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CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Managing Director Neil Howe. Click here to learn more.

 

"... As head of Hedgeye’s new Demographic Sector, on Monday I wrote a Hedgeye column called “Driverless Cars: Unsafe at Any Speed: Why Fully Autonomous Vehicles are Still a Long Way Off.” I won’t recap the piece here (you can read it yourself), but my basic argument focuses on (1) the absurd overconfidence in the ability of today’s AI and sensors to replace the higher-order thinking of human drivers; (2) the all-or-nothing contradiction of semi-automatic driving; and (3) the obvious revulsion with which people will respond to machines that kill them at random." 

 

CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car - driverless 3


Hubris

“I'm a Silicon Valley guy. I just think people from Silicon Valley can do anything.”

–Elon Musk

 

We can thank the ancient Greeks for so many of civilization’s achievements: stunning advances in philosophy, logic, mathematics, politics, economics, and technology. We can even thank them for these very words: They all derive from Greek.

 

It is only fitting that an ambitious people who learned to soar so high gave us yet another word: hubris. Sophocles defined it as “outrageous arrogance” that offends the gods. To possess hubris is to consider yourself so all-knowing and all-powerful that you have the world utterly within your grasp. To you, all secrets are revealed. To you, the weakness and worry of other mortals is a mere annoyance.

 

From what I know about Elon Musk, I greatly admire him—for his daring, imagination, and obvious brilliance.

 

But as I read the breaking news about Tesla—the SolarCity deal and, more seriously, the new SEC and NHTSA investigations about the fatal accident in Florida—the word hubris does come to mind. And I’m not just talking here just about Musk’s personally, but about the entire Silicon Valley community he personifies. These digital titans take pride in their brain power. They mock the gods. They create high-tech miracles. And after each success, they promise to create something even more awesome and revolutionary than the last.

 

Does there come a moment when hubris over-reaches? When it meets nemesis, the divine spirit of retribution? It happens in Greek tragedy: No one was bolder, smarter, and more “rational” than Oedipus Rex before his fall. So what about real life?

 

Well, it just might happen, blow by blow.

 

As head of Hedgeye’s new Demographic Sector, on Monday I wrote a Hedgeye column called “Driverless Cars: Unsafe at Any Speed: Why Fully Autonomous Vehicles are Still a Long Way Off.” I won’t recap the piece here (you can read it yourself), but my basic argument focuses on (1) the absurd overconfidence in the ability of today’s AI and sensors to replace the higher-order thinking of human drivers; (2) the all-or-nothing contradiction of semi-automatic driving; and (3) the obvious revulsion with which people will respond to machines that kill them at random.

 

Silicon Valley technophiles have persuaded Detroit that it will be able to bring driverless cars to the consumer market by 2018 (Tesla) or 2021 (BMW). My own estimate, admittedly a guess, is more like two decades at a minimum. I don’t know that I’m right. But I am certain that they’re wrong.

 

What interests me more, though, is the mindset that leads to such grossly unrealistic expectations. Apparently it starts with taking something as social, human, intimate, and complex as personal transportation and treating it as a mere engineering problem. And it ends with chilling cost-benefit dismissals of those who die as a result.

 

I wonder what leads to this mindset. Is it overconfidence or arrogance? Is it too much left brain or too little EQ? Could it all be summed up in just one word, hubris?

 

Back to the Global Macro Grind…

 

What are we to make of the post-Brexit rally? This morning, after a day in which the rally seems to have stalled or paused, it’s a good time to reflect.

 

Clearly, a dramatic shift in the market’s perception of future CB behavior is the major driver. The market believes the Fed has responded to Brexit by taking any Fed hike this year off the table. The BOE will soon initiate cuts. The ECB is turning up the dial on its corporate-bond vacuum cleaner. And the BOJ, in the wake of Abe’s electoral triumph, awaits orders to unleash the Kraken (or Mizuchi, if he’s still around).

 

Hubris - Three central bankers cartoon 07.06.2016

 

With ECB and BOJ now buying corporates, often at negative yields, they are putting direct downward pressure on U.S. corporate yields—which in turn directly subsidizes stock buybacks. And this puts further fuel under the S&P.

 

Bottom line: Policy leaders are promising to keep rates low and pour oil on the waves of volatility. Over the last decade, we have repeatedly witnessed this positive equity-and-bond rally from redoubled QE, just as we have seen the opposite—recall the tantrum?—when cold turkey was on the menu.

 

It may seem perplexing that monetary leaders will respond to a perceived global threat by pushing markets higher than they were before the threat. Perplexing indeed. But you’re used to that by now, right? In our brave new world, markets serve less to give authorities information about the future; they now serve more as tools by which authorities try to manipulate the future.

