• run with the bulls

    get your first month

    of hedgeye free


Japan: A Case Study In The Folly Of Central Planning & Dogmatic Economic Thinking

Takeaway: As the BOJ takes extraordinary measures to save its flagging economy, macro markets continue to confound conventional economics.

Japan: A Case Study In The Folly Of Central Planning & Dogmatic Economic Thinking - Japan cartoon 05.02.2016


Since Japan is the playground of central planners and economic orthodoxy, here's some of the more interesting recent developments out of Japan that should give pause to any honest economist (oxymoron?) or investor.


"Japanese companies are expected to issue 3.3 trillion yen ($32.9 billion) worth of bonds during the three months ending in September, double the amount from the year-earlier quarter, as businesses capture demand from yield-hungry investors to finance growth spending," Nikkei reports. 


Clearly, Japanese companies are taking advantage of the country's interest rates hanging out near record lows. Take a look at Japan's steadily pancaking yield curve. 

Got #GrowthSlowing?


Japan: A Case Study In The Folly Of Central Planning & Dogmatic Economic Thinking - japan jgb

The Failure of Central Planning...


A survey of Japanese companies conducted after Prime Minister Shinzo Abe announced the 13.5 trillion yen fiscal stimulus package reveals unsurprisingly underwhelming expectations:


"Less than 5 percent of companies believe the steps will boost the economy near-term or raise its growth potential, according to the Reuters Corporate Survey, conducted August 1-16... Corporate Japan was also cautious about fresh monetary stimulus, with over 60 percent saying the BOJ should not ease further or should even start to wind down its massive stimulus."


Interestingly, in the open-ended portion of the survey, one general machinery firm wrote: "Helicopter money must be avoided." Clearly, Japanese companies aren't as sanguine as the hopes and dreams put forth by the country's central planners.


Macro markets have already sniffed out the folly of central planning. Pick your indicator...

The NIKKEI Crash Continues...


Japan: A Case Study In The Folly Of Central Planning & Dogmatic Economic Thinking - nikkei 8 24

Or Yen strength...

(which according to economic orthodoxy should weaken with more stimulus)


Japan: A Case Study In The Folly Of Central Planning & Dogmatic Economic Thinking - yen 8 24


How this ends is anyone's guess but one thing is clear, the Japanese people aren't happy with all of this meddling. And yet, the cries for more stimulus keep flowing. 

More to come.

EHS | Convergence to Zero Complete

Takeaway: EHS declined -1.6% YoY, marking the slowest pace of growth in 23-mos and completing the convergence to 0% growth. Focus now = PHS next Wedn.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume. 


EHS | Convergence to Zero Complete - Compendium 082416


The data ping pong in domestic housing remains in full effect as yesterday’s shot of New Home Sales exuberance was chased with disappointing EHS and HPI data this morning.  


The Data:  Existing Home Sales dropped -3.2% sequentially and fell to -1.6% YoY, marking the slowest pace of growth since November of last year. Arguably, it’s the slowest pace of growth in 23 months given that November 2015 was negatively distorted by the TRID regulatory implementation in the prior month (the distortion in demand at the point of mortgage application flows through to actual closing volumes on a 4-6 wk lag).


The Convergence to 0% Growth: As we’ve highlighted, our expectation since the beginning of the year was for demand growth in the existing market to continue to converge towards 0% against peak comps.  With Pending Home Sales printing negative YoY growth for the 1st time in 2-years on a seasonally-adjusted basis in May, NSA growth printing a 19-month low in June, and EHS now confirming with negative growth in July, that expectation has largely been realized.   For the balance of the year, we think demand runs somewhere in the 0-3% range. 


The softness in EHS in July was not unexpected as signed contract activity (i.e. Pending Sales) naturally leads closed transaction volume (Existing Sales) and a recoupling of EHS to the relatively softer trend in PHS suggested sequential softness in existing sales for July.  We’re more interested in the Pending Home Sales data for July released next Wednesday (8/31). 


Looking across the rest of the release:


1st-time Buyers: The share of 1st time buyers (again) failed to maintain its emergent momo, retreating to 32% in July from the cycle peak of 33% recorded last month.   Growth in sales to 1st timers remained strong, however, growing +12.4% YoY.  The other side of that solid growth is a notable decline in demand from non 1st-time buyers.  Implied growth in EHS to non-1st timer’s fell -7.1% YoY, marking the fastest pace of decline in 5 years.  While much of the industry and investment focus has been on the prospects for re-emergent 1st timer demand to catalyze a next leg  higher in transaction volumes in the existing market, the realization of that prospect is predicated on largely steady demand from the non-1st timer contingent. 


Sales by Price Tier:  All price tiers declined to negative YoY growth in July but the weakness was barbelled as the low and highest price tiers led the weakness.  Sales growth fell to -10.6% and -10.4% in the <$250K and >$1M price tiers, respectively.


Regional:  Sales declined sequentially across all regions except the West (+2.5% MoM) and were flat-to-negative across all geographies on a YoY basis.   


Inventory Unit supply rose +0.95% sequentially but held negative (-5.8%) on a year-over-year basis for the 14th consecutive month.  With Sales down and Inventory up, months-supply rose to 4.74-months - marking the 47th month below the conventional balanced market level of 6-months. Tight Supply will remain a secular challenge as demographics, near-negative equity positons and the post-crisis foreclosure-to-rental conversion glut will continue to constrain inventory brought to market. 


HPI & Home Price Spreads:  Median Existing Home prices rose +5.4% YoY to 246K in July, bringing the New-to-Existing Price Spread to at 3-year low at $48.6K.  The price spread between new and existing homes has begun to compress in recent months as growth in new home inventory has improving relative to existing supply and builders have progressively focused more on entry level construction.  Continued spread compression would serve as a relative tailwind to demand in the new home market, at the margin.    


And Lastly ….


FHFA HPI = Deceleration: The FHFA HPI series for June released this morning showed price growth decelerating for a 3rd consecutive month, taking the rate of change in HPI to an 10-month low of +5.6% YoY.  With the Case-Shiller and CoreLogic series reflecting a similar trend, all three primary price series are telling a congruous story of HPI deceleration.   


EHS | Convergence to Zero Complete - SF EHS LT Cycle Context


EHS | Convergence to Zero Complete - EHS by Price Tier YoY


EHS | Convergence to Zero Complete - EHS vs PHS


EHS | Convergence to Zero Complete - EHS 1st time buyers


EHS | Convergence to Zero Complete - NHS vs EHS Price Spread


EHS | Convergence to Zero Complete - EHS Inventory Months Supply


EHS | Convergence to Zero Complete - EHS Inventory Units


EHS | Convergence to Zero Complete - EHS Inventory Units YoY


EHS | Convergence to Zero Complete - EHS Units   YoY TTM


EHS | Convergence to Zero Complete - EHS regional YoY


EHS | Convergence to Zero Complete - FHFA HPI YoY TTM


EHS | Convergence to Zero Complete - HPI FHFA   CS



About Existing Home Sales:

The National Association of Realtors’ Existing Home Sales index measures the number of closed resales of homes, townhomes, condominiums, and co-ops. Existing home sales do not take into account the sale of newly constructed homes. Existing home sales account for 85-95% of all home sales (new home sales account for the remainder). Therefore, increases in existing home sales tend to signify increasing consumer confidence in the market. Additionally, Existing Home Sales is a lagging series, as it measures the closing of homes that were pending home sales between 1 and 2 months earlier.



The NAR’s Existing Home Sales index is published between the 20th and the 22nd of each month. The index covers data from the prior month.



