Pascal's Process

Friday is garbage pickup day in Central CT.  My garbage guy’s name is Pascal which is amusingly great, here’s why:

If it snows into Friday, I have no idea whether trash pickup will actually occur or not.  And since the current fancy of the Gods is to will every snowstorm to Thursday evening, I’m left with this now weekly trash-lemma:

If I don’t leave the trash out and they come I’m stuck with a full garbage for another one or two weeks.  If they don’t come and the plow makes another pass there are small odds I have a buried, dumped out trash can to deal with.

Not quite the asymmetry of “Pascal’s Wager” but a close, contemporary cousin.  Anyway, the point is that it’s annoying because there’s no discrete process or communication around pickup activity to anchor my decision making. It’s all hope and whimsicality.

Yesterday we hosted our 1Q18 Macro Themes call and what, I hope, was on display was a fuller exposition of our Global Macro Risk Management Process.

We’ve been doing this successfully now, every quarter, for a decade.  We don’t get everything right, but we do always know how we arrived at a particular conclusion and can disentangle and learn from deviations from those prediction.    

Without process …. all hope & whimsicality.

Conceptually, the path to a differentiated view is relatively straightforward.

If one can conceive a unique way of conceptualizing prevailing conditions and then build an analytical apparatus around that framework to effectively curate, measure and map the dynamic evolution of those conditions, then you’ve successfully created a differentiated process.

And a differentiated process has a sneaking capacity to birth differentiated views.

If you missed the presentation, I’d encourage you to listen to the replay (email for the details). 

In spite of the storm, it was another higher-high in attendance.  As active participants in our attempt to evolve the process of Trendcasting macro and markets, we thank you for your continued engagement and trust.

Back to the Global Macro Grind ….

 

Today is, of course, Jobs Friday which mostly means you’ll (again) have to moat your psycho-emotional stability from the meme torrent of “slack” mentions and “Phillips Curve” references in order to get to the weekend.  

As always, there will be manic focus on AHE and the Payroll headline and rightfully so but, thankfully, we already know most of what matters as it relates to December NFP:

Asymmetries remain the macro risk managers Valhalla and there exists some nice (positive) asymmetry in the labor setup to close out 2017.  Let’s review and preview:

1. Payroll Growth:  Employment growth has accelerated for 2 consecutive months and anything >157K will = another month of acceleration.  ADP printed +250K and NFP consensus is currently 190K.  Taking the under on 157K is not a high probability wager.
2. Aggregate Hours:  The combination of faster payroll growth and an uptick in average weekly hours drove aggregate hours growth to a 28-month high in November.  Recall, assuming stable productivity, more hours worked = more output (i.e. if you are producing the same amount of stuff per hour but are working more hours then real GDP is higher … the same is obviously true for the growth version of those equations).  And …
3. Aggregate Income:  In spite of flat hourly earnings growth, the acceleration in aggregate hours growth drove aggregate private sector income growth (aggregate income growth = the sum of aggregate hours growth and earnings growth) to a 17-month high in November.  You can’t have a sustained organic acceleration in consumption without some positive 2^nd derivative mojo in income growth. 
4. Consumption Comp-sternation:  The trend in income growth will become increasingly important to consumption as the tailwind from a declining savings rate diminishes.  Remember, simply, how this works …. If your income is the same but you save less, consumption is higher.  The Savings Rate printed a 2-handle (2.9%) for the 1^st time this cycle in November and the decline in the savings rate over the past year has been a notable support to consumption growth alongside flattish aggregate income growth.  The Savings Rate has been falling ~80-100 bps year-over-year and unless we continue to plumb new lows, the tailwind to consumption growth will progressively recede. 

So, the high probability outcome is that payroll growth accelerates for a 3^rd consecutive month in December.  And that acceleration flows through the growth arithmetic in the form of an increased probability for acceleration in both aggregate hours growth (i.e. real output/GDP) and aggregate income growth (i.e. consumption growth). 

Sure, there will be other internals to parse but from a top down perspective that – the slope of employment, income/consumption, and output growth – is most of what matters.  And, for December, those 2^nd derivate trends can be reasonably handicapped ahead of the actual release.

What else:

• Industrial Production:  Watch aggregate hours in the manufacturing space.  That is your lead read on Industrial Production and whether we’re likely to extend the now conspicuous,  10-month acceleration in industrial activity.
• Housing:  Similarly, watch aggregate hours in the construction industry.  That is your lead (albeit less consistent) read on new residential construction activity.  With Starts and NHS tracking +9% and +16% Q/Q, respectively, residential investment looks set to reverse to a nice positive contribution to investment/GDP in 4Q.  

I’ll keep it tight and leave it there this morning.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.39-2.52% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Biotech (IBB) 107-112 (bullish)
VIX 8.80--10.38 (bearish)

To purpose, process and performance,

Christian B. Drake