In this week’s edition of ‘Macro Mentoring’, Hedgeye CEO Keith McCullough highlights the outlook for the U.S. Dollar , walks you through his asset allocation model as well the importance of knowing where we are within the cycle.
In this no-punches pulled excerpt from The Macro Show, Hedgeye CEO Keith McCullough explains what the media missed about today’s jobs report.
Here's how the dominoes fall. Jobs growth slows => Number of Hours Worked falls => Productivity slips => GPD dips.
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Takeaway: There are whoppers. And then there are WHOPPERS. This is a case of the latter.
Remember this beauty from President Obama in his final State of the Union address? We do.
"Anyone claiming that America's economy is in decline is peddling fiction."
Well, we may have discovered how Obama was able to deliver that statement (with a straight face) in spite of overwhelming economc evidence to the contrary. Consider who he's listening to.
Jason Furman, chair of the White House Council of Economic Advisers
Mr. Furman appeared on CNBC this morning, shortly after release of the lackluster September jobs report, peddling the White House's own headscratching spin of economic fiction. Here's what he had to say.
"I don't think you're late cycle... I just don't believe in the concept of late cycle."
Before we dissect this nonsense, let's take a look at the series of untruths Furman puts forth ... shocking even to CNBC anchors Carl Quintanilla and David Faber:
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Quintanilla: On non-farm payrolls, last year's average was 229,000. We're doing 178,000 so far this year leading a lot of people to believe that we are in what we call late cycle. Do you agree with that?
Furman: First of all, our analysis says you need 80,000 a month to stay stable with the unemployment rate and the participation rate. And the fact that you're well above that is why you'll continue to see the labor market improve.
I don't really believe in late cycle. I think the US economy has the potential to continue to grow going forward. You see consumers who are confident, that have wage gains, and you see high levels of consumer spending. That's 70% of the economy. So I don't think you're sort of late cycle. I think it's a matter of the choices you make and I think we can keep going
Faber: So those are the reasons you cite for why you don't believe it's late cycle?
Furman: Oh, I just don't believe in the concept of late cycle.
Faber: Why not?
Furman: I think if you look at business cycles historically, the evidence is that they don't die of old age. There's not an increased probability that an expansion comes to an end as it gets older. It just could happen at any point in time, but right now with consumers confident and optimistic the way they are, and with wage gains, I feel good about where we are.
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...and There you have it
The most glaringly irresponsible statement of the day.
Maybe Mr. Furman should have been on our Macro Themes call yesterday? Sounds like he may have learned a thing or two from Hedgeye CEO Keith McCullough as he discussed #Labor'sLags, why jobs growth will continue to slow from its cycle peak. (Note: Mr. Furman, if you're reading this we'd be more than happy to send it to you. Below are a few slides from that 114-page deck on the house.)
Let's unpack Furman's Fiction point-by-point:
1. Job Gains
"Our analysis says you need 80,000 a month to stay stable with the unemployment rate and the participation rate."
That's convenient. So now that jobs growth has rolled off its cycle peak the White House says we only need 80,000 in monthly job gains. Tell that to the 553,000 "discouraged workers," people who, according to the Bureau of Labor Statistics, "want a job, including those who are not currently looking, because they believe no jobs are available." The lackluster job gains Furman is talking about won't help them.
Year-over-year jobs growth continues to slow from its cycle peak of 2.3% in February 2015 to today's 1.7%.
2. Consumer Confidence
"You see consumers who are confident."
No. Consumer confidence is well past peak and continues its slide from a level of 98.1 hit in January 2015 to 91.2 in September.
"We see wage gains."
4. Consumer Spending
"You see high levels of consumer spending."
Wrong. As jobs growth has slowed so has income and consumption growth.
And finally the most dishonest statement of all...
5. Late Cycle
"I don't think you're late cycle... I just don't believe in the concept of late cycle. I think if you look at business cycles historically, the evidence is that they don't die of old age."