About FHFA:

The Federal Housing Finance Agency (FHFA) Home Price Index measures changes in the value of single-family homes by analyzing Fannie Mae and Freddie Mac’s data on conforming, conventional mortgages. The index employs data from all US states, weights price trends equally for all properties, and is calculated using purchase prices as well as refinance appraisals. Similarly to the Case-Shiller, the FHFA HPI is published on a two month lag. However, the index represents only one month of data, versus Case-Shiller’s three month rolling average. Additionally, the FHFA HPI uses both purchase prices and refi appraisals in its calculations.



The FHFA HPI is published on the third or fourth Tuesday of every month. The index is released on a one month lag.



Joshua Steiner, CFA


Christian B. Drake

McMonigle: Sell the OPEC Oil Production Freeze Nonsense

Does the OPEC rumormongering have you confused? Hedgeye Energy Policy analyst Joe McMonigle sifts through the rumors and speculation on The Macro Show today. He provides clarity on what's really going on and what likely lies ahead for oil prices.


Subscribe to The Macro Show today for access to this and all other episodes. 


Subscribe to Hedgeye on YouTube for all of our free video content.

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

In Honor Of #NationalWaffleDay...

We can't confirm the rumor yet. But word on the street is Waffle House has officially named Janet Yellen its national spokesperson. According to unnamed sources, regional Fed Heads including San Francisco's John Williams and St. Louis' James Bullard have been offered similar positions at Denny's and IHOP, but are waffling on whether to accept their respective offers.


Happy Waffle Day amigos.


In Honor Of #NationalWaffleDay... - fed waffle

Sarcasm Alert: The U.S. Economy Is Absolutely Killing It! (A Peek Inside Existing Home Sales)

Takeaway: Existing Home Sales were down 1.6% year-over-year for the month of July.

Sarcasm Alert: The U.S. Economy Is Absolutely Killing It! (A Peek Inside Existing Home Sales) - existing home sales 8 24


Today's Existing Home Sales data showed July down -1.6% year-over-year. That's the worst level of demand since November. That matters because EHS makes up 90% of total transaction volume.


We're not surprised by this month's EHS downside and were largely expecting a July slowdown. Here's what Hedgeye Housing analysts Josh Steiner and Christian Drake in an institutional research note on July 21 following the much ballyhooed June data (which was largely the result of a holiday distortion):


"In aggregate, growth in EHS slowed to +3.0% YoY but made a new cycle high at 5.57M units. The gain wasn’t particularly surprising given the trend in PHS and noise in the relationship between the two series (PHS vs EHS) stemming from the March Easter distortion.  We’re more interested in next week’s Pending Home Sales data for June. Absent a moderate pickup and/or positive revision to May, the risk to EHS for July is to the downside."

In other words...



Additional thoughts...


QUESTION: How does declining Existing Home Sales fit into the hawkish Fed's rate hike calculus? Could they raise rates with 90% of the U.S. Housing market down 1.6% year-over-year?


ANSWER: Sure. They've been known to obfuscate the truth before.

Volatility: How To Trade This #WickedChop

Takeaway: Trading US equity markets takes patience. I like to wait on selling equity Beta around VIX 11-11.5.

Volatility: How To Trade This #WickedChop - Volatility cartoon 09.02.2015


Volatility has been smashed (on the front end) alongside US Equity Volume (-26% yesterday vs. 1yr avg). There have only been 5 trading days in the last 30 with a VIX move of +/- 0.5%, but I like to wait on selling US Equity Beta around VIX 11-11.5. #Patience. #TradeTheChop


Speaking of Volatility...


#WickedChop continues w/ Oil Volatility (OVX) tracking higher (again) this morning off 34-35 support. WTI failed @Hedgeye TAIL risk resistance of $52.12 (again); our Energy Policy analyst Joe McMonigle had a very timely note up intraday yesterday saying fade the Iranian “freeze” noise. (Read McMonigle's "Oil/Iran: Sell The News!")



*  *  *  *


Editor's Note: Here's Hedgeye CEO Keith McCullough explaining how to trade an environment in which volatility continues “shocking people to the upside.”


investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.