“I Used to Be a Human Being: An endless bombardment of news and gossip and images has rendered us manic information addicts. It broke me. It might break you, too.”
-Andrew Sullivan, New York Magazine
I used to be smart.
Maybe I still am.
I like to think that my “smartness” has evolved; that the craving for complex and hyper-technical analysis that characterized my graduate work in molecular biophysics was but a necessary, analytical stepping stone to a more enlightened, more efficient mental alacrity that, now, actively seeks simplicity.
Maybe that’s just a perma-bullish narrative I tell myself, about myself. Maybe I’m just lazier.
Or perhaps it’s simply a human response to a sectoral social shift. Modern day macro risk management, in an era of social media, big data and the democratization of information, has become an exercise in data curation, distillation and simplification.
If you want good “flow”, the immersion is unavoidable. It’s also exhausting.
As the Fed double talk has escalated in 2016, the perma-bullish thesis drift has become more pervasive and the narrative creativity on both sides of the market aisle has billowed, I’ve increasingly taken to analytical reclusion – my own personal chamber of mental reclusion I’ve affectionately dubbed ‘Occam’s Nirvana’.
Less multi-screen, manic, digital stimulus and information flow … more Platonic/Socratic/Einsteinian stroll-the-gardens and think kind of flow.
In my self-fashioned chamber of cerebral solitude, I attempt to objectively distill the domestic macro data down to both an intuitive and quantitative conclusion around fundamental Trends.
It’s always great to nail a point estimate on a one off data point but, as a Macro-ticians, the real return is in accurately Trendcasting, repeatably.
Back to the Global Macro Grind…
Yesterday we hosted our 4Q16 Macro Themes call. It was another higher-high in attendance. As active participants in our attempt to evolve the process of Trendcasting macro and markets, we thank you for your continued engagement and trust.
Since I’m perma-bearish on wheel re-creation and yesterday’s content was better than whatever early morning, de novo analysis I could conjure, below are a selection of highlights across our three themes. You also get a three-fer on Charts of the Day.
#Labor’sLags: I know that you know that we all know that we can always cherry pick an “as of” or “since” date to justify a given view. And it’s no secret that we’ve been (probably annoyingly) riding the #GrowthSlowing theme for over a year now. I like today’s Chart of the Day because it’s simple, intuitively tractable and cuts through any narrative fallacy. It’s just the data, alone and self-contained.
Simply – and taking a labor centric view of growth - if you have negative second derivative trends in the number of people working, the number of hours those people work each week and in how productive that collective labor force is …. you can’t get a positive second derivative trend in output.
#GrowthSlowing has been macro’s reality for five consecutive quarters and we don’t expect the slope of the line to change over the nearer-term.
#DoubleDip Recession: The theme title is purposefully sensational but refers specifically to the risk in the cyclical-industrial space.
As Keith highlighted yesterday, with Industrial Production growth negative for a non-recession record 12-months, Core Capitals Goods orders negative for a non-recession record 19 of the last 20 months and growth in factory orders negative for a record 22-consecutive months, it could be rightly argued that we’ve never undipped from the industrial recession.
In considering what could drive a positive inflection in industrial activity, it’s important to remember that, on the resource side, investment cycles have a long tail and a single year of easy comps off a secular peak doesn’t represent a catalyst.
Our commodities analyst, Ben Ryan, contextualized it like this using copper as an example:
Cheap money, a weaker dollar and peak commodity price inflation coming out of the great recession created an epic, debt-fueled capital spending boom that all producers across the resource space participated in. Taking a commodity out of the ground and transporting it somewhere else always looks much more attractive on an NPV, breakeven, or discounted cash flow basis with lower financing costs and higher commodity prices, and everyone piled into these projects at the same time.
With,
- Producers outspending replacement costs for a long period of time, leveraging themselves to do it, and with
- The current level of fixed capital where it is relative to raw materials and equipment, etc. being produced, demand doesn’t suddenly return after a year or more of deflation.
The producer who bought a piece of equipment (made by raw materials) to take copper out of the ground doesn’t need a new one, nor can they afford it with commodity prices plunging. Mining equipment shipments related to copper mining were +100% in 2011 when copper hit an all-time high. Those assets were capitalized on the balance sheet at the highs and will be depreciated over a long period of time (or impaired, which is what we’ve seen.)
The cycle doesn’t bottom until a big chunk of production comes offline and companies underspend replacement cost for a long period of time to try and survive at which point the capital spending cycle again become investible.
#TrumpvsClinton: This became a theme by popular demand and you really have to read through it to capture the insight. A main topic Wall Street has anchored on is the probability for a large-scale fiscal spending initiative under either candidate. Indeed, Clinton has put forth a $275B infrastructure plan, while Trump has pledged to revitalize America’s infrastructure with a grand plan on the order of The New Deal, floating figures as large as a “Trillion Dollars”.
With Public construction spending as a % of GDP currently -2 Standard Deviations below its historical average, the U.S.’s infrastructure deficit needs to be and will be addressed.
The relevant investment question to consider is the extent to which these expectations have already been discounted. As can be seen below, stocks that will benefit from resurgent infrastructure spending have already run up considerably.
Another important consideration is whether another crisis or economic/market collapse is first required to catalyze congressional consensus for approval of such a plan.
There is a lot of risk between current prices and crisis-as-a-catalyst.
Lastly, as it relates to today’s NFP data, anything >152K will = a sequential acceleration in employment growth. It’s mostly a comp effect from a soft September print last year.
That’s the tree.
The forest is that NFP employment growth peaked 20-months ago and has been in steady retreat. And that trend will certainly continue in 4Q when comps reverse to some of the hardest of the cycle.
If employment growth continues to slow faster than wage growth accelerates then growth in aggregate income will continue to slow. And if income growth continues to slow, the deceleration in consumption growth will continue and the singular expenditure bucket supporting GDP over the last year+ will come under increasing pressure.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.49-1.77%
SPX 2142-2175
EUR/USD 1.11-1.13
Oil (WTI) 44.09-51.19
Gold 1
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst
