Hedgeye - Owning It

Whateva! I do what I want!

The Great Recession sucked, for obvious reasons.

It also sucked, less obviously, because ubiquitous coverage of the recessionary aftermath swamped awareness of the early emergence of one of the most amusingly annoying social-cultural trends of the century.

The trend toward “Owning it”.

“Owning It” started as a legitimate, albeit cutesy, life-coachy type tool for selective, personal acceptance and empowerment. But it quickly devolved and metastasized as a catch-all rationalization crutch.

If you weren’t, somehow, witness to the peak “owning it” crescendo of the late 2000’s, it followed this basic stylized pattern:

Individual exhibits some (controllable) mental, physical or social characteristic that isn’t generally appealing or accepted
Individual is unwilling (stubborn or lazy) to make any attempt at improvement
Individual publically and confidently over-proclaims that they don’t care what other people think and that they are just going to “own that shit”

The celebrity cases are the most accessible, most amusing, and the algorithm was as full-proof as it was simplistic:

Go on The View and/or any late night talk show
Passively acknowledge that you are lazy or obnoxious or unhealthy, etc.
State that you are done trying to please other people and fit into the worlds view of “ideal” (although you’ve made no serious attempt to objectively consider or address that character flaw)
Proclaim that it’s “just who I am” and “whatever! I’m proud to embrace it” …. and I’m going to “totally just own it”.
Audience claps
Receive instant and permanent exoneration of that willful incompetence or laziness or slovenliness or other perfectly discretionary character trait.
Garner tabloid headlines for “how brave you are” for “putting yourself out there”.

It’s no secret that economic crises birth discrete psycho-behavioral responses and, in many ways, the GFC was probably more progenitor then subjugator of the “owning it” onslaught.

After all, if you don’t own financial assets, aren’t a beneficiary of phantasmal trick down monetary policy and don’t see any near-term upside in your personal income statement, it’s natural that you take ownership of what you can ….

“Owning it” is a kind of individual psychological QE; a self-controlled printing press for ego maintenance and psycho-emotional self-preservation.

Back to the Global Macro Grind…

Remember the good ole days when Consumer Confidence was breaching new highs, household spending was going to “sustain and support” growth, residential construction spending would be an outsized support to investment and false optimism grazed blissfully on the manicured late-cycle hills of willful rate-of-change blindness?

…. Ahhh, 3 weeks ago was great, good times!

After jumping to a new cycle high in September and sparking resurgent optimism around the consumers capacity to continue carrying the expansion, the Conference Board Consumer Confidence reading saw the largest sequential drop in 12 months in yesterday’s October reading as sentiment retreated -4.9 pts against downwardly revised September estimates.

The give back wasn’t particularly surprising as all the other primary sentiment series have failed to confirm the Conference Board’s lone wolf September ramp:

University of Michigan: After showing a muted gain in September, Confidence fell -3.3pts in October and remains well off cycle peak and continues to trend lower
Bloomberg Consumer Comfort: Was down sequentially in September and has tracked lower thus far in October as well
NFIB: Small Business Optimism was down small as of the latest September data and remain well off cycle peak.

And like it or not, we’ll get to own the Consumer’s diminished contribution to 3Q16 GDP come Friday.

Retail Sales: Spending in the Retail Sales Control Group was conspicuously underwhelming in 3Q, registering outright decline in July and August and managing just a +0.1% sequential gain in September. On a QoQ annualized basis, goods consumption (recall, Retail Sales only represents spending on goods – which is ~35% of PCE and ~25% of GDP) is only up +0.3% in 3Q16. This compares to +6.8% last quarter. Spending on Services has been marginally better but ….
PCE: With two months of data reported, total household spending is tracking at just +2.4% QoQ in 3Q compared to +4.2% in 2Q. A flat to small sequential gain in September implies (1) PCE will be softer QoQ and less supportive of reported growth and (2) It will be basically flat at ~+2.7% on a YoY basis.

In other words, consumption will remain “okay” on an absolute basis but the multi-quarter trend of deceleration off the 1H15 rate-of-change peak will remain ongoing.

And if we’re even ballpark correct on our 3Q16 GDP estimate of +1.2% YoY, the macro accounting implies a couple of things:

Payroll growth, while slowing, will still be growing at a premium to output growth. If growth in the biggest input is rising at a premium to output growth, productivity will remain challenged.
Income growth, while slowing, will still be growing even with or faster than nominal GDP. If growth in the biggest input cost (aggregate labor income) is rising faster than revenue (nominal GDP), profitability will remain challenged.

In the end, the math owns us all.

Elsewhere across domestic macro, we’ll get the most volatile, error prone and highly revised housing data series there is New Home Sales (NHS) for September this morning.

NHS in July/Aug demonstrated a positive divergence from the preponderance of domestic housing data as both comp dynamics and what we believe to be statistical distortion supported reported activity.

To quickly contextualize: The monthly New Home Sales data are derived from the Census Bureau’s Survey of Construction (SOF) and are imputed based on the issuance of permits. Historically, NHS and SF permits have demonstrated a consistent ratio with each other – which is not surprising as one is a derivative of the other – and in almost all instances in which there has been a dislocation from this historically consistent ratio, NHS have seen a negative revision and subsequent mean reversion lower.

Such a dislocation was observed in the Jul/Aug data (Starts/Permits were flat to down while NHS jumped) and is the basis for our expectation of modest to moderate softness in NHS in the coming month(s).

With the data set for release at 10:00 am ET we won’t have to wait long to see whether we’re right or not. And we’ll “own” the outcome either way.

We aren’t always right but right or wrong we have an analytical platform for contextualizing and understanding why - and can adjust and evolve.

Owning a call can get you a series MVP. Owning a process can get you the Hall of Fame.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.60-1.80%

SPX 2122-2154

EUR/USD 1.08-1.10
Oil (WTI) 49.01-51.67

Gold 1

Best of luck out there today,

Christian B. Drake

U.S. Macro Analyst