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CHART OF THE DAY: This Is #1 Causal Factor on "Slower and Lower for Longer"

Editor's Note: This is an excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more. 

 

If you don’t get that Demographics is the #1 causal factor on slower and lower for longer, you’re definitely not reading Hedgeye’s Demography Research (see Chart of The Day for details on the rate of change in growth for the 35-54 year old US population). 

 

CHART OF THE DAY: This Is #1 Causal Factor on "Slower and Lower for Longer" - EL 15


Free Money Mess

“Originals are people who take the initiative to make their vision a reality.”

-Adam Grant

 

Isn’t that the truth? That’s one of the opening volleys in one of the better books I’ve read this year called OriginalsHow Non-Conformists Move The World, by Adam Grant. Sheryl Sandberg (COO of Facebook) called it “one of the most important and captivating books I have ever read.” #OrderIt

 

Originals aren’t always positive influences that move the world. Ben Bernanke and Dick Fuld were originals, for example. Today is actually tricky Dick’s 8th anniversary. On this day in 2008, Lehman Brothers officially filed for bankruptcy. In 2011, The Post Growth Institute labelled today, Free Money Day. I’m hearing that Bernanke is taking a helicopter ride to commemorate it.

 

Since those days of many risk management lessons already lost, many central-market-planners, bankers, and pundits have borrowed the original ideas of Bernanke and Fuld. Adam Grant calls this “kleptomnesia” – i.e. “accidentally remembering the ideas of others as our own.” Especially on Wall Street, you know as well as I do that there’s no accident in self-interest.

 

Back to the Global Macro Grind

 

Were Bernanke and Fuld non-conformists? Big time. Did it end well? Obviously for bankers of Fuld’s ilk, no. But what about those who have followed the ideological path of money printing, currency devaluation, and market manipulation?

 

The story about that central-market-planning #BeliefSystem is still being told.

 

In the same opening chapter, Adam Grant reminds us of the risks of not changing our minds when going against the grain goes bad. He illuminates that reality using a great quote from George Bernard Shaw:

 

“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”

 

Since Draghi, Kuroda, Yellen, etc. took the baton from Bernanke and took us down this rat hole towards Free Money Forever have they adapted themselves to the world’s markets reactions? Or have they continued to try to tell markets to react to them?

Free Money Mess - central bank kool aid 06.09.2016

 

These are critical questions that I think most reasonable (and un-reasonable) central bankers would be held to account to if they were actually elected by The People. Instead, as long as no one forwards my notes, I’m one of the originals taking them to task.

 

I did it in 2008. I’m doing it now. I do it in print, on video, and in cartoons, every day. And I like it.

 

I do it on the road seeing Institutional Investors too. Between NYC and Kansas City, I just finished 2 days of meetings and I have to say that there’s nothing else people want to talk about other than the Federal Reserve, ECB, BOJ, PBOC, BOE, and the US election.

 

‘Good call on #GrowthSlowing Keith… but what’s the Fed going to do in response. How about the BOJ in response to the Fed? … can and will Draghi do more? … how about China? Who is Trump going to pick to run the Fed if Hillary’s man is Summers?’

 

And it goes on and on and on… so many questions that have so few answers as clear as #GrowthSlowing itself.

 

Meanwhile most establishment economists (non-originals) are sitting in their ivory towers confounded by things like the Philips Curve getting crushed and US Productivity being on its worst run since the 1970s.

 

Here’s a DCF model I built for them on productivity (please borrow it as your own!):

 

  1. D = Demographics
  2. C = Capex
  3. F = Federal Reserve

 

If you don’t get that Demographics is the #1 causal factor on slower and lower for longer, you’re definitely not reading Hedgeye’s Demography Research (see Chart of The Day for details on the rate of change in growth for the 35-54 year old US population). You didn’t need to know anything about Dick’s “level 3 assets” to know what that line going red in 2007 meant.

 

Capex is running negative -4.9% on a year-over-year basis (negative for 9 straight months) because most sane business people consider the Fed flip-flopping from hawkish to dovish (6x in 8 months) insane. Why in God’s good name would you “invest” at this stage of the #GrowthSlowing cycle as the #BeliefSystem that the Fed, ECB, BOJ, PBOC, BOE, etc. breaks down?

 

No. The answer isn’t “raise rates so that we can get out of this mess.” The entire capital market system is held up by this mess. And, especially for the original bankers who built the foundations of these non-free “markets”, as our Chief Compliance Officer, Moshe Silver, often reminds us… “it’s a lot easier to make a mess than to clean it up.”

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.48-1.73%

SPX 2109-2160

VIX 13.86-19.62
EUR/USD 1.11--1.13
Oil (WTI) 42.44-46.49

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Free Money Mess - EL 15


The #BeliefSystem in central-market-planning continues to break-down as Global Growth Slows…

Client Talking Points

Japan

This is the epicenter of all things “central-market-planning innovation” so watch it very closely; Nikkei down hard again overnight on a Yen move that did nothing – despite BOJ “buying” (every day into the close), the crash in the Nikkei (from the 2015 top in the Global Equities bubble) is back to -21.5%.

