up, up, down, down, left, right, left, right, B, A. Start.
-Kanomi Cheat Code (i.e. get 30 extra lives in Contra)

So, here’s something fun and blessedly apolitical. 

Hold your hands up in front of you with your palms facing in. 

Now, is your ring finger longer than your pointer finger?  

If it is, congratulations! … you’re the proud recipient of positive, Darwinian early development selection.  

The deal is this:   

The ring finger has a relatively higher number of testosterone receptors and, during fetal development, it generally grows in proportion to the amount of testosterone present in the hormonal milieu. 

A low 2D:4D ratio (ratio length of your 2nd finger to your 4th finger) sits as a biomarker of a favorable fetal testosterone profile and a heavy fetal testosterone pulse is key to brain, bone and muscle development. 

In distilled form:   More testosterone produced = longer ring finger = lower 2D:4D ratio = early bio-hormonal cascade supporting relative advantages in athletic/competitive attributes.  A number of studies have detailed a significant skew towards low 2D:4D ratio’s in elite level athletes.     

We’ve delved into the relative merits of “Bro-science” over the years, namely in the service of highlighting how physique and competitive athletes front-run ‘accepted, academic, peer-reviewed research’ by years (even decades) via in-the-trench empirics while drawing parallels to consequential chasms between macro practitioning and macro-academic theorizing.

We highlighted this one a few years back, for example: 

Q:  How do you know if cortisol levels (i.e. stress hormone levels) are muted, the central nervous system is piqued, and the overall hormonal mix is primed for hardcore training and positive physiological adaptation …in ~5s and at no cost?

A:  Wake up and pick up something heavy. If your grip strength is there right out of bed, it’s almost assured the body and central nervous system are recovered and ready for positive stress.  

It turns out grip strength carries ranging implications, representing a kind of a psycho-physiological cheat code for assessing other dimensions of health and well-being including cardiovascular health, intelligence, athleticism and longevity. 

In other words, most of the traits desired in mate selection.

In other, other words, chicks dig the grip strength … even if it’s (partially) subconsciously. 

So, on a day-to-day basis, grip strength represents a tactical indicator of the body’s adaptive capacity while representing a proxy for marriage and procreation proclivity over the medium term and the probability for graceful aging and enhanced longevity on a longer-run basis.

Cheat Codes - contra nes 1101143

Back to the Global Macro Grind… 

I mostly just wanted to write about bio-physical cheat codes this morning … but the cross-duration implications for grip strength and hormone levels dovetail nicely with our duration sensitive Trade/Trend/Tail macro process framework.    

Let’s go tactical this morning, lift some high frequency data and check our domestic macro grip strength.  I’ll delve into some intriguing medium and longer-term potentialities soon.

Retail Sales: 

  • The Data: Headline Retail Sales rose +0.5% sequentially against upwardly revised April and May estimates while accelerating to a fresh 80-month rate-of-change high at +6.6% Y/Y. 
  • The Detail:  The headline was belied by moderately less sanguine internals as gas station sales rose to +21.6% Y/Y (gas prices were up +25.4% Y/Y in June and, remember, Retail Sales are reported nominally so higher gas prices still support headline growth even if they represent a drag on other discretionary consumption) and Control Group Sales decelerated -60 bps to +4.9% Y/Y.   E-commerce (and this is pre Prime Day) accelerated to +10.2% Y/Y and continues to grow as a share of total as the “Amazon effect” and its various retail goods deflationary manifestations remain entrenched.  Food and Beverage sales – particularly across the ‘eating out’ category – accelerated, suggesting a (still) buoyant state of domestic consumerism. 
  • The Distillation:  Control Group Sales close 2Q up significantly on both a year-over-year and quarter-over-quarter annualized basis (GDP accounting basis).  Spending on goods has been running at a notable premium to services spending which is why Retail Sales have been decidedly stronger than total household consumption.  Higher ticket discretionary consumption on durable goods is more cyclical and generally a better barometer of the collective state of domestic consumerism, but it will be interesting to see if services consumption rebounds similarly in June.  Net-net the data remains supportive of our #Divergences theme and domestic-centric growth narrative (remember, Eurozone Retail Sales growth has 1-handle on it).  A couple more months of easy income and consumption growth comps should support rate of change strength into 3Q, particularly if the savings rate holds current levels. 

Empire State Manufacturing:  

  • The Data:  Empire State Manufacturing Index retreated -2.4pts sequentially to 22.6 to kick off the Fed Regional Survey data for July. 
  • The Detail:  The Current Conditions, Forward Expectations, New Orders and Capex Plans series all moderated sequentially.  On the other side, Expected New Orders increased and the Prices Paid and Delivery Times both improved, suggesting raw materials and (transportation) bottlenecks are ebbing on the margin.  
  • The Distillation:  The Chart of the Day below shows our New Orders Composite for the Fed Regional Surveys.   We’re just south of cycle highs for the full set of June data and we’ll update it as the Regional data continues to roll in for July but the broader read through is that manufacturing and industrial activity will remain solid nearer-term.   The continued slide in Capex Plans, however, leaves the door open for ongoing counterfactual speculation around the impact of trade policy on corporate confidence and business investment and further reinforces the proclivity for tax cuts to fund financial engineering in lieu of large-scale productive investment.

Industrial Production: 

  • The Data: We’ll get the data at 9:15 this morning but the balance of 2nd derivative risk is to the upside.
  • The Detail: Aggregate hours growth in the NFP release is your lead read on Industrial Production growth for the month and aggregate hours were +0.5% M/M in June (note we look to it as a directional indicator, less as a direct input to a point estimate).  If Industrial Production – which will also be supported by Utilities activity amidst the heat wave – matches the +0.5% sequential increase in manufacturing hours growth, it will accelerate +40 bps to +3.9% Y/Y.  Indeed, even if it happens to not increase at all, it would still be flat sequentially at +3.4% Y/Y  

We’ll leave the data contextualization redux there, but before closing I want to re-highlight a simple point around risk management and duration sensitivity.

Our 2Q18 and 3Q18 Macro Themes were, respectively, the following.

2Q18: USA: #Peak Cycle?, Global #Divergences, Reiterated, Dollar #Bottoming?
3Q18: #StrongDollar, #HaveRatesPeaked?, #ShortEM

A mechanical problem with quarterly outlooks is what you said one quarter ago is usually still in some form of transition but investors are a forward looking and impatiently myopic bunch and generally want your expectation for the next 3-6 months to play out, conspicuously, every day. 

For example, our expectation for 2H is for growth to slow progressively into 2019.  That’s our 3Q18 theme and that’s what investors understandably want to focus on.  

But yesterday’s Retail Sales data was for June …. Which is still “USA: #PEAK Cycle” data.   It was supposed to be good … the data is always best before the crest.

Front-running inflections in trending rates of change in growth and inflation is macro research alpha but tops are processes and traversing the top is risk management exercise.

Trends are the sangre vital of portfolio allocation and the @Hedgeye GIP model is your global macro cheat code.

Our immediate-term Global Macro Risk Ranges are now: 

UST 10yr Yield 2.81-2.90% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
VIX 11.01-17.09 (bearish)
USD 93.50-95.25 (bullish)
Copper 2.70-2.92 (bearish)

Grip it and rip it. 

Christian B. Drake
U.S. Macro analyst

Cheat Codes - New Orders Fed Regional Composite CoD