 

The recent rally has also tilted global markets toward the U.S. By fundamentally weakening Europe’s prospects, Brexit makes the still-chugging U.S. economy look all that more appealing. And despite Janet’s white flag on hikes, she has no plans to try out the exotic new QE and NIRP experiments coming out of the ECB and BOJ. Which makes the U.S. economy look better still.

 

Not surprisingly, while the U.S. S&P is hitting record highs, stock markets elsewhere remain way down in the shadows of prior glory elevations. So the dollar is rising. Oil is falling. Deflation is once again on the table. And, should these trends continue for long, the global economy will suffer. At which point markets would ultimately protest and reverse direction.

 

One critical fact to keep in mind: The recent rally is not a response to any significant improvement in the economic outlook.

 

The United States? The Atlanta Fed’s GDP Nowcast for Q2 has actually declined 50 basis points since June 23. The Fed’s beige book for June, released yesterday, was utterly ho-hum: Steady but tepid growth, no price pressure, possibly “weakening” retail. And now we are entering earnings season, which is nearly certain to deliver a stunning fifth-in-a-row quarter of declining S&P profits.

 

The rest of the world? Late last week, the IMF further downgraded its forecast for the Eurozone’s GDP growth and inflation for both 2016 and 2017. For the past 15 months, according to a report released yesterday by Global Trading Alert, the volume of global trade has flatlined—the first time this has ever been known to happen outside of a global recession. Needless to say, most commodity exporters will be hammered by a further rise in the dollar.

 

Now there are some who will say this is all perfect news to keep an equity bull market rolling: Just enough momentum to keep the economy above stall speed, but not enough to trigger another bother from inflation, from wages, or from the Fed.

 

I won’t dismiss the possibility out of hand. After all, a steady diet of luke-warm “Goldilocks” gruel has worked pretty effectively in recent years.

 

But in our current late-cycle environment, with so many indicators gathering negative speed in rate-of-change terms, I doubt this is likely. And even if such an arrested or “frozen” business cycle were possible economically, it won’t fly politically. People will no longer tolerate it. The social mood has its own cycle. Don’t forget: In November, America faces its own Brexit moment.

 

To learn more about receiving my Demographic Sector research please contact . Additionally, I encourage you to check out our site to read my weekly column, “About Everything.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.32-1.55%

SPX 2096-2166
USD 95.21-97.01
EUR/USD 1.09-1.12
Oil (WTI) 43.28-47.40

Gold 1311-1388

 

Best of luck out there today,

 

Neil Howe

Managing Director

 

Hubris - driverless 3


JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2

 

“Try and fail, but don’t fail to try.”

     - John Quincy Adams

 

FINAL VEEP VETTING: Donald Trump is wrapping up the vetting process for the bottom half of the Republican ticket and members of his family are heavily involved in the final screening; IN Governor Mike Pence, AL Senator Jeff Sessions, and former House Speaker Newt Gingrich sat down for last minute meetings with the Trump family, while NJ Governor Chris Christie traveled side by side with Trump earlier in the week. Trump’s focus has been on political experience - Christie fits that bill as well as that of “attack dog” and is said to be Trump’s favorite given his early support, but the family and many anxious conservatives believe Pence is the better option.  We’ll all be glued to his presser tomorrow morning...

 

SHORING UP HER SENATE SUPPORT: Hillary Clinton heads to Capitol Hill to meet with Senate Democrats just hours before they skip town for the summer recess. Unlike their Republican brethren across the aisle, many members of the caucus will have outsized roles at the Democratic convention and throughout the election and Clinton is looking to shore up and rally the troops coming off one of her worst weeks yet. Clinton will then cross the Potomac to hit the campaign trail in the Old Dominion with veep shortlister and Senator Tim Kaine in that battleground state.

 

ZILCH FOR ZIKA?: True to form this year, the House plans to leave town earlier than expected to start their summer recess - but not so fast for the other side of the Capitol as a last minute push for Zika funding is expected to be considered. Senate Majority Leader Mitch McConnell has reiterated Republican’s take-it-or-leave-it offer on the House-passed package and continues to emphasize that he has held the same line in private conversations with the Administration. The calculated move backs Senate Democrats into a corner with the House’s departure, ensuring nothing more can be added or removed. We don’t expect the bill to move given President Obama’s veto threats and leaving more unfinished business for September.  

 

WALL STREET SHIVERS: The increasingly progressive Democratic platform provides language for “a financial transaction tax on Wall Street” – but Clinton isn’t focused on big banks, shifting her attention instead to taxing high-frequency traders who spam markets with orders they later cancel. Remember, platforms have no formal holds on candidates, but do reflect the general direction they plan to follow. The inference gives another nod to Sanders, who wants a broader tax on financial transactions. Though it remains little more than a talking point for now, it could gain momentum throughout future policy discussions, as a similar idea was floated in the House a few years ago.

