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What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing

What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing - help wanted 1 6


BREAKING: The Bureau of Labor Statistics is 90% sure that the U.S. economy added somewhere between 42,000 and 270,000 jobs in the month of December.


Wait, what?


That's right. The BLS, which is charged with calculating montly jobs gains, released today's labor market report showing 156,000 new jobs were added in the month of December. But based on the way this data is collected, the U.S. economy may have added or subtracted an additional 114,000 jobs from that initial jobs estimate.




Interestingly, and more importantly, year-over-year jobs growth continued to slow. To be precise, jobs growth has slowed from 2.3% (year-over-year) in February 2015 to today's rate of 1.51%. The year-over-year growth rate captures the big picture better than blindly staring at these uncertain monthly oscillations. The long-term trend is that jobs growth continues to slow.

These nuances got lost in the shuffle of mainstream media headlines


Most media outlets suggested that jobs growth has been chugging along. Nevermind that the 156,000 number missed Wall Street consensus' estimate of 180,000. Here's mainstream media reporting on this morning's jobs report:


  • CNN Money: "The U.S. job market kept up its overall momentum right up until the end of 2016."
  • MarketWatch: "The U.S. added 156,000 new jobs in the final month of 2016 and worker pay rose at the fastest pace since the Great Recession, reflecting a surge in employment over the past six years that’s left many companies complaining about a shortage of skilled labor."

Chart of the Day: The Absurdity of predicting Monthly Jobs Growth 


Now take a look at today's Chart of the Day below. This captures the wide range of possible outcomes for the BLS's calculation of monthly jobs growth. This should throw cold water on anyone trying to come up with a montly estimate. Alas, Wall Street continues to guess. Here's Hedgeye U.S. Macro analyst in today's Early Look note published just before the 8:30 a.m. Jobs Report:


"Below is a friendly updated reminder from the BLS on the standard error in the NFP estimate.  To summarize, if NFP prints +114K this morning, the BLS is 90% sure we gained between 0 and 228K jobs."


In other words, Wall Street consensus should know better than to predict 180,000 jobs in December. With a range of plus or minus 114,000 jobs for a given month, economists could just as easily pull their nonfarm payroll estimate out of thin air.


What The Media Missed: Jobs Growth Isn't "Surging." It's Slowing - BLS CoD  2


P.S. If you'd like to dig into this a bit further, here's the exact language from the BLS explaining in detail the chart above and how the monthly Jobs number is derived:


"What does this chart tell us? The red dot for total nonfarm employment shows a gain of 161,000 jobs in October, as we reported on November 4. That number is an estimate based on our montly sample survey rather than a complete count of jobs each month. Different samples of employers might give us different estimates of employment change.


We can measure the sampling error, the variation that occurs by chance because we collected the number from a sample of employers instead of all employers. With our measure of sampling error, we can calculate a confidence interval. The blue bar for total nonfarm shows the 90-percent confidence interval ranged from 46,800 to 275,000.


We call this a 90-percent confidence interval because, if we were to choose 100 different samples of employers, the October nonfarm employment change could be between 46,800 and 275,000 in 90 of those samples."

Can Stocks Hit Fresh All-Time Highs? Yup. Volume Is Accelerating

Can Stocks Hit Fresh All-Time Highs? Yup. Volume Is Accelerating - volume accel

The U.S. stock market is within spitting distance of all-time highs


Which begs the question: Can the market go higher? You bet.


As you can see in the Chart of the Day below (from today's Early Look), equity market volume (the number of shares traded on U.S. stock exchanges) yesterday was up +11% versus its 1-month average and up 8% versus the 3-month average. The S&P 500 was up +0.6% yesterday. This follows increasing volume in Tuesday trading as well, when the market was up 0.85%. Here's the volume scorecard on that move higher:


  • Trading volume (1/3) vs. 1-month average: +30%
  • Trading volume (1/3) vs. 3-month average: +26%

What Accelerating Volume Means For Stocks

Think of accelerating volume (on up days) as a vote of confidence that the market can head higher. It's simple. If more investors are buying as the stock market heads higher that's bullish. Conversely, if volume accelerates on down days that means investors are selling in droves. That is very bad and very bearish signal.


Consider what happened during a two particularly trying weeks at the end of October and early November in which stocks fell -3%. Volume was consistently accelerating as investors headed for the door. On November 1st and 2nd, volume was up almost 20% versus the one-month average as stocks dropped -0.6% on both days. 

Bottom Line

We're a far cry from those dismal days today. The U.S. economy is growing, stocks are heading higher and volume is accelerating. All of this bodes well for equities. We don't see an end to the 9-year bull market just yet.


