“I’m not a businessman, I’m a Business, man!”
-Jay-z
If you, by chance, are privileged enough to hold personal court with her Majesty, Queen Elizabeth II, she will ‘honor’ you by presenting to you, as a gift, a picture of ….herself.
I get it. It’s a celebrated, throw-back tradition. But in an era of rising developed world wealth and income inequality, nothing embodies self-importance & 1%-er detachment from Main Street quite like giving out an unsolicited picture of yourself.
I don’t know The Donald much beyond the sound bites and surface volatility but, superficially, he exudes some solid, picture-of-myself potential.
Perhaps the 2-million Brits who signed the “don’t-meet-with-Donald’ petition are all on the wrong side of the Kindred Spirit trade.
Or maybe that’s just where we’re all heading collectively anyway. Perhaps we should all take to handing out pictures of ourselves, crescendo the selfie zeitgeist to its next level and take the incestuous national circle of narcissism to its terminal end.
Anyway, in other, Important Lady news, this past weekend my daughter got her first “Big Girl Bed”.
Unsolicited, she delivered the following 2-part proclamation around the rules governing bed use:
- You can only come in my bed if you are totally clean.
- Anyone is allowed to fart in my bed.
Back to the Global Macro Grind…
It’s not just freshly minted 4 year olds who deliver conflicting, self-defeating declarations.
Let’s quickly review a couple hot topic macro issues, each of which is either superficially deceptive, self-defeating or self-regulating.
Border Adjustment: The proposed trade policy initiatives have been well covered but, in talking with retail and non-macrocentric institutional investors, less well understood.
Border Adjustments represents an attempt at fiscal devaluation. The simple goal of taxing imports and subsidizing exports is to improve the trade balance, support domestic production and provide an incremental tailwind to headline growth.
It’s the same effect targeted by monetary easing whereby a weaker currency is hoped to increase exports (U.S. goods priced in dollars will cost less/be more attractive to foreigners with a weaker dollar), increase domestic demand for domestically produced goods (for the same reason – with a weaker currency foreign goods become more expensive in dollar terms) and support aggregate growth via improvement of net exports.
The conventional thinking is that the net benefit is ultimately nothing as the currency adjusts (strengthens) and the real exchange rate remains largely unchanged.
The why is relatively straightforward:
- It becomes more expensive to buy foreign goods, so people buy less of them. That means less dollars being supplied to the Fx market (Supply ↓)
- The subsidization of exports usually means domestic exporters can lower prices and take share. Higher foreign demand for U.S. exports increases the demand for dollars (Demand ↑)
- Supply ↓ + Demand ↑ = Currency ↑
In theory, the currency adjustment fully offsets the intended benefit.
When you hear analysts talk about the border adjustment proposal and the currency impacts, those are the (simple) mechanics underpinning expectations.
Regulation: A Rich Wolf in Populist Clothing?
One arm of the regulatory and tax policy discussion has focused on adjusting the mortgage interest deduction for itemized filers.
Most of the headlines and soundbites from Mnuchen et al center on the vague but superficially appealing notion of “capping” mortgage interest deductibility.
As we understand it, the actual proposal is almost exactly opposite of what it sounds like.
Under the current system, you can deduct mortgage interest on debt up to $1mn, which equates to around ~$45k in deductible interest assuming a 30-year mortgage at current rates of 4.5%.
Under the new system, total itemized deductions would be capped at $200k. As the Chart of the Day below illustrates, hitting that $200K cap would support a mortgage balance of $4.4mn under the same assumptions.
To make it a little more realistic (it’s unlikely mortgage interest would be the lone itemization item), let’s consider the situation for the top 1% of income earners.
The cutoff for the 1% income threshold in the US is ~$390k. Applying liberal assumptions for medical expenses, state & local taxes and charitable contributions (see HERE), non-interest itemized deductions would total ~$100K, leaving ~$100K for mortgage interest – which would support a mortgage of >$2mn or 2X the cutoff under current law.
The point is that it’s not unreasonable to conclude that only the top 25-75 bps of earners are likely to be (modestly) impacted by a switch to an itemization deduction cap of $200K
Employment: RoC Solid?
Lastly, since it’s Jobs day we’re kind of obliged to deliver some labor market contextualization.
Regular readers know we don’t do monthly point estimate forecasts for an unforecastable NFP number. We’re concerned with the directional and rate-of-change probabilities and the flow through implications for income and consumption growth.
As it relates to this morning’s January NFP print:
- Consensus is at +170K. We think the risk is to the upside. Anything can happen of course when the standard error on the estimate is >100K but this month, upside = the highest probability outcome.
- 170K also happens to be the level above which payroll growth will show sequential acceleration.
- An arrest of the payroll slowdown that commenced in Feb 2015 would, on the margin, be positive.
- It’s also likely that we re-decelerate next month in February before heading into easy Apr/May comps. From a trend perspective, though, the probability is rising that we could see a 5-6 month period of flat-to-rising payroll growth. This would be a notable shift from the conspicuous deceleration that has characterized the last 20 months or so.
To be clear, I don’t want to overstate the reality. The preponderance of domestic fundamental data is improving as are the forward prospects but it’s not a gimme.
Employment and income comps ease but remain reasonably tough the next couple months. Consumption growth comps will, by extension, remain similarly challenged.
Inside of that reality, there are only really 3 factors that can flex and swing the rate-of-change on the consumption side: savings rate, credit growth and wage growth.
In short, the savings rate needs to stay down YoY (similar to the dynamic the last few months), credit growth needs to continue to accelerate and/or wage growth needs to continue to accelerate equal and opposite to any slowdown in employment growth. Variant combinations of those can serve to maintain or accelerate spending but it can’t happen without a couple of those occurring.
We’ll be tweeting and covering the employment data this morning – as always – on The Macro Show at 9am.
Two Trump (& Lila) inspired rules for the show this morning:
- We only want objective, independent thinkers and thoughtful participants on the call.
- We’ll only take your questions if you agree with us.
Kidding …. Or maybe not. Tune in.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.41-2.58%
SPX 2
VIX 10.15-12.82
EUR/USD 1.05-1.08
Oil (WTI) 52.29-54.26
Gold 1183-1228
Christian B. Drake
U.S. Macro Analyst
