedgeye's Take On Today's Financial News - lemmings cartoon 02.23.2016


Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses St. Louis Fed head James Bullard's poor forecasting abilities, Bernanke's Brexit blog post, sorry hedge fund European equity bets and the bubble in mergers and acquisitions.




Poor Bullard

Interesting reads from the St. Louis Post-Dispatch and the Wall Street Journal on St. Louis Fed head James Bullard's forecasting abilities (or lack thereof). Here's the St. Louis Post-Dispatch, "For someone who has called himself “the North Pole of inflation hawks,” James Bullard sounds dovish these days." And here's WSJ:


"The president of the Federal Reserve Bank of St. Louis has developed an unrivaled reputation for changing his mind on the central question of whether the Fed should raise interest rates. He surprised markets again by declaring on June 17 that he now favors raising the Fed’s benchmark interest rate just once this year, by a quarter of a percentage point, then holding it steady through 2018."


Bottom Line: The biggest risk to investors is believing in the Fed's serially-overoptimistic and incorrect forecasts.


Bernanke's Brexit Blog Post

Former Fed head Ben Bernanke weighed in on Brexit today and the effects on the global economy via the Brookings blog:


"Among the hardest hit countries is Japan, whose battle against deflation could be set back by the strengthening of the yen and the decline in Japanese equity prices. In the United States, the economic recovery is unlikely to be derailed by the market turmoil, so long as conditions in financial markets don’t get significantly worse: The strengthening of the dollar and the declines in U.S. equities are relatively moderate so far."


Bottom Line: Bernanke's modus operandi has been to devalue the dollar (the US Dollar hit a 40-year low during his reign as Fed head). What makes him so sure the Fed has that power now? The central planning #BeliefSystem is breaking down.


The Filter: Hedgeye's Take On Today's Financial News - central bankers cartoon 09.08.2015 large


Hedge Fund Herding

"While some hedge funds have profited from the pain crippling global markets since Britons voted to exit the European Union, more funds may be facing potentially heavy losses," WSJ's Gregory Zuckerman writes. Apparently, a lot of hedge funds were buying European equities ahead of the vote.


Bottom Line: "2016 might go down as the worst year for hedge funds ever; so many of the 10,000 lack a repeatable macro process," Hedgeye Senior Macro analyst Darius Dale writes. That's a tough pill to swallow especially after last year's showing. In 2015, hedge funds lost more than 3%, on average, according to early estimates from hedge-fund-research firm HFR Inc., while the S&P 500 returned 1.4%, including dividends.



Here's the headline from Nikkei"Brexit survey: Japanese firms see weaker European economy." "Nearly 88% of respondents think the U.K.'s exit from the EU will harm their operations: 34.1% expect a negative impact while 53.7% predict the effect will be mildly negative. None of the 123 chiefs expects a positive outcome for their business."


Meanwhile, a survey of 1,000 U.K. business executives conducted by the Institute of Directors, found "about a quarter of respondents are planning to freeze recruitment, with 5% saying they would cut jobs. One in five executives said they were looking to move operations outside the U.K."


Bottom Line: The Brexit fallout continues.


The biggest M&A Bubble In History?

According to Bloomberg, "Companies paid a median of 11.07 times their target’s earnings before interest, taxes, depreciation and amortization through June 27 to make acquistions, the data show. That’s the most since at least 2007." The story also notes a drop in deal value. "About 18,000 deals with a total value of about $1.5 trillion dollars were announced so far in 2016, compared to $1.7 trillion in the same period last year."


The Filter: Hedgeye's Take On Today's Financial News - bloomberg M A


Bottom Line: "This is one of the top M&A Bubbles in world history," Hedgeye CEO Keith McCullough writes. The pricking of the bubble will be undoubtedly painful as the #LateCycle U.S. economy rolls over.



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