Here's a dose of reality, Mr. Furman: the U.S. economy just entered its 87th month of economic expansion. History is clear on this. The average U.S. economic cycle lasts 59 months before recession. We are now 28 months past that.
The Obama White House can keep peddling whatever fiction it pleases but a casual review of reality is crystal clear... This time is not different. The U.S. economy is slowing. People are understandably concerned. In other words, no, things are not good Mr. Furman.
"We have a clear monetary policy framework in the United Kingdom," Bank of England head Mark Carney said earlier this week.
The BoE's policy is crystal clear:
- Flood the economy with pounds; thereby...
- Devaluing the currency in an effort to stave off the UK's slowing economic growth;
- Pump the FTSE full of easy money.
And that's precisely what's happening this morning. The pound is down 1.7% today, bringing its year-to-date decline to -16%. Meanwhile, the FTSE is up 0.7% today and +13.3% year-to-date.
Bloomberg blames a "flash crash" for the pound's drop today, caused by blips in algorithmic trading models. #Cool. But the year-to-date call on the pound has everything to do with the BoE's pernicious policy to do whatever it takes to devalue the currency.
And while that's great for wealthy Londoners who have the dough to buy stocks, the true losers in this regime are the country's poor, who who can't afford to offset the resulting loss of purchasing power with gains in the stock market. Hedgeye CEO Keith McCullough calls this out in a note sent to subscribers today:
"Why is it that every time something crashes faster than it’s already been crashing (in this case for months), everyone calls it a “flash crash” and blames the algos? #1 to blame here is the Bank of England who has an explicit policy to devalue (crash) the purchasing power of the people in exchange for FTSE, etc. asset inflation that isn’t driven higher by algos?"
Britain's new Prime Minister Theresa May called the BoE's Carney out on this earlier in the week saying low rates had "bad side effects." She continued:
"People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come. And we are going to deliver it."
"I entirely agree with the spirit of what the prime minister said. Monetary policy has been overburdened and we need a better balance between monetary policy and fiscal policy."
In other words, here comes the big push for fiscal spending (and the BoE keeps monetary policy easy). Don't expect relief for Britain's poor any time soon.
the central-planning gong show continues...
Takeaway: The "Geo-Graphics Mini Mac Index" deep fries the Big Mac once again.
Editor's Note: This piece is reposted from the Council on Foreign Relations’ Geo-Graphics blog.
The “law of one price” holds that identical goods should trade for the same price in an efficient market. But to what extent does it actually hold internationally?
The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.
But you can’t buy a cheap burger in Beijing and eat it in New York. So in 2013 we created our own Mini Mac Index that compares the price of iPad minis across countries. iPad minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world. As illustrated in the graphic above, and explained in the video below, this helps equalize prices.
The Mini Mac Index suggests the law of one price holds far better than does the Big Mac Index. And it has done so consistently year after year since we started it. Both indexes currently show the dollar overvalued against most currencies. But the Big Mac Index puts the average overvaluation at 24 percent—a Whopper. Our Mini Mac Index puts it at only 7 percent—Small Fries.
The Mini Mac Index also suggests that the dollar has become slightly less overvalued (down from 9 percent) since the beginning of the year. The pound is now 12 percent undervalued, after its sharp fall on the back of the Brexit vote. Having been undervalued by 10 percent at the beginning of the year, the yen is now slightly overvalued, threatening to derail efforts to push inflation to the Bank of Japan’s 2 percent target.
No wonderJapanese officials are contemplating currency market intervention to weaken the yen. The renminbi has weakened slightly and is now 7 percent undervalued—a more sensible estimate than the 45 percent undervaluation implied by the Big Mac Index.
The evidence is clear—the Big Mac Index doesn’t cut the mustard.
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This Hedgeye Guest Contributor research note was written by Benn Steil and Emma Smith. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. This piece does not necessarily reflect the opinion of Hedgeye.
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