Can Stocks Hit Fresh All-Time Highs? Yup. Volume Is Accelerating - 01.05.17 EL Chart  2

The U.S. Economy Is Growing: Sell Long-Term Bonds & Gold

The U.S. Economy Is Growing: Sell Long-Term Bonds & Gold - growth info

Sell Gold and Long-Term Bonds


Simply put, the U.S. economy is accelerating and that's not good for either Long Bonds or Gold. Case in point, yesterday's ISM Manufacturing release hit a 2-year high. This follows recently reported economic data from GDP to Retail Sales to Durable Goods orders that's been better than expected.


If you've been following Hedgeye for a while you might be shocked to see the aforementioned investment conclusions. We had been bullish on Long-Term Treasury Bonds (TLT) since late 2014 and liked Gold (GLD) for much of 2016. But we also told subscribers to sell it all shortly after Donald Trump's Election Day victory. Why this seemingly radical change? It's actually not radical at all but consistent with a fundamental aspect of our research process. 


Let's back up a bit. It was our contention in 2014 that the U.S. economy was slowing. It did. U.S. growth peaked in March of 2015 at 3.3% (on a year-over-year basis) and declined to 1.3% in June 2016. Over that period, Gold, Long-Term Treasury bonds, and the Utilities sector (XLU) posted double-digit gains. These typically outperform in a slow growth environment.


Shortly thereafter, the market began betting that the U.S. economy bottomed. The traditional U.S. growth slowing leaders turned into laggards and sectors tethered to an accelerating U.S. economy, like Industrials (XLI) and Financials (XLF), came roaring back. (See our detailed explanation in "Why Trump Didn't Kick-Start the U.S. Economy.")

U.S. Economic Data Hadn't Confirmed Recovery (Yet)

#Economy #GDP #Recession


The market was front-running the U.S. economic data. As the numbers rolled in (just before Trump's victory in early November), however, the data started to rubber-stamp investor's bets:


  • Durable goods and Retail Sales data for the month of October began improving.
  • Then previously recessionary Industrial Production data started to look up.
  • U.S. GDP for the third quarter stopped slowing, rising to 1.7% after five quarters of deceleration from 3.3% year-over-year growth in March 2015 all the way to 1.3% in June 2016.


The ISM Manufacturing report from yesterday is further confirmation. As you can see in the Chart of the Day below, the ISM numbers started to signal that we were lapping the recessionary lows of the Industrial economy back in August.


Take a look at the breakdown of data below:


  1. August 2016 ISM = 49.4
  2. October 2016 ISM = 51.5
  3. September 2016 ISM = 51.9
  4. November 2016 ISM = 53.2
  5. December 2016 ISM = 54.7


"In other words, in addition to ISM, Industrial Production, Durable Goods, etc., there’s now plenty of evidence to suggest that the Industrial & Manufacturing #Recession that the US experienced bottomed in August-September 2016," Hedgeye CEO Keith McCullough wrote in today's Early Look. In the fourth quarter of 2016, as the U.S. economy was bottoming, Gold and Long-Term Bonds lost -13.1% and -14.1% respectively.


The U.S. Economy Is Growing: Sell Long-Term Bonds & Gold - 01.04.17 EL Chart

the U.S. Economy Will continue to Grow...

#GrowthAccelerating (tickers: TLT, GLD)


All of this supports our current research call on U.S. growth accelerating. It's also why investors should now short Long-term bonds (TLT) and Gold (GLD).


Our predictive tracking algorithm suggests U.S. GDP will come in at 1.9% growth in the fourth quarter of 2016 (the Federal government's first estimate will be released on January 27th). Add all this together and we'd expect more carnage for investors in Long Bonds and Gold.


Sell it.

Early Look

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Why Trump Didn't Kick-Start the U.S. Economy

Why Trump Didn't Kick-Start the U.S. Economy - trump hat making


Wall Street is betting that Donald Trump can kick-start the U.S. economy. The story goes that tax cuts and infrastructure spending will unleash a boom of pent-up economic activity. But let's not give the President-elect too much undue credit. Before he even takes office on January 20th, Trump will inherit an accelerating U.S. economy. Consider the evidence.

The market already sniffed out An Accelerating U.S. Economy


Sure, since Election Day, investors have been betting on Trump by buying the Russell 2000. It's up 14.8% since then, as a pure play, domestic-oriented stock index. But the market started to front-run U.S. growth accelerating back mid-2016. 


Check out the sector performance from June 30th until just before Trump's victory in the chart below. Utilities (XLU), the classic outperformer when U.S. growth is slowing, was lagging while sectors tied to U.S. growth accelerating, like Industrials (XLI), Financials (XLF) and Materials (XLB), started to lead the pack. Note: This was a complete reversal of the trend in which Utilities led the sectors and Financials lagged.


