“Wealth can only be accumulated by the earnings of industry and the savings of frugality.”
-John Tyler
After spending two full days of Institutional Investor meetings in Boston, I can stop talking about Trump vs. Hillary scenarios and get back to what I’m less bad at, measuring and mapping the rates of change in both the economy and earnings.
For those of you Canadians, Germans, etc. reading this morning’s note, John Tyler was the 10th President of The United States (1). He was a Virginian who started as a Democrat-Republican (1811-1828) and ended as an Independent Democrat.
I personally couldn’t tell you if Trump is a Democrat or a Republican. I really don’t care. What matters most to me between now and election day is making sure you continue to accumulate wealth. Losing it due to partisanship or perma-bullishness, is not an option.
Back to the Global Macro Grind…
Being too bullish on the “earnings have bottomed” narrative is costing some people their year. With the SP500 only up +4.3% YTD (vs. Gold +18.6%, Utilities +11.0%, TLT +10.7%, etc.), this recent drop has some people in a performance pickle.
Obviously, it’s still early in Earnings Season, but the ideas of mid-October have the following red lights:
- Basic Materials (XLB) -3.3% for OCT to-date
- Healthcare (XLV) -2.8% for OCT to-date
- Industrials (XLI) -2.2% for OCT to-date
The only sector that’s “up” (for now) in OCT is the Financials (XLF) at +0.16%. While Healthcare (XLV) -2.7% YTD has taken over as the cellar-dweller of 2016 perf, Financials (XLF) are still -0.1% YTD. I assume that’s because Jamie Dimon was going to have a “great quarter.”
The surge in non-performance (being long the Financials in 2016) will take on a whole new narrative today – behold, the surge in “credit products!” All the while, traditional banking profits (net interest margins) are 30-40% below the quarterly average for Q3 of 2015.
“So”… as Janet Yellen likes to posit, these bankers better do their best to report non-GAAP earnings and tell us a story of how #LateCycle “credit growth” is the next panacea as consumer delinquency rates rise, like a phoenix, from their cycle lows.
Delinquencies?
Yes, Jamie. When your loan guys/gals are diving down that FICO file to extend credit to whoever will take it, the risk profile of that loan book starts to look like it always does at the end #TheCycle.
While we only spent, on average, 10-15 minutes on Trump vs. Clinton in our Boston meetings this week. We spent a good 30-45 minutes reminding investors what a consumer employment, consumption, and credit cycle looks like.
For those of you who have our current Q4 Macro Themes Slide deck (I’ll be reviewing it with some CT hedge fund managers today), see slides 40-49 where we highlight:
- Consumer Credit Growth Slowing now for 8 months
- Delinquency Rates having the most negative asymmetry as any macro chart you can find (from all-time lows)
- Negative Inflections in Credit Card Delinquency Rates
- Future Delinquency Probability (using the Fed’s own surveys!)
- The (Deep) Sub-prime Resurgence
Nah, Jamie and the Stumpf-ster haven’t quite yet explained these cyclical risks to investors.
Stumpf was obviously pre-occupied trying to make you believe his team could “cross-sell” and “extend” credit to deep sub-prime borrowers at its fastest year on record. All the while, Dimon is saying in his earnings release this morning that “we grew both loans and deposits double-digits, and our new card product, Sapphire Reserve, has gotten a great response.”
That’s right, 2015 was the fastest year ever (and ever remains a long time) in net extension terms (number of credit cards) to deep sub-prime and traditional sub-prime borrowers. #Timestamped
Yeah, I’m sure this will all end well for everyone who wasn’t doing this at Wells Fargo (WFC)… but we see this rise in leverage as a massively underappreciated risk. As you can see in the Chart of The Day, the deep sub-prime bucket (sub 620 FICO score) and the traditional sub-prime bucket (620-659) carry average balances not dissimilar from prime borrowers.
While people may think that wealth can be accumulated through leverage (and not saving), every 6-7 years (for the last 20 in America), when the cycle slows to 0% GDP growth, many of those people have lost a lot of money.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.53-1.79%
SPX 2117-2151
RUT 1
VIX 14.01-17.85
USD 95.75-98.50
Oil (WTI) 46.28-51.78
Gold 1
Copper 2.08-2.17
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