Italy

When growth slows and rates crash, “there’s no alternative to stocks”, Ex-China, Japan, Italy, Spain, etc… we get the US brokerage narrative, and we also get that if the US economy slows to Italy’s growth rate, stocks and bonds stop going up together too; MIB Index back on its knees this morning at -31.1% from that same Global Equity Bubble top of 2015.

Oil

Yet another chart chase that went bad – the @Hedgeye TAIL risk call on Oil remains firmly intact and all the Fed has to do is make another policy mistake and WTI will have a $3 in front of it; the SP500 “earnings have bottomed” call is a fancy fiction if commodity prices continue their long-term #Deflation from Bernanke’s inflated highs.

Asset Allocation

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/14/16 54% 4% 4% 7% 29% 2%
9/15/16 51% 5% 4% 8% 30% 2%

Asset Allocation as a % of Max Preferred Exposure

CASH US EQUITIES INTL EQUITIES COMMODITIES FIXED INCOME INTL CURRENCIES
9/14/16 54% 12% 12% 21% 88% 6%
9/15/16 51% 15% 12% 24% 91% 6%
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
GLD

No update this week.

VYM

After a relative pull-back in large cap, low beta, liquid names (an exposure we’ve like for the balance of the year). We can now buy back that exposure lower. As you can see in the style factor table below, high debt, high beta, and small cap stocks in the S&P 500 have outperformed over the last month. As Keith McCullough wrote to II subs Friday:

 

“We've seen plenty a one-way chart chaser lose lots of other people's money doing it otherwise (they are chasing what’s worked recently). VYM has a 3% Yield and is signaling immediate-term TRADE oversold within our bullish intermediate-term @Hedgeye TREND view.”

TLT

No update this week.

Three for the Road

TWEET OF THE DAY

GOLD: the recipient of the central-market-planning #BeliefSystem breaking down = $1320/oz = +24.5% YTD pic.twitter.com/MnwsKYUwcG

@KeithMcCullough

QUOTE OF THE DAY

“When you gotta shot, you shoot.  Don’t talk.”

-The Good, the Bad and the Ugly

STAT OF THE DAY

Jameis Winston leads the NFL in QBR through week 1.


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.

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record

Takeaway: In week 37 of 2016, this year's trends in domestic stock funds are ~$40 billion worse than last year and twice as weak as 2008.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

With this week's -$4.5 billion withdrawal from domestic stock mutual funds, the category's losing streak is now the biggest on record at -$323 billion over the past 80 weeks (we define a streak as intact if not offset by 4 weeks of inflows). Through 37 weeks of 2016, this year is setting new outflow records previously set in 2015, with flows in U.S. stock funds -$37 billion worse than last year and shockingly over 2.2x worse than the outflow trends in the first 37 weeks of 2008. With equity markets at all time highs, there is no bigger indication of the secular shift out of the antiquated mutual fund structure (in the equity asset class at this point). Meanwhile, all bond mutual funds except for those with global mandates brought in net subscriptions this week, contributing to total fixed income mutual fund flows of +$6.2 billion. Bond ETFs did not fare as well, however, losing -$2.8 billion. Finally, investors pulled -$29 billion from money market funds.

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI1

 

Running annual recaps outlining the worst outflow on record for 2016:

 

<chart20>

 

In the most recent 5-day period ending September 7th, total equity mutual funds put up net outflows of -$6.1 billion, trailing the year-to-date weekly average outflow of -$4.1 billion and the 2015 average outflow of -$1.6 billion.

 

Fixed income mutual funds put up net inflows of +$6.2 billion, outpacing the year-to-date weekly average inflow of +$3.1 billion and the 2015 average outflow of -$475 million.

 

Equity ETFs had net redemptions of -$770 million, trailing the year-to-date weekly average inflow of +$309 million and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net outflows of -$2.8 billion, trailing the year-to-date weekly average inflow of +$1.6 billion and the 2015 average inflow of +$1.0 billion.

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI19

 

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 Stock Funds Printing the Worst Year on Record - ICI2

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI3

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI4

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI5

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - 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 Stock Funds Printing the Worst Year on Record - ICI12

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI13

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI14

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI15

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - 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 Stock Funds Printing the Worst Year on Record - ICI7

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors redeemed -3% or -$206 million from the utilities XLU ETF and -3% or -$222 million from the long duration treasury TLT ETF.

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - 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 Stock Funds Printing the Worst Year on Record - ICI17

 

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a negative -$10.3 billion spread for the week (-$6.8 billion of total equity outflow net of the +$3.4 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 -$5.0 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 -$18.4 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Domestic Stock Funds Printing the Worst Year on Record - 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 Stock Funds Printing the Worst Year on Record - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

Patrick Staudt, CFA







JT TAYLOR: Capital Brief

JT TAYLOR: Capital Brief - JT   Potomac banner 2

“Heroism is not only in the man, but in the occasion."

