“First learn stand, then learn fly. Nature rule Daniel son, not mine”
-Mr. Miyagi
So I’m moving Citizens Arrest to the top of my bucket list this morning.
Getting drunk with Mr. Miyagi in the Dominican Republic at 17 years old used to occupy top spot … but then I did that.
I think shorting the euro is moving higher also.
Back to the Consensus Currency Grind…
I have a soft spot for psycho-social phenomenon and markets can be a lot like relationships in terms of psycho-behavioral tendency.
For instance, there’s seemingly a pervasive penchant in relationships to purposefully “push the other person’s buttons” … and then get mad when it works.
Say something with the explicit intention of generating an emotional overreaction and then get mad when the other person exhibits that intended reaction.
That’s not a generalization, it’s just a qualitative observation on an insignificant sample size.
Similarly, investors seems to have an insatiable proclivity for pushing mean reverting series to extremes and then getting mad when they mean revert.
For example, diffusion indices are inherently mean reverting and when the New Orders component in the ISM index was hitting fresh multi-years highs of 65 a few months back, we noted the following:
Realistically (& empirically), it’s unreasonable to expect a sustained ramp from current levels. Indeed, there have only been 3 instances over the last 50 years in which New Orders have had a multi-month streak above the 65-level and just a single (early-cycle) 4-month streak in the last 30 years. Again, middling should be the baseline expectation as we comp out of the industrial and commodity price recession and the mean reverting nature of diffusion indices takes hold.
Screening for extremes in sentiment and positioning is naturally a first, fertile ground for identifying potential opportunity.
And speculative futures and options positioning is a solid sentiment stalking ground.
3 Sigma Sentiment: Today is Tuesday, which is also the last day captured by the weekly CFTC futures and options report which comes out on Friday.
As of last Tuesday speculative, Futures and Options positioning in the Euro was +2.8 Standard Deviations on a 1Y basis and +3.01 Standard Deviations on a 3Y basis and that has likely only grown alongside further gains in the Euro over the last week.
For sure, incremental political clarity, solid growth data and a comparably strong “economic surprise” trend have all supported the transition of the “risk-on” trade from the Dollar to the Euro.
And that move could persist a bit further but as a low-intensity macro rule of thumb, anytime something goes into the +2.5-3.0 Standard Deviation range, it should throw up a cautionary flag, at the least.
Remember like 4 hours ago when spec positioning in 10Y treasuries was net short to the tune of -3.0 Standard Deviations (now largest net long position in years). Or how about that blissful long $USD stupor from about 5 hours ago.
Consensus convictions are infamously finicky. A behavioral psychologists playground and macro headline chasers dystopia.
The currently prevailing positive Euro sentiment, of course, is all extra interesting with the ECB announcement on Thursday.
Draghi is obviously (& rightly) concerned about currency strength and Euro gains are already pricing in incremental (rhetorical) tightening and attempting to front run tighter future interest rate differentials (presumably, the assumption is that yields on Euro area bonds rise alongside declining ECB asset purchases).
It will be interesting to watch the reflexive fireworks if we get a dovish policy shock and/or as the Eurozone transits to Quad 4 (Growth and Inflation Slowing) in 2H17.
In any case, as the Chart of the Day below shows, once bullish sentiment begins to push >+2.5 Standard Deviations, the return profile starts to turn asymmetrically negative.
In other psycho-social behavioral news ….
GOYARD BAG: As everyone knows, there are really only two reasons to have a Goyard Bag:
- because you can, and/or
- because you want other people to know you can.
Psychological underpinning aside, tracking spending on luxury goods offers us a proxy read on the state of high-ticket discretionary consumption – a not insignificant factor as the top 20% of income earners account for over 40% of consumer spending.
After collapsing for 2 years into mid-2016 alongside stagnant asset price growth, high ticket discretionary consumption has, indeed, reaccelerated on a short lag to resurgent equity price reflation.
With the S&P500 up 12.2% (vs 2016 avg price), Luxury consumption is tracking +5.5% YoY for the YTD and growing at its strongest pace since 2014.
We still like long-the-rich as a theme, for now.
For the rest of us, we’ll get the Fed Flow of Funds data for 1Q on Thursday and an update to the Labor’s Share of Income chart below.
Labor's share of income typically only rises in the late stages of an expansion as the labor market tightens and after sales/profits have been strong for a protracted period.
We’ve been in a little bit of a goldilocks setup the last quarter or two as labor’s share of income has remained solid as corporate margins and profits have expanded, comping against the trough of the profit recession.
From here, it gets more “zero-sumy” as further improvement in returns to labor in the face of still weak productivity trends are paid for via corporate margin compression.
Productivity growth in 1Q was revised higher yesterday. The headline was underwhelming at +0% QoQ but, on a year-over-year basis, it accelerated for a 3rd consecutive quarter and at its fastest pace in 2 years at +1.23%.
Remember, at a base growth accounting level and over the long-term, GDP is simply a function of how many people you have making stuff and how much stuff each person can make.
Given slow and slowing population growth trends, the onus will increasingly fall on productively gains to support a sustained increase in real growth and real wage gains.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.13-2.31% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
Nikkei 194 (bullish)
DAX 122 (bullish)
VIX 9.41-11.69 (bearish)
USD 96.25-99.20 (neutral)
EUR/USD 1.10-1.13 (bearish)
YEN 110.00-112.09 (bearish)
GBP/USD 1.27-1.30 (bullish)
Oil (WTI) 46.42-49.83 (bearish)
Nat Gas 2.91-3.20 (bearish)
Gold 1 (neutral)
Copper 2.50-2.60 (bearish)
First new ideas and Investment, then stronger GDP. Growths rule, Daniel son, not mine.
Christian B. Drake
U.S. Macro Analyst
