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About Everything | Live Q&A with Neil Howe: The Global Economy Gears Down

 

In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 


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

 

Click here to access the associated About Everything slides.

 


CHART OF THE DAY: Here's Why You Hide Out In Cash & Gold

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Now how about us crazy Canucks who have a 60% Cash position in USD (and 10% in Gold)?

  1. US DOLLAR has not only held @Hedgeye TREND support but continues to rise as the Pound (and Euro) are devalued
  2. USD has developed an immediate-term POSITIVE correlation of +0.8 with GOLD
  3. GOLD continues to hold an intermediate-term INVERSE correlation of +0.9 with 10YR Yields" 

 

CHART OF THE DAY: Here's Why You Hide Out In Cash & Gold - 07.06.16 Chart


Cartoon of the Day: Pounded

Cartoon of the Day: Pounded - Pound cartoon 07.05.2016

 

The British pound hit a 31-year-low against the dollar today as the Bank of England warned that "the current outlook for UK financial stability is challenging."


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The Latest Nonsense From SF Fed's Williams: Brexit Isn't A Big Deal For U.S.

Takeaway: San Francisco Fed head John Williams is full of baloney.

The Latest Nonsense From SF Fed's Williams: Brexit Isn't A Big Deal For U.S. - marketwatch story

 

According to San Francisco Fed head John Williams, Brexit isn't "a big deal for the U.S. economic outlook."

 

Reminder: This is the same guy who, in January, said the Fed should raise rates as many as five times in 2016 because the U.S. economy was "in very good shape."

 

Question: What happened between January and today to make the Fed significantly dial back rate hike expectations? 

 

Answer: The U.S. economy continued to slow...

 

In other words, why should we listen to Fed forecasters who are so continually on the wrong side of their own predictions? Well, we shouldn't.

 

Here's the key Brexit excerpt from the wider interview via MarketWatch and other delusional statements:

 

  • Williams on Brexit: "And so even though I think [Brexit] is a significant event, I am not trying to downplay Brexit, I’m just saying that with a little bit of time, people have kind of gotten more reasonable and kind of sharpened their pencils and said 'ok what does this really mean for Britain, Europe and the global economy' and when you do that, it doesn’t seem quite a big deal for the U.S. economic outlook."
  • Williams on the May Jobs Report bomb: "... A good chunk of the May weakness was either partly due to the Verizon strike effect but also due to some unusually good weather earlier in the year and this was payback for that. So when you take out the effects of the strike, and you adjust for the fact of the unusual weather pattern, you basically see a pattern that job growth has continued to be very good, above trend, through the six months of this year."
  • Williams on Fed-induced financial market imbalances: "... If asset prices, real estate prices, continue to go further and further away from longer-term fundamentals I think that creates risk for the economy, I think it creates risks eventually for the financial system. I don’t think these are risks that are really powerful today. These are not things that worry me, “oh are we going to have a big crash next week or something,” it is just as these imbalances in the economy continue to grow slowly over time I think we will just be facing more difficult challenges in our economic and policy environment in a few years."

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

Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses the ongoing U.S. earnings recession, sliding corporate M&A, the Bank of England's latest post-Brexit salvo, and China's efforts to massage its slowing economic data.

 

The BS Filter: Hedgeye's Take On Today's Financial News - world

Earnings Recession Redux

According to the Financial Times, "US companies face another bleak earnings season with analysts forecasting the longest profit recession since the financial crisis... Earnings of the major groups that comprise the S&P 500 index are seen falling 5 per cent in the second quarter from the same three-month period in 2015."

 

Our Take: As Hedgeye CEO Keith McCullough wrote earlier this morning, "The second quarter should be the worst quarter yet!" Proof? Below are the last year's earnings comps that 2Q16 is up against broken down by sector.

 

The BS Filter: Hedgeye's Take On Today's Financial News - s p 500 earnings tough comps

Corporate Dealmaking Grinds To A Halt?

"Global investment banking fees fell by nearly a quarter in the first half of 2016 from a year earlier as market volatility hit capital markets and M&A deal making... Global fees for services ranging from merger and acquisitions advisory services to capital markets underwriting fell 23 percent to $37.1 billion at the end of June, the slowest first half for fees since 2012," Reuters reports. 

 

Our Take: This is precisely why Hedgeye Financials analyst Jonathan Casteleyn remains The Bear on Lazard (LAZ). As Casteleyn wrote recently, "The M&A cycle peaked last year and historically new restructuring revenue takes 2 years to offset M&A losses."

BoE's post-Brexit Scramble

Today, the Bank of England reduced a bank regulatory capital requirement that was set to be introduced next year "from the planned 0.5% of a banks' lending 'exposure' to 0%," the BBC writes.

 

That could potentially free up £150bn for lending the BoE says, as the Brexit vote added economic uncertainty to U.K. economy. "There is evidence that some risks have begun to crystallise," BoE head Mark Carney said today. "The current outlook for UK financial stability is challenging."

 

On a related note, the Pound/U.S. Dollar cross plunged to a 31-year low today and property funds M&G and Aviva halted redemption requests, as investors feared a peak in Britain's booming commercial property market.

 

Our Take: The worst may be yet to come for Europe's slowing economy.

China Cooking The Books

In China's latest effort to make up economic growth numbers that suit its narrative, the Chinese government is "studying new methodologies to assess the economic contribution from industries seen as part of the 'new economy,' ranging from biotech firms to online retailers," Reuters writes.

 

Our Take: Hedgeye cartoonist Bob Rich has been all over China's massaging of its slowing economic data for some time now.

 

The BS Filter: Hedgeye's Take On Today's Financial News - China cartoon 05.06.2016 normal


A Look At How Central Planners Are Crushing Banks

A Look At How Central Planners Are Crushing Banks - Financials cartoon May 2016

 

Banks stocks around the world continue to crash today. No, it's not post-Brexit fallout. It's just another case of maniacal central planning gone awry. 

 

The latest news comes from Italy. Here's the wrap from the Wall Street Journal:

 

"In Italy, 17% of banks’ loans are sour. That is nearly 10 times the level in the U.S., where, even at the worst of the 2008-09 financial crisis, it was only 5%. Among publicly traded banks in the eurozone, Italian lenders account for nearly half of total bad loans."

 

Isn't it ironic that the European Commission authorized €150 billion in liquidity support for Italian banks last week? This measure will prove counterproductive as the ECB maintains its negative interest rate policy (NIRP). With no end in sight, Eurozone banks will continue to see a squeeze in their net interest margins. 

 

So, while financial media continues to frame Italian banks as the problem child of Europe, it's more appropriate to turn your attention to the ECB. To be clear, central bank policies have been ravaging Europe's banks for quite some time now. Since the ECB announced NIRP in June 2014, European bank stocks are down -48% versus -6.1% for Euro Stoxx 600. 

 

A Look At How Central Planners Are Crushing Banks - european banks

 

Same story in Japan...

 

The BoJ announced NIRP in January 2016. Since then, Japanese bank stocks are down -27.3% versus -12.3% for the Topix.

 

A Look At How Central Planners Are Crushing Banks - japan bank

 

Meanwhile in the U.S. 

 

Year-to-date, Financials (XLF) remain the worst performing sector in the S&P 500. The XLF is down -6.2% as the Fed has dialed back its rate hike rhetoric. The 10s/2s Treasury yield spread (a rate of change proxy for US growth and bank earnings via net interest margins) hit a cycle low today. (Incidentally, Financials remain our favorite 2016 sector short.)

 

As desperate central planners push interest rates ever lower, banks are apparently struggling to make a profit.

 

Who'd have thought?


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