CHART OF THE DAY: China's $704,000,000,000 Debt Binge

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake. Click here to learn more.


"... 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."


CHART OF THE DAY: China's $704,000,000,000 Debt Binge - CoD 4


“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

It was the “perfect” week for the SPY chart

Client Talking Points


One way to keep US Equity Beta Up = Dollar Down (on the week); but how does that continue (from here)? With GBP/USD signaling immediate-term TRADE overbought at $1.34 and US economic growth (Q2 GDP) not tracking to recession (our Q2 predictive tracking algo currently has 1.5-1.8% y/y)?


The other side of the FX (and relative economic slowing) TREND looks like Euro Down (vs. Dollar Up) to us; EUR/USD top-end of the risk range = $1.12, and as European #GrowthSlowing continues, we're looking for a re-test of $1.05; French stocks down -0.8% have the CAC40 out of “crash” mode at -17% from last year’s high, but still bearish TREND @Hedgeye.


The other former Perma Bull narrative on US Stocks was Oil $60-70… and while you pretty much have to change that Equity Beta Chasing narrative quarterly at this point, it’s still important to remind you that Oil is signaling bearish TREND now ($47.54 resistance WTI) inasmuch as USD is signaling bullish TREND @Hedgeye.

Asset Allocation

7/14/16 56% 0% 0% 12% 25% 7%
7/15/16 51% 0% 0% 13% 30% 6%

Asset Allocation as a % of Max Preferred Exposure

7/14/16 56% 0% 0% 36% 76% 21%
7/15/16 51% 0% 0% 39% 91% 18%
The maximum preferred exposure for cash is 100%. The maximum preferred exposure for each of the other assets classes is 33%.

Top Long Ideas

Company Ticker Sector Duration

Last week, we introduced our Q3 Macro Themes: #ProfitCycle, #ConsumerCredit, #EuropeImploding. The gist of themes #1 and #2 emphasize that the economic cycle continues to roll over as evidenced by declining corporate profitability and the pending deceleration in consumer credit growth which is more of a “when” rather than an “if” scenario. 


Consumer credit growth has a direct effect on consumption. Employment and consumption peaked on a Y/Y rate of change basis in Q1 2015 right after corporate profits peaked in the second half of 2014.


We want to be long of continued growth decelerating and inflation picking up from a GIP modeling perspective into the back half of 2016. TIPS are a great way to play both of these views along with our GLD (reflation) and TLT (growth slowing) positions.


See update on TLT/GLD.

Three for the Road


OIL: reiterating Long Gold (instead of Oil) as WTI continues to fail @Hedgeye TREND



"If you aren't going all the way, why go at all?"

-Joe Namath


Joe Namath threw 173 TD's and 215 interceptions for the NYJ.

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Chipotle (CMG) is on the HEDGEYE Restaurants Best Ideas list as a SHORT.



We still think there is significant downside to CMG.  The challenge to our short call remains timing.  The biggest challenge remains finding the right balance of being aggressive on the SHORT versus the slope of the line in the recovery in sales trends.  Aggressive capital allocation toward new units will be the ultimate downfall of the stock.  Timing matters.    




CMG continues to underperform the S&P 500 across all but the one-month duration!  

  • 1-Month – +7.1% vs. S&P 500 +4.5%
  • 3-Month – (10.9%) vs. S&P 500 +3.9%
  • YTD – (12.9%) vs. S&P 500 +5.9%
  • 12-Month – (36.8%) vs. S&P 500 +2.7%



  • Revenues – 1 for 6 (missed the last 2 quarters)
  • Same-Store Sales – 2 for 6 (big miss last quarter)
  • EPS – 5 for 6 quarters
  • Price Impact – On average -4.5% for 5 of the last 6 quarters


SHORT INTEREST – SI is at a 5 year high.  Began 2016 at 8.2% and is now 15.5%.


EARNINGS REVISION – Will 2Q start to see a stabilization in the negative revision trends? No guidance from the company.

  • 2Q16 – Was $1.58 in MAR currently $0.95 down 40%
  • FY16 – Was $15.97 in DEC ‘15 currently $4.41 down 72%
  • FY17 – Was $16.73 in JAN currently $11.38 down 32%



VALUATION – Currently trading at 22.5x NTM EV/EBITDA - YTD the EV/EBITDA multiple has risen 8.0x due to the decline in profitability. 




