“If you have a 10-yr plan on how to get somewhere, you should ask: Why can’t I do this in 6 months”
-Peter Thiel
Easier said than done. Author of “The 4-Hour Workweek”, Tim Ferriss, consolidated and summarized his large library of personally conducted interviews into the book “Tools of Titans.”
I’m usually not a huge fan of the alleged “non-fiction” books that glorify and immortalize successful business icons. The title may be misleading but this book is an easy to read guide with actionable lessons from interviewees across a wide variety of backgrounds.
Whether you agree with him or his politics, Peter Thiel unarguably packs a serious intellectual punch. If you’ve been on the right side of the FAANG, you can thank him for being an integral early-adopter and curator of the platform business model as a co-founder of Paypal.
Back to the Global Macro Grind…
Statistics vary, but market and consumer data company GfK estimated in their 2016 Ownership and Trend Report that 25% of households have opted to go without cable and satellite, instead taking to the platform super-centers for content.
Any household that cuts the cord likely still pays for internet through the same provider, but in general it’s hard to see how the evolution of the platform business model and technological cost deflation in general hasn’t been beneficial across a number of key consumption categories (think UBER, Airbnb, Kayak in the private space). I’m skeptical Amazon will swallow the world whole but disinflation is generally a good thing for transparency and consumption.
Theories aside, let's focus on the tangibles…
We created what we’re calling a “Key Cost Center Basket” in our Q3 macro themes presentation. It was a PCE-weighted basket of the contribution of 5 consumption categories included in the CPI reading:
- Shelter: 33.6%
- Food At Home: 7.6%
- Medical: 6.7%
- Energy: 3.7%
- Wireless Services: 1.6%
- Total CPI Weighting of Key Cost Center Basket: 53%
Now, we have a pretty good handle on high-end consumer trends. Their consumption capacity is much more closely tied to asset price inflation:
- 85% of financial assets are owned by the top 10%
- The top 20% of income earners account for ~2/5ths of total consumer spending.
- There is a direct relationship between stock market performance and “Luxury Goods” spending (An index created from the PCE categories including pleasure boats, aircraft, jewelry, and watches)
You’ve heard it before from us. To partially use a loathed Fed word, if you own a wide variety of financial assets, the push and pull of utility and energy costs is at least somewhat “transitory”. Not to mention, the weightings of the 5 items included in our “Key Cost Center Basket” as a % of after tax income are much smaller for the top decile of income earners. In an effort to stay short-winded, the expenditure weights as a % of after-tax income for the top decile are roughly ½ of the median consumer weightings in those 5 categories.
For the median income consumer who brings in ~$47K after taxes and spends ~$46K, the “transitory” pass-through of their costs and investments isn’t relevant. Most in this category don’t own financial assets.
The “Key Cost Center” categories are highly relevant, and the weightings as a % of after-tax income match up very closely with the PCE basket weightings in CPI (~51% of the median consumer’s expenditures).
See the Chart of the Day for a categorical breakdown.
The YY delta in the Key Cost Center Basket peaked in February at +4.3% and marched down the ladder to +2.4% in May. Our work suggests this trend will continue with Friday’s June CPI report. The Key Cost Center Basket is a tight fit, hence Reflation’s Peak (Q1) Reflation’s Rollover (Q2).
With the major carriers taking their medicine and offering unlimited data plans, the wireless services component of the basket has fallen off the face of the earth this year. It’s a small % of the basket at 1.6%, but we haven’t heard any credible arguments that technologically-driven disinflation will lose momentum (sure the comps will get tougher).
So all-in-all the real consumption implications have been very favorable, and in hindsight, the market front-ran this tailwind in bidding up QUAD1 exposures. We remain buckled in on this train.
From here we have the second derivative effects of growth and inflation comps keeping the U.S. economy in QUAD 1 through the balance of 2017, but we also remain cognizant of potential headwinds. Or instead of headwinds, “slowing tailwinds”: To name a few:
- Payroll Growth: As Christian Drake wrote ahead of last week’s NFP print: “The +297K gain and year-over-year acceleration in June of last year sits as one of the hardest comps of the cycle. Indeed, we need a NFP print of +300K to avoid a deceleration in Y/Y [payroll growth]”. NFP growth did in fact slow to +1.55% Y/Y, and a +291K base from July 2016 suggests a similar set-up with next month’s release.
- Savings Rate: When the cycle low in the savings rate as a % disposable income from Nov 16-Jan 17 is lapped, this will be a marginal consumption headwind in the back half of the year, but for the next couple of months, 6% is the comp vs. 5.5% in May of 2017 (A higher savings rate comp is a consumption tailwind).
- Credit Growth: Revolving Credit Growth peaked in November at +6.7% and has since trended lower to +6.1% as of June. A continuation of this trend would be a headwind. Although confidence readings that typically front run loan growth remain supportive.
Coming at it from a consumer income statement standpoint to wrap-up, both comp effects and structural deflation have created a pretty strong QUAD 1 cocktail which feeds on itself with high-end financial asset ownership. Current tailwinds won’t last forever and the top-line has some comp effect and potential credit growth headwinds, but those arguments could be countered by confidence readings and labor tightness arguments among other items outlined in our Q3 themes presentation. If we do in fact cut the cord on any of our big themes, you’ll know about it in real time as always.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.13-2.40%
SPX 2
RUT 1
NASDAQ 6070-6255
VIX 9.70-12.39
USD 95.01-96.75
Oil (WTI) 42.57-47.00
Gold 1
Good luck out there,
Ben Ryan
Macro Analyst