Treasury bond yields, another important barometer of economic activity, also bottomed around this time. (Falling bond yields generally portend slower growth and conversely yields often rise during acceleration.) On July 6th, the 10-year Treasury yield hit 1.32% and have backed-up to 2.5% today.


Why Trump Didn't Kick-Start the U.S. Economy - S P 500 Sector Performance

U.S. Growth Expectations Were Confirmed by Economic Data


Data collected just prior to Trump's win, rubber stamped the market's prediction that the U.S. economy had bottomed.


  • Durable goods and Retail Sales data for the month of October began improving.
  • Then previously recessionary Industrial Production data started to look up.
  • U.S. GDP for the third quarter stopped slowing, after five quarters of deceleration from 3.3% year-over-year growth in March 2015 to 1.3% in June 2016, .


Now that U.S. growth is so clearly accelerating, the U.S. dollar is ripping to the upside. As you can see in the Chart of the Day below, in the fourth quarter alone, the dollar was up +8.5%.


(Note: When U.S. growth and inflation are accelerating, we call this Quad 2 in our proprietary GIP model [Growth, Inflation, Policy]. To learn more check out, "A Closer Look At How We Actually Model The U.S. Economy.")


Why Trump Didn't Kick-Start the U.S. Economy - 01.03.17 EL Chart


Now, to be fair, Trump can be credited with instilling a countrywide euphoria (i.e. Trumphoria) that has been spilling into recently reported November economic data. Time will tell whether it's justified but for the time being the data corrobates Wall Street's #TrumpTrade.

Bottom Line


To be sure, we're in for an interesting 2017 under President Trump. This morning's mainstream media freakout is over Trump's tweets related to the ongoing tit-for-tat trade battles with China, the nuclear armament of North Korea, a border tax on General Motors and the wholesale repeal of Obamacare.


But a lot can happen in between Trump's 140 character tweet storms and the signing of actual legislation. In terms of market implications, we'll have to wait and see how this all shakes out. (Hedgeye's Washington Policy research team offered up their Trump policy predictions in a recent HedgeyeTV special, "Our Top Five Trump Administration Investing Themes.")


For now, we remain bullish on U.S. stocks as the economy continues to accelerate, at least until Inauguration Day.

Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises

Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises - em debt crises


The U.S. dollar just hit a 14-year high against the Euro. So, as the world's reserve currency, dollar strength will have implications for investments around the globe, particularly for emerging markets.


Here's what you need to know.

What the Media Missed

A stronger dollar has caused a mainstream media freakout that's been largely misdirected. The focus has been on the impact to the U.S. The story goes that corporate profits particularly in the manufacturing sector could take a hit and this weakness may spill over into the broader economy.


(**Note: In theory, a stronger curency does make purchasing U.S. exports less attractive to foreigners whose currency and buying power weakens versus the dollar. But U.S. exports aren't the primary driver of our economy, consumption is. We've outlined before, in more detail, why we think the media's attention is misguided, here and here.)


Establishment media is missing the more important implication of the dollar, Emerging Markets. In the fourth quarter-to-date, the U.S. dollar index is up almost +8%. Emerging Markets (EEM), meanwhile, have taken it on the chin, -5.9% over that same period.


The U.S. Dollar/Emerging Market relationship is fairly simple to understand. The problem is two-fold. Most Emerging Markets are commodity exporters. Since commodities are priced in dollars, prices typically take a hit when the dollar strengthens. Also, developing countries account for one-third of the $9.7 trillion dollar debt held outside the U.S. as of the end of 2015. As the dollar strengthens against these developing country currencies, it becomes harder to service that debt which is priced in dollars.

Here's a brief recap of Emerging Market crises

As you can see in the Chart of the Day below, a decade of Emerging Market crises are typically preceded by a decade of easy money from the U.S. federal government which seeks to perpetuate a weaker dollar for one reason or another.


The developing crisis typically follows these stages:


  1. Flooding the world with dollars sends cash-flush investors in search of opportunities abroad.
  2. Developing economies pig out on the money pouring in. 
  3. New debt is then issued but becomes increasingly difficult to pay back as the cycle turns and dollar heads higher.


Below is a timeline of the U.S. Dollar index with Analysis...


Stronger Dollar = Emerging Market Carnage: A Brief History of Emerging Market Debt Crises - StrongDollar vs.  WeakDollar Cycles EM Crises

Click image to enlarge.

1960 – 1979

The Federal Reserve and U.S. government tag team to weaken the U.S. Dollar through abandoning the Gold Standard and Fed easy money policies. Latin America goes on dollar-denominated debt binge.

1982 – 1989

  • Mexico Default (1982)
  • Latin American Debt Crisis (and IMF imposed austerity, 1982 – 1989)

1980 – 1989

The Plaza Accord (1985): The governments of France, Germany, U.S., U.K. and Japan agree to manipulate foreign exchange markets by depreciating the U.S. dollar relative to the Yen and Deutsche mark. The U.S.’s resulting easy money policies caused money to flow into emerging markets.