 

RISING RISK ACROSS THE POND: As Euro-area financial markets continue swooning over Italian bank bailout hopes, keep a close eye on credit default swaps. Post-Brexit, credit default swaps for some of Europe’s largest financial institutions remain elevated versus where they were at the start of this year. Look no further than Unicredit CDS, +43.4% year-to-date; Aviva PLC, +59.6%; Deutsche Bank: +139.9%. Incidentally, one of our top three 3Q16 Macro Themes is #EuropeImploding. The situation in Europe promises to get more interesting in the months ahead.

 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

The Macro Show with Christian Drake Replay | July 14, 2016

CLICK HERE to access the associated slides.

An audio-only replay of today's show is available here.


ICI Fund Flow Survey | Domestic Disturbance

Takeaway: Even with all the focus on the Brexit damage to come, investors are still more pessimistic on domestic equities than international.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

Post-Brexit vote, investors were more optimistic about international equity in the 5-day period ending July 6th, contributing +$1.4 billion to the category. However, domestic equity continues to be a source of funds, losing -$4.5 billion. As defensiveness prevailed, all fixed income categories but global bonds experienced inflows last week, bringing total bond fund flows to +$1.3 billion. In ETFs, both equity and bonds took in a healthy amount of capital. Equity ETFs gained +$4.1 billion with bond ETFs gaining +$6.5 billion. On a year-to-date score, equity ETFS are languishing however averaging just over a -$1.0 billion redemption per week versus passive bond ETFs which are just starting a new growth curve taking in +$1.7 billion.


ICI Fund Flow Survey | Domestic Disturbance - ICI1

 

In the most recent 5-day period ending July 6th, total equity mutual funds put up net outflows of -$3.1 billion, trailing the year-to-date weekly average outflow of -$2.8 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$1.3 billion, trailing the year-to-date weekly average inflow of +$2.2 billion but outpacing the 2015 average outflow of -$475 million.

 

Equity ETFs had net subscriptions of +$4.1 billion, outpacing the year-to-date weekly average outflow of -$1.0 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$6.5 billion, outpacing the year-to-date weekly average inflow of +$1.8 billion and the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Domestic Disturbance - ICI2

 

ICI Fund Flow Survey | Domestic Disturbance - ICI3

 

ICI Fund Flow Survey | Domestic Disturbance - ICI4 2

 

ICI Fund Flow Survey | Domestic Disturbance - ICI5

 

ICI Fund Flow Survey | Domestic Disturbance - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Domestic Disturbance - ICI12

 

ICI Fund Flow Survey | Domestic Disturbance - ICI13

 

ICI Fund Flow Survey | Domestic Disturbance - ICI14

 

ICI Fund Flow Survey | Domestic Disturbance - ICI15

 

ICI Fund Flow Survey | Domestic Disturbance - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Domestic Disturbance - ICI7

 

ICI Fund Flow Survey | Domestic Disturbance - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, the financials XLF ETF lost -6% or -$952 million in redemptions.

 

ICI Fund Flow Survey | Domestic Disturbance - ICI9



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Domestic Disturbance - ICI17

 

ICI Fund Flow Survey | Domestic Disturbance - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$6.8 billion spread for the week (+$992 million of total equity inflow net of the +$7.8 billion inflow to fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is -$3.4 billion (negative numbers imply more positive money flow to bonds for the week) with a 52-week high of +$20.2 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Domestic Disturbance - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Domestic Disturbance - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

Patrick Staudt, CFA







July 14, 2016

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INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.55 1.32 1.48
SPX
S&P 500
2,096 2,166 2,152
RUT
Russell 2000
1,155 1,216 1,201
COMPQ
NASDAQ Composite
4,835 5,062 5,006
NIKK
Nikkei 225 Index
15,129 16,450 16,231
DAX
German DAX Composite
9,307 10,097 9,931
VIX
Volatility Index
12.40 18.25 13.04
USD
U.S. Dollar Index
95.21 97.01 96.21
EURUSD
Euro
1.09 1.12 1.11
USDJPY
Japanese Yen
100.30 105.16 104.44
WTIC
Light Crude Oil Spot Price
43.28 47.40 45.11
NATGAS
Natural Gas Spot Price
2.60 2.99 2.75
GOLD
Gold Spot Price
1,311 1,388 1,343
COPPER
Copper Spot Price
2.05 2.21 2.24
AAPL
Apple Inc.
94.09 98.35 96.87
AMZN
Amazon.com Inc.
718 761 743
NFLX
Netflix Inc.
89.20 99.96 96.43
GOOGL
Alphabet Inc.
680 738 729
JPM
J.P. Morgan Chase & Co.
57.10 63.99 63.16
AA
Alcoa, Inc.
8.83 10.99 10.71



Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


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