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A Troubling Update On Australia’s Housing Bubble

Takeaway: The housing bubble in Australia is bad news for the country's big banks.

Editor’s Note: Below is a brief excerpt from an institutional research note written by Hedgeye Financials analyst Josh Steiner discussing ME Bank’s semi-annual report called the Household Financial Comfort Report which details the results of a survey that gathers responses from a significant sample size of 1,500 households.


This is an update to a previous piece, “Banks on the Barbie: Four Short Ideas In Australia’s Housing Bubble.” To access our institutional research email sales@hedgeye.com.


A Troubling Update On Australia’s Housing Bubble - Australia housing cartoon


The red line in the chart below represents the portion of the 65% of indedbted households that expect they will be unable to make their minimum payments. After being virtually flat for the entirety of the survey’s life, that line has risen twofold in the last six months from 5% as of December 2015 to 10% as of June 2016. To be clear, that means that 10% of the 65% of Australian households with debt—6.5% of all households—expect to default in the next 6-12 months.


A Troubling Update On Australia’s Housing Bubble - australia manage debt


**To access our institutional research email sales@hedgeye.com.



Consumption Capacity = Trending Lower | A Few Quick Updates

Takeaway: Credit has supported HH spending in the face of slowing income growth. Credit growth slowed for a 3rd month in June & may now be past peak.

Together with the NFP data for July, the Consumer Credit report for June released on Friday provided notable updates on the capacity for domestic consumerism.   


Because household spending remains the singular GDP support – a reality that is likely to persist given global DM weakness and ongoing recessionary capex spending domestically - the trend and outlook for consumption growth remains of obvious import. 


Aggregate Income | NFP Implied Growth = Flat:   Income growth defines the capacity for sustainable consumption growth for most households. With payroll growth slowing over the last four quarters (YoY growth decelerated  further in July despite the “good” absolute gain) and weekly hours largely flat, the modest acceleration in wage growth has not been enough to offset the deceleration in employment and aggregate income growth has slowed.  Consumption growth, unsurprisingly, has shown a similar deceleration.  *Note: for our purposes here, we are defining aggregate income growth as aggregate private sector salary & wage income. 


The sum of aggregate hours growth + earnings growth in the NFP release offers a preview of the official income and spending data released later in the month.    The NFP implied figures aren’t a precision projection but they do offer an insightful directional signal.  NFP data for July imply flat sequential year-over-year growth in aggregate income.  Assuming static savings and credit (more below) trends, consumption growth should reflect a similar 2nd derivative trend.


Consumer Credit Growth = Past Peak? 

  • Total Consumer Credit:   Total Consumer Credit growth decelerated for a third straight month in June and at +5.77% YoY has now decelerated ~130bps off the rate-of-change peak of +7.1% YoY recorded in October of last year. 
  • Revolving Credit:  Revolving Credit represents the primary means of pulling forward consumption for most households and the trend of the last two years has been one of acceleration.  Indeed, with aggregate income growth slowing we’ve needed to see ongoing acceleration in credit growth just to maintain a flattish trend in nominal household spending.  Revolving Credit growth was flat sequentially at +5.4% YoY in June and has now been slowing for 3 consecutive months off of peak cycle growth (+6.1% YoY) recorded in March.   

Consumption Capacity | Income + Credit = ↓:  Holistically, and over shorter and medium terms, spending capacity is defined by income and credit growth.  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 household spending growth (again, assuming a roughly flat savings rate).  After supporting spending over the last year and a half in the face of decelerating aggregate income growth, revolving credit growth has now been trending lower for the last three months.   


Employment growth will continue to slow and if wage inflation continues to show only crawling improvement, consumption growth will not be able to maintain its current pace if credit growth continues to decelerate – particularly with consumption facing its toughest compare of the cycle in 3Q16. 


Consumption Capacity = Trending Lower | A Few Quick Updates - Reported   Implied Income


Consumption Capacity = Trending Lower | A Few Quick Updates - Consumption Capacity 1


Consumption Capacity = Trending Lower | A Few Quick Updates - Consumption Capacity 2


Consumption Capacity = Trending Lower | A Few Quick Updates - Revolving Credit Growth


Consumption Capacity = Trending Lower | A Few Quick Updates - Consumer Credit Revolving   Total


Consumption Capacity = Trending Lower | A Few Quick Updates - PCE YoY


Consumption Capacity = Trending Lower | A Few Quick Updates - PCE Comps



Christian B. Drake


What Wall Street Missed About Friday’s Jobs Report

In this brief excerpt from The Macro Show earlier today, Hedgeye CEO Keith McCullough and Senior Macro analyst Darius Dale discuss Friday’s Jobs Report. Spoiler alert: #EmploymentSlowing.

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Fed Perpetuated Problem? Fed Study Finds Many Americans Have Negative Wealth

Takeaway: Fed policies boosted asset prices to the benefit of the super rich while devaluing the American people's purchasing power.

