This one speaks for itself.
Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses why the public have stopped paying attention to economists, an update on negative yielding government bonds, the BOJ's latest efforts to prop up their struggling economy, and Italy's plan to help their struggling banks.
"The predictions from economists about the consequences of Brexit were widely ignored. That shouldn’t be surprising. In recent years the public has lost faith the in the economics profession," economist Mark Thoma writes in The Fiscal Times. Thoma recounts the disagreements among economists, who can't seem to agree on why productivity has fallen, declines in the labor force participation, and what is the cause of inequality.
Bottom Line: We are equally skeptical of linear economic forecasters (both at the Fed and on Wall Street). Watch Hedgeye CEO Keith McCullough in the video below, "The 3 Most Overrated Economists in the World."
According to Fitch Ratings, "Investors' flight to safe assets following the UK's EU referendum on June 23 pushed the global total of sovereign debt with negative yields to $11.7 trillion as of June 27, up $1.3 trillion from the end-May total." Japanese government bonds make up a staggering two-thirds of the negative yielding bonds ($7.9 trillion).
Reuters reports that Japanese government and BOJ officials met for a second time post-Brexit in which "Abe urged Bank of Japan (BOJ) Governor Haruhiko Kuroda to ensure the central bank provides ample funds to the market to prevent any credit squeeze."
"A sense of uncertainty and worry about risks remain in the markets," Abe told the meeting. Finance Minister Taro Aso is also closely monitoring currency moves and responding flexibly to market developments in coordination with other Group of Seven economies. In other central-planning news, Chinese Premier Li Keqiang won't allow "rollercoaster" markets following Brexit.
Bottom Line: Central planners are pulling out all the stops to stem the post-Brexit bleeding. For the time being, investors seem to be buying into all the bloviating.
Apparently, the Italian government is considering injecting as much as 40 billion euros ($44 billion) to some of its banks, according to Bloomberg sources. "The government may support lenders by providing capital or pledging guarantees, said the person. The amount is still under discussion and no final decision has been taken, according to the people."
"Italian banks, hurt by 360 billion euros of non-performing loans, sluggish economic growth and record-low interest rates, are under pressure to clean up their balance sheets and restore investor confidence. The country was among the hardest hit by Friday’s market rout that wiped $2.5 trillion from global equity values, with some of Italy’s largest banks dropping more than 20 percent."
Bottom Line: With the ECB's negative interest rate policy, don't expect struggling Italian banks to be in the clear anytime soon. Avoid the region, #EuropeSlowing...
In this excerpt from The Macro Show earlier today, Hedgeye Senior Macro analyst Darius Dale lays out the bull case for Long Bonds (TLT) and explains why consensus has completely missed it.
Subscribe to The Macro Show today for access to this and all other episodes.
Subscribe to Hedgeye on YouTube for all of our free video content.
Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.
Takeaway: All The Right Moves; You're Hired; Benghazi Blame
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.
"Whatever you are, be a good one."
Donald Trump is back on Hillary Clinton’s heels and rallied the faithful delivering an anti-globalization speech in the highly contested rustbelt region. Trump aptly chose a former steel town in western PA for another prepared speech - trashing Republican-backed (and formerly Clinton) at policies promoting free trade (NAFTA, TPP, China), while highlighting the need for an economic renaissance.
In the most detailed economic address he has given to date, Trump slammed Clinton for her insider mentality and for rigging the system, and lamented the downturn working-class families have experienced given the decline in American manufacturing. His shift towards a policy speech has all the right moves, but will a change in style win over a divergence in substance?
Trump’s presidential campaign continues to surprise as he takes integral steps - baby ones - in the right direction. Trump’s campaign announced a handful of new hires in its communications operations as he aggressively tries to match the first-rate team backing Clinton. Better late than never - and more hires are expected to be announced soon - including state directors, surrogates, speech writers and convention advisors.
With Cleveland fast approaching, the unconventional Trump has been hard-pressed by Republicans to move towards a more conventional campaign - we’ll see if these veteran hires put the Trump train back on track.
Republicans delivered the final Benghazi Committee report that criticized the Obama Administration's handling of the 2012 terrorist attack, while Clinton's campaign continues to classify the findings as discredited conspiracy theories. Either way, there are no new significant revelations about the role played by Clinton.
So what’s all the fuss about? The 800-page report is concerning - yet somewhat vanilla - but it's sure to add fuel to the Republican fire throughout the election as they blame Clinton for security lapses leading to the tragic event.
Takeaway: Please note we are removing McDonald's from Investing Ideas (long side) today.
"On both an absolute and relative basis, I’ve been lovin’ it on the long side of Restaurants analyst Howard Penney's bullish MCD call," Hedgeye CEO Keith McCullough writes today. "Now though, with US Equity Beta becoming more obviously at risk, I want to take a break," he added. "I’d rather come back to the story after this summer’s volatility has played out in full. This Q2 earnings season is going to be ugly."
We added McDonald's to the long side of Investing Ideas on August 11, 2015. Penney wrote then, "2015 will be the last time this stock is below $100."
Takeaway: We see 20%-40% downside for shares of Kroger from current levels. Not to mention the massive potential pain ahead for pensioners.
Earlier this spring, I presented my short call on Kroger (KR), arguing that America’s largest supermarket chain was feeling the increased pressure of an intensely competitive food retail environment. That’s the plain vanilla rationale behind my bear case. But there’s more.
One of the more distressing risks lurking beneath the surface—one that represents a threat not only to shareholders, but to pensioners as well—is Kroger’s exposure to a large number of multi-employer pension plans (MPPs). The company intentionally keeps these plans in an underfunded status and this has the potential to backfire on the company. In addition to increasing annual costs, the company’s total exposure to these plans, in another downturn, is potentially debilitating.
Kroger’s woes are emblematic of an affliction plaguing pension funds across the country. It’s the same old story – chronic underfunding, as the swelling ranks of retirees overtake a smaller base of currently contributing employees.
To underscore the issue at hand, MPPs are the primary source of retirement income for over ten million active, inactive and retired workers and their survivors. A number of these pension plans, much like their state-run brethren, are severely underfunded. In a report to Congress in 2013, the Pension Benefit Guaranty Corporation (PBGC) estimated that MPPs have $757 billion in pension benefit liabilities, $391 billion of which are unfunded obligations. No small potatoes.