1990 – 1999

  • Mexico’s Tequila Crisis (1994)
  • Contagion in Argentina and Brazil (1994 – 1995)
  • Asian Financial Crisis (1997 – 1998)
  • Russian Default (1998)
  • Brazil Currency Crisis and devaluation (1999)
  • Turkish Financial Crisis (2001)
  • Argentina Debt Default (2001 – 2002)
  • Uruguay Banking Crisis (2002)

2000 – 2009

A secular growth slowdown and two recessions in the U.S. (Dot Com bust and the Great Recession) cause Presidents Bush and Obama and Fed chairmen Alan Greenspan and Ben Bernanke to implement a variety of fiscal and monetary easing policies. The U.S. Dollar hits all-time lows in April 2011.


Money flows into Emerging Markets once again, in search of higher growth and higher interest rates. At the same time, the invention of ETFs greatly reduces barriers to investing in Emerging Markets. Chinese demand for raw materials quintuples bolstering these commodity export-driven economies.

2010 – Present

  • India and Indonesia Currency Crises (2013)
  • China Mini Banking Crisis (2013)
  • Argentine Currency Crisis (2014)
  • Russian Currency Crisis (2014)
  • Turkey and Brazil Currency Crises (2015)
  • Mexican Currency Crisis (2016)

Why This Matters Today

The post-financial crisis trend of dollar weakness is clearly over. The dollar has been strengthening for the better part of three years now. The Federal Reserve is tightening monetary policy, which will cause further dollar strength. Simply put, expect further carnage in Emerging Markets as this trend sets off a deleveraging of the $9.7 trillion in dollar-denominated debt held outside the U.S. 

Will Trump Ignite A Full-Blown Trade War With China?

Will Trump Ignite A Full-Blown Trade War With China? - Boxing Gloves 2


Donald Trump has repeatedly accused China of manipulating global financial markets to gain a trade advantage over U.S. industries.


The President-elect says China is intentionally weakening its currency, the yuan, thereby making U.S. dollars relatively stronger and Chinese goods appear artificially cheaper. This illusion of cheap Chinese goods hurts U.S. industries, so the theory goes, and American jobs suffer as a result.


Here's a tiny taste of Trump's China theory:


"Look at what China is doing to our country ... They are devaluing their currency and we have nobody in our government to fight them ... They are using our country as a piggy bank to rebuild China."


It's a neat theory that plays well in the Rust Belt (i.e. Trump's core constituency) but upon closer inspection of the facts reveals a more complicated truth.

Not Just China: America's Trade Issues Run much Deeper


First, the facts. As Hedgeye Senior Macro analyst Darius Dale writes in today's Early Look, China is the U.S.'s third largest export market, following Canada and Mexico. In 2015, the U.S. and China exchanged a total of $599 billion goods and services, with China netting a $367 billion surplus advantage (in other words, China exported $483 billion to the U.S.; U.S. exported $116 billion to China).


So far so good for Trump's theory.


But here's where it gets a little murky. The U.S. ran trade deficits with 100 other countries last year, Dale points out, so it's odd to single out China as the bad actor on global trade. 


"To the naked eye of a less-informed populist like Trump, the U.S.’s disadvantage comes across as the result of bad trade deals and unfair trade policies on the behalf of the Chinese government. From our vantage point, that’s only half true at best.


Specifically, the U.S. doesn’t have a series of bilateral issues with China and other key trading partners; in 2015 it ran trade deficits with 101 countries. One hundred and one. The broad-based nature of our bilateral trade deficits is not likely to be the result of “bad deals” or “unfair practices” as Trump and his national trade team have repeatedly suggested."



So what are we missing here? The U.S. consistently consumes more than it saves. Plain and simple. As you can see in the Chart of the Day below, U.S. Gross National Savings less Investments as a percentage of GDP (in short, the amount of money Americans save each year) has been negative for the past 35 years. This mirrors the U.S.'s Current Account Balance as a percentage of GDP (essentially the net trade balance, or exports minus imports, versus the broader U.S. economy).


There you have it. 


Will Trump Ignite A Full-Blown Trade War With China? - Chart of the Day 12 29 16

Why Trump's Misconceptions Matter


Facts don't always filter into policy. That's the risk. Trump's rhetoric plays well among his core constituency so there's a considerable amount of risk to investors who blindly dismiss the possibilities of a full-blown U.S.-China trade war. Trump's pick for director of the National Trade Council, Peter Navarro, is no salve. He literally wrote the book on combating Chinese trade and the country's increasing militarism. (see "Death by China" and "The Coming China Wars.") In other words, this is a risk worth watching.


More to come.


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