“Too many of us take great pains with what we ingest through our mouths, and far less with what we partake of through our ears and eyes.”
-Brandon Sanderson
The internet is full of food for investment thought. But it’s mostly low on analytic calories and/or macro-nutrient density – superficially fetching but, from a practical investment application perspective, it’s akin to only eating lettuce or filling up on bread before the main course arrives.
While our morning missive generally strives for tactical and actionable research alpha, I thought I’d try something different this morning and pivot from the normal, prosaic brain candy to some global macro eye candy.
Back to the Global Macro Grind…
Think of the chart selection below like a mini macro buffet of enticing analytical morsels to help fill your data mosaic plate.
Let the cerebral satiation commence…
1. Consumption Capacity: For most households the trend in wage and salary income defines the capacity for sustainable consumption growth. More holistically, and over shorter and medium terms, spending capacity is more aptly defined by income and credit growth. And outside of high ticket purchases like home & autos, revolving credit (i.e. credit cards) represent the primary means of pulling forward consumption for most households. And credit trends are of increasing import to consumption trends at this point in the cycle.
With employment growth slowing, wage inflation and credit growth, collectively, need to rise as fast as payroll growth slows in order to maintain the current pace of HH spending growth. After supporting spending over the last year in the face of decelerating aggregate income growth, revolving credit growth has slowed in each of the last two months.
2. Global Trade = Past Peak?: After 30 years of ongoing improvement world trade now appears to be past peak. According to World Trade Organization data, World Trade of Goods peaked into 2014 and has since been in steady decline. The trend in export of Services looks similar as does total trade as a % of world GDP (i.e. it’s not just a function of falling energy prices). Remember, the globe as a whole is a closed system and the primary mechanism of action of last ditch currency war policy is to drive relative improvements in global export share. A flat to modestly larger share of a smaller pie is not the policy path to sustained prosperity.
3. Household Formation | All the Wrong Places?: Despite employment and income growth among 25-34 year olds inflecting 3 years ago and subsequently growing at a premium to the broader average, household formation for the group has yet to really pick up. According to the CPS monthly micro data, the welcomed pickup in household formation observed over the last 6 quarters has largely been a result of household formation in older age cohorts. Headship rates for young adults, the share of 1st-time buyers in the existing market and the prevalence of basement dwelling (% of 18-34 year olds living with parents) have all remained near their post-crisis peak through 2015. Ball under water or false hope?
4. Chinese Debt: Credit growth and proclivity for malinvestment in China is well publicized but I still think loan growth in 1Q was underappreciated. New loan growth in China was a remarkable $704B in 1Q16. To put that in context, the ARRA Act of 2009 (i.e. Peak Crisis, U.S. Recession Stimulus Package) was just north of $800B. What did that buy them? – another lower cycle low in GDP for 1Q.
To put the protracted Chinese debt binge in further context, cumulative private sector credit growth for the U.S. and Eurozone from 2000-2008 was ~$25T combined. Private sector credit growth in China from 2000-Present is ~$24.9T – essentially as much as the US and EU combined during the peak leverage/bubble expansion. Recall also that the 1Q16 increase – which saw loan growth increase $380B in January alone -occurred at the peak of global deflationary angst and probably put a floor under the cratering in commodities and the downward spiraling of the commodity correlation trade in equities. Relatedly, Chinese non-performing loans rose to 1,392 billion Yuan as of March 31, 2016, which is up +41.7% year over year.
5. Luxury Spending: Estimates on the impact of the wealthy on consumer spending vary but all put the share of consumer outlays by the top quintile at greater than 40%. Spending on luxury goods – a proxy for the state of high end consumerism – is growing at its slowest pace since 2010 in 2016 YTD. In fact, the -2.7% YoY decline in spending recorded in May was the 1st month of negative growth since 2011.
6. Housing | Foreign Demand: Strong Dollar, Weak Global Growth & New Regulation are pressuring foreign demand for residential real estate. According to the latest data from the NAR, total sales to non-resident foreigners declined -11% YoY in the latest year while total dollar volume fell -18.5%. This matters as international buyers have represented ~4% of total transaction volume and ~8% of dollar volume over the last few years and, in select geographies (Miami for example), represent upwards of one quarter and one third of sales and dollar volumes, respectively.
Relatedly, beginning this year the Treasury Department & the FBI will track high end real estate transactions in Miami and Manhattan in an attempt to crackdown on money laundering in the ultra high-end real estate markets. Nationally, nearly 50% of foreign buyers purchasing properties over $5mn are doing so through shell company LLCs.
7. Fund Flows | Bear Tracks: The running year-to-date tally for stock ETFs is now a -$27 billion while the exodus from active equity mutual funds has maintained record pace at -$88 billion thus far in 2016. On the other side of these outflows, of course, is corporate buyback activity. Companies bought back a record $166B in stock in 1Q16 according to Factset and that trend looks to have continued in 2Q. How does record repo activity at all-time highs in equities, 7-years into an expansion register on your long-term shareholder value creation radar?
8. Record Weakness | Industrial Production & Capital Goods: Industrial Production growth has been negative for 12 consecutive months and New Capital Goods Orders have had an epic run of negative growth in 16 of the last 17 months. In each instance the current losing streak represents the worst non-recessionary data essentially ever. To now, Industrial Production has also carried the distinction of sending zero false positive signals with respect to recession signaling over the last 7+ decades.
9. Anchored | 10Y Yields: The simple fact is that you don’t have $13T in negative yielding sovereign debt because everything is awesome and global escape velocity is imminent. Yield differentials – particularly with Japan and Europe – have acted as an anchor on domestic bond yields. At present, the 10Y U.S. treasury yield spread to German and Japanese yields remains as wide as its been in the peri-recession and post-crisis period. Assuming static yields OUS, a return to average post-crisis spread would put the U.S. 10Y under 1%.
10. The “APP Economy”: People have a tendency to look at hiring in the “Information” Sector as their proxy for tech employment trends. This is misleading, however, as employment in Computer System Design – which includes the jobs people typically view as the “app economy” including those related to programming, cloud computing, etc. - is classified under the Professional and Business Services sector.
App economy employment growth decelerated for a 12th consecutive month in June while recording the slowest pace of MoM growth since 2010. The payroll slowdown accords with the conspicuous slowing in tech funding trends. VC funding in Silicon Valley has rolled over the last couple quarters with total deals declining -18% YoY and Total Dollar funding down -19.5% YoY in 1Q16.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.31-1.56%
SPX 2101-2177
VIX 12.24-18.32
USD 95.28-96.92
Gold 1
Best of luck out there today. Have a great weekend,
Christian B. Drake
U.S. Macro analyst