COMMENTARY – Aggressive store growth is the Achilles heel of the company.  CMG’s profitability trends remain a disaster, and there is no visibility on the trajectory of the recovery.   

  • UNIT GROWTH – 12.8% or opening 52 stores (ending stores 2,118)
  • SAME-STORE SALES - CM is looking for -20.3% or -8.0% on a 2-year basis vs -9.7% in 1Q16; Traffic  -17.6% vs -21% in 1Q16.
  • RESTAURANT LEVEL MARGINS – 15.2% vs. 27.98% LY
  • SG&A – 7.2% vs. 5.9% LY (knowing the LT run rate of this number is critical)
  • OPERATING MARGINS – 4.01% vs. 18.9% LY




Closing out 2Q16 , the CMG consumer brand survey results held steady versus our last publishing (VIEW HERE). Now, two weeks into 3Q, we have received a few hundred responses to our survey, and it shows a minor trend to the positive for CMG, but before releasing we would like to gather more responses to get a reading representative of the broader population. 




The only guidance the company gives is store growth of 220-235 new units.


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2 


"We must dare to be great; and we must realize that greatness is the fruit of toil and sacrifice and high courage."

             - Teddy Roosevelt


NO TIME TO BE PENCIVE: Donald Trump has delayed his decision to name his running mate until the weekend given the horrific terrorist attack in Nice. Speculation that IN Governor Mike Pence will be named is reaching critical mass now that high-level sources have leaked the news, but a final decision "has not been made" although Pence landed in NY last night and we don't think he had tickets to Hamilton. Pence appears to be the best option of those on the shortlist given his conservative credentials and boasting a resume that includes executive experience as Governor as well as strong ties to Congress. But, given his penchant for going off-script, Trump could very well move in a different direction. His hand may be forced sooner than later as Pence has to make a decision to file to withdraw for Governor by noon today further complicating the timing of the announcement.  


REBOUND DATE: Senate Finance Committee Chairman Orrin Hatch (UT) and House Ways and Means Committee Chairman Kevin Brady (TX) have introduced a resolution calling for the U.S. to quickly start trade talks with the U.K. Once divorced from the EU, the U.K. will lose access to a number of trade agreements and would have to renegotiate more than 50 trade deals forged by the EU with countries around the world. The pair intends to move what’s expected to be a popular resolution as quickly as possible, but not before Labor Day...


WRANGLING RULES: The Republican Convention Rules Committee began meeting yesterday to outline convention rules and procedures for next week’s big event. They’re expected to wrap up this evening, but not before they confront a movement to make it more difficult for Trump to be the automatic nominee by unbinding delegates from their state’s rules freeing them to vote as they choose. Although the effort is alive and kicking, it’s unlikely it will make it to the full convention, as Trump allies and the RNC have called in reinforcements to combat the insurgency.  


HILLARY HOBBLING ALONG: As she prepares to accept her party’s nomination, Hillary Clinton has been hobbled from the aftermath of the investigations into her email practices while at State - and the issue of honesty looms large as she faces rising numbers of voters who continue to view her as dishonest.  Even though the outcome of the investigations let her off the legal hook, significant damage has been done and may prove lasting as polling over the past week has shown.


I’LL KEEP HOLDING ON: Retaining the Senate remains a top priority for the 2016 Republican agenda, and so far, so good. Incumbent Republican senators have been posting strong numbers, leading Democratic challengers in FL, OH, and PA – all competitive swing states. The Republican party and its allies have been worried about down-ticket races being too connected to the toxic presidential race, but the strategy of running “local” races and the influx of funding and grassroots efforts appear to be neutralizing the issue.


FCC TO ADOPT 5G SPECTRUM RULES TODAY: Our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on how the new FCC rules will make 28 GHz and 39 GHz licenses more attractive, resulting in 5G vendors getting a boost. You can read his piece here.


REPLAY | HEALTHCARE THEMES CALL: Our Healthcare Policy Advisor Emily Evans hosted her 3Q16 Healthcare Themes Call with a comprehensive update of her #ACATaper and Healthcare #Deflation themes. You can listen to the replay here.


NOTE:  We'll be back on Tuesday in time for the Republican National Convention.

The Macro Show with Ben Ryan Replay | July 15, 2016

CLICK HERE to access the associated slides.



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

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