- Calvin Coolidge

 

TRUMPMENTUM: Just a few short weeks ago, politicians, pundits and many in the media brushed off Donald Trump after a lackluster showing in the polls - at one point he was down by a whopping 15-point margin. But now, Trump has pulled himself together both in national polls and in important battleground states. New data shows Trump leading by larger margins than expected in vital states like OH, FL, NV, and AZ - states that have been tightening in recent weeks. His campaign is gaining momentum at the right time, as he’s beginning to lay out policy plans, invest in advertising in the right places, and continues to take advantage of Hillary Clinton’s shortfalls - something tells us that he wishes he had done all this before. In the next 53 days, we expect Trump to keep up the intensity and discipline, but don’t think for a second anyone is discounting the chance for a significant Trump misstep.

 

WE’RE OFF TO SEE THE WIZARD: Health has been the main topic for both campaigns this week, and each candidate has taken steps to prove they’re fit to take office. Trump spent time on the Dr. Oz show to discuss details of his health, and Clinton released updated letters from her physicians to show she’s healthy enough to continue. Though the topic is health, the underlying theme is about character. Clinton has taken fire for some time now from Republicans for her well-being, and most have brushed it off - but now that it’s become a real concern, many are interested in understanding how she handles it and how it’ll affect her future. Trump on the other hand, has put on his routine show, “releasing” his medical records on a talk show to meet basic transparency standards.

 

POWELL’S PARADOX : In the latest episode of the never-ending email controversy, a newly leaked tranche of emails shows former Secretary of State Colin Powell vented to his associates about Clinton’s attempts to rope him into her defense of her email practices - and he didn’t hold back either, calling Trump a “national disgrace” and Clinton “greedy and non-transformational.” Clinton’s repeated attempts to invoke Powell’s email use at the State Department has proven a persistent source of irritation for both the press and Powell’s team – and the continued revelations are alarming, digging the hole even deeper. To make matters worse, court-ordered responses regarding Clinton’s email server are now delayed due to her, “campaign’s unavailability of counsel and the press of campaign business, among other reasons.”

 

ECON DATA BOOSTS CLINTON: Weak income growth for the middle class has been a focus for both parties, and past presidents alike, but new data shows the largest single-year boost in median household income in nearly half a century, prompting economists to say that Democratic policies are working - that's some very welcoming news for Clinton's campaign. The jump is the first annual increase of any kind, after inflation, since the Great Recession of ‘07-‘09, and the largest recorded annual increase since the data series started in 1967. And brace yourselves for Clinton ads quoting Trump in 2004 stating, “it just seems that the economy does better under the Democrats than under the Republicans.” But the new income hike won’t impress Trump too much - he insists that economic statistics are rigged, and that the 5% unemployment rate is “one of the biggest hoaxes in American politics” (he’s pegged it at 42%). Either way, Clinton is primed to use the new data as a preview of her Administration.  

 

THE IMPERVIOUS IMPEACHMENT: The House Freedom Caucus plans to follow through with a vote to impeach IRS Commissioner John Koskinen...just not yet. The far-right group held a “special order” on the impeachment, which allowed lawmakers to hold court on the topic of their choice after the chamber finished business for the day, but later came to an agreement with House Judiciary Committee Chair Bob Goodlatte to postpone a vote until Koskinen testifies before the Committee next week. The impeachment effort is broadly opposed by Democrats and has split Republicans down the middle, but won’t disappear any time soon. If the deal holds true, we expect a vote sometime in the lame duck session, or even after the election, but don’t expect it to succeed.

 

ANOTHER “NAIL IN THE COFFIN” FOR AN OPEC FREEZE: Our Senior Energy Analyst Joe McMonigle dissected the current oil market fundamentals on BNN and explained why he's not expecting an OPEC production freeze any time soon. You can watch the video here.

 

TOP THREE DEFENSE POLICY ISSUES FOR NEXT PRESIDENT: Our Senior Defense Policy Advisor LtGen Emo Gardner hosted a call with the Honorable Dr. James Miller, former Undersecretary of Defense for Policy and leading expert on defense policy, to discuss the choices facing our next president. You can listen to the replay here.

 

CALL INVITE: ELECTION UPDATE WITH CHARLIE COOK OF THE COOK POLITICAL REPORT: Please join us for a call on Tuesday, September 20th at 2:00 PM EDT with Charlie Cook of the Cook Political Report to discuss his outlook on the presidential race, the state of play for House and Senate elections, and a preview of the upcoming presidential debates later this month. Call details can be found here.


The Macro Show with Keith McCullough and Darius Dale Replay | September 15, 2016

CLICK HERE to access the associated slides.

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

 

 


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