Fed Perpetuated Problem? Fed Study Finds Many Americans Have Negative Wealth - Fed Up cartoon 03.22.2016


In a late 2010 Washington Post op-ed entitled "Aiding the Economy: What the Fed Did and Why," then Fed chairman Ben Bernanke defended the FOMC's zero interest rate policy and quantitative easing saying:


"[Fed policies] had eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate this additional action. Easier financial conditions will promote economic growth... And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion." (Emphasis added)


Nearly six years have passed since Bernanke wrote those fateful words. The supposed "wealth effect," brought on by super easy Fed policy, has failed to "boost consumer wealth" for a significant number of Americans.


According to a recently released Federal Reserve Bank of New York study, 15.1% of households in the U.S. population have either zero or negative net wealth. The authors find that Americans plagued by negative wealth are more likely to be female; from single parent households; or from a minority group (either African American or Hispanic). These households are riddled with credit card debt, student debt and mortgage debt (with "some 7 percent of home-owning households in our survey report being underwater on their mortgage," the survey finds).


With the Fed's balance sheet comfortably above $4 trillion and so much promise from omnipotent central bankers, why are so many Americans still struggling? The S&P 500 is up 170%+ since the market bottomed in 2009. In short, what gives?


Here's the key chart showing the breakdown of total wealth in the U.S. and the ownership of U.S. financial assets by wealth distribtuion from our 99-page Q3 2016 Macro themes presentation. As you can see the top 10% of Americans own 84.5% of U.S. financial assets. In other words, debt-ridden families weren't able to participate in the Fed-stoked asset price boom. (To access our institutional research email sales@hedgeye.com.)


So much for the wealth effect...


Fed Perpetuated Problem? Fed Study Finds Many Americans Have Negative Wealth - wealth 8 8 16 


Meanwhile, during Bernanke's reign, the Fed devalued the U.S. Dollar to a 40-year low, in 2011-2012, thereby devaluing the purchasing power of the American people. Then again currency devaluation, asset price inflation in central planning 101. Note: This policy doesn't help the bottom 50% of Americans who own 1% of U.S. financial assets and are paid in U.S. dollars.


Unfortunately, the Fed's policies have helped lined the pockets of the rich and inflated "one of the top-three stock market bubbles in history" all at the expense of average Americans. 


Fed Perpetuated Problem? Fed Study Finds Many Americans Have Negative Wealth - Fed  Haven t a clue  cartoon 07.13.2016

EVENT | Healthcare Earnings Recap

Thursday, August 11th at 11:00AM ET

Watch a replay below. 


CLICK HERE to access the associated slides.



433 of 500 S&P companies have reported an aggregate EPS decline of -4.3% y/y...

Client Talking Points

US Dollar

Next to Gold, USD remains our favorite currency right now after closing up another +0.7% last week taking it’s 3-month run to +2.6%; Euro (vs. USD) down -0.8% last wk (-2.8% in last 3 months) still favorite short in our Q3 Macro Themes.


Headline jobs # “good” (rate of change in NFP slowed again to 1.72% vs. 2.10% in JUL 2015) and that got UST 10yr to tap the top-end of my 1.45-1.60% risk range; signal says that’s probably it w/ 1% GDP being goldilocks, for now.


Globally, straight up this am (Nikkei loved the Up Dollar, Down Yen move) and this rarely happens all on the same day but SPY, DAX, Nikkei are all signaling immediate-term TRADE overbought this morning - everything is awesome at all-time highs.

Asset Allocation

8/7/16 64% 4% 6% 6% 10% 10%
8/8/16 66% 3% 3% 8% 12% 8%

Asset Allocation as a % of Max Preferred Exposure

8/7/16 64% 12% 18% 18% 30% 30%
8/8/16 66% 9% 9% 24% 36% 24%
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

See update on TLT/UUP


Back to growth ... we’ll refrain from commenting on Friday’s headline non-farm payrolls number in isolation, and rather offer some perspective on the cyclical nature of the non-farm payroll data series (you’ve heard it before):

  • On a Y/Y rate of change basis, Non-Farm Payrolls peaked in February of 2015;
  • Once growth in this series peaks and rolls over, it doesn’t return and we move toward economic contraction on the margin. Read: Bullish for Long Bonds (TLT);
  • A print of +282K jobs was needed for July to avoid another Y/Y sequential deceleration in the series. NFP additions were +255K. While this beat expectations of +180K (which was cheered by just about every mainstream media outlet), the TREND in this series remains slow-moving, predictable, and most importantly past peak

Our team’s macro process is both fundamental and top-down, and we get the top-down signals in real-time. The bottom-line is that both the CRB Commodities Index and crude oil have recently broken down from a quantitative risk management perspective. While this is a key factor contributing to our recent addition of the PowerShares DB US Dollar Index Bullish Fund (UUP), it also signals that TIP does not have as much upside as we thought. As Keith McCullough wrote to subscribers this week:


“Changing my mind on longer-term longs has happened infrequently this year, but it should happen. That’s how the game goes.”

Three for the Road


Daily Market Data Dump: Monday app.hedgeye.com/insights/52944… cc @KeithMcCullough #Stocks #Bonds #FX #Commodities $SPY $USD



“The world breaks everyone, and afterward, some are strong at the broken places.”  

–Ernest Hemingway


Michael Phelps has won the most Olympic medals with 23 (19 gold, 2 silver, 2 bronze).

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