In this excerpt from The Macro Show this morning, Hedgeye Demography Sector Head Neil Howe answers a subscriber’s question on how whether income inequality in the U.S. is depressing aggregate demand.
Takeaway: Convention Coup; Speaker Engagement; Fiscal Year Funding Fiasco
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.
"Tell the truth, work hard, and come to dinner on time."
-Gerald R. Ford
With less than a week to go until the convention, anti-Trump forces are scrambling faster than ever to dethrone the presumptive nominee. Removing Donald Trump may be their main objective, but another option is being weighed – attempting to select his veep akin to an arranged marriage. The nominee's running mate is still technically decided by an independent delegate vote and delegates have no obligation to support the nominee's choice.
The Rules Committee is set to meet later this week to decide convention rules and the party platform, and we doubt any coup will succeed, but this could get interesting depending on Trump’s highly anticipated pick reportedly coming at the end of this week.
Speaker Paul Ryan has finally agreed to speak at the convention, becoming the most notable stumper on a somewhat atypical lineup. Ryan’s speech is expected to be penned by Ryan himself and will focus on the House Republican agenda and the sharp contrast between Republican ideals and another term of progressive Democratic policies. Expect Ryan’s speech to be more of a pitch for the party than a pitch for the nominee.
FISCAL YEAR FUNDING FIASCO
If you believed there was any chance of Congress agreeing on its annual spending bills this year, forget it – it’s time to focus on avoiding a government shutdown. As we mentioned numerous times throughout the past few months, the process of moving individual appropriations bills was limping along with some progress in each chamber, but with Congress about to call it quits for the summer, almost all hope has been lost. Republicans have now shifted their attention to a timeline for a stopgap spending bill they would need to move before the end of the fiscal year on September 30.
Takeaway: Here's our take on some of today's top financial stories.
"Be wary of the arrogant intellectual who comments from the stands without having played on the field."
Helicopter Ben Visits Japan
"Bernanke met Haruhiko Kuroda, the central bank governor, for lunch Monday," Bloomberg reports. "The BOJ issued no statement on the substance of those talks, which come three weeks before its next policy meeting as it confronts a fresh strengthening in the yen this year that risks undermining inflation and weakening the appetite for investment and wage increases." Interestingly, Bernanke has been weighing in on the efficacy of helicopter money recently.
OUR TAKE: As the BOJ's negative interest rate policy (NIRP) fails and continues to draw the ire of the Japanese public, the likelihood that central planners turn to helicopter money is rising.
Earthquakes, Unforeseen Events & Brexit
The OECD will hold off on publishing its Composite Leading Indicators (CLIs) – "an effective tool during periods of extreme volatility" – until September in order to properly assess the Brexit shock. In a press release, the OECD compared Brexit to an unforeseen event like a natural disaster:
"The CLIs cannot, however, account for significant unforeseen or unexpected events, for example natural disasters, such as the earthquake, and subsequent events that affected Japan in March 2011, and that resulted in a suspension of CLI estimates for Japan in April and May 2011.
The outcome of the recent (23 June) Referendum in the United Kingdom is another such significant unexpected event, which is affecting the underlying expectation and outturn indicators used to construct the CLIs regularly published by the OECD, both for the UK and other OECD countries and emerging economies."
OUR TAKE: As Hedgeye Director of Research Daryl Jones wrote in today's Early Look "So the moral of the story is: if you don’t like the numbers, just suspend reporting them. That’s one way to deal with adversity anyway. Practically speaking, it is pretty difficult to call Brexit an unforeseen event. Perhaps it was viewed as improbable, but hardly unforeseen."
A pre-Brexit survey of 8,2000 firms in the U.K., conducted by the British Chambers of Commerce, found that "UK economic growth was uninspiring in the run-up to the EU Referendum." The BCC found that services sector sales continues to fall and manufacturing sales remained at historically "low ebb."
OUR TAKE: In our Q3 Macro Themes, the Hedgeye Macro team warned that "Europe's cyclical and structural growth and inflation headwinds" combined with political risk would cause ... #EuropeImploding. More to come.
Equity Market Bull & S&P all-time highs
"We don’t have the rising (bond) yields that would typically check the market rally, that’s one of the reasons we keep going higher," Jim Paulsen, chief investment strategist at Wells Capital Management told Reuters. Paulsen continues: "I certainly think (low bond yields) are creating problems in the bond-like stocks. I wouldn’t want to be sitting in utilities or REITs right now."
OUR TAKE: We've been The Bulls on Long Bonds (TLT) and Utilities (XLU) on U.S. #GrowthSlowing. That's been the right call and we're sticking with it (see chart below). As for Paulsen's call against bonds and utilities, it is what it is ... a whole lot of bull.
Taleb: The Importance Of Probability
"One thing it took me 30 years to realize is that the way people compute future performance of portfolios is wrong because they take alpha and simply apply it as if you were invested in that strategy. But if you have any uncle point, in other words if you hit ruin, then you never realize that return," author and distinguished professor Nassim Taleb tells Bloomberg.
The "uncle point" Taleb is talking about is the point at which you have to reduce your position or take a loss. Now, an investor might have realized their expected returns if they were able to wait for a downturn to mean revert but "uncle points," like a margin call, prevent such long-term patience. Taleb's conclusion? "People [therefore] underestimate how much protection they need."
OUR TAKE: Taleb's analysis is always thoughtful and this video is no exception.
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Takeaway: Total market volume was down -24% versus the 1-month and 3-month average yesterday as the S&P 500 breached its all-time high.
All-time high in the S&P 500 yesterday?
Meanwhile, US Equity Volume crashed. Here's analysis from our Macro team in a note sent to subscribers earlier today:
"Take a look at volume the last two trading days. We’re comfortable calling the nearly 2% move in the SPY Friday-Monday a “melt-up”. Market and Total exchange volume on Friday was down -8% and -7% vs. 1-month averages on Friday and yesterday volume was much lighter still. Total market volume was down -24% vs. 1-month averages and total exchange volume was down -19% vs. 1-month Averages showing the lack of breadth at all-time highs and cycle high market multiples."
In other words, yesterday's no volume up day is an expression of investors' lack of conviction. Funny how market volume rips on down days and is nowhere to be found on bull-touted "rallies."
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, rates and bond spreads, and key currency crosses. 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.
CLICK TO ENLARGE
Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.
"... The FTSE has largely shaken off the impact of BREXIT and is now approaching 52-week highs. The British pound on the other hand remains at close to 52-week lows and has barely budged since collapsing after the June 24th referendum. Perhaps no currency is an island?"
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