“We’re all pretty bizarre, some of us are just better at hiding it.”
Andy, Breakfast Club

Studies have become ubiquitous in their support of the autoregulatory effect of breakfast. 

Simply, eating a nutrient dense breakfast and frontloading your caloric consumption helps regulate appetite hormones over the balance of the day and limits compensatory eating at night. 

Insulin sensitivity is also highest in the morning which allows for increased, targeted carb intake without negative body composition implications. 

Physique athletes and bodybuilding bro’s in the trenches have been intimately familiar with this empirical reality for years and have leveraged it as part of a larger, comprehensive dieting strategy to feel better on the way to looking better. 

That front-loading consumption when the hormonal and nutrient partitioning milieu is most favorable and ahead of a full day of caloric expenditure that will utilize that intake may seem self-evident … but so too did outlawing Jim Crow, lobotomies, lead paint, cars without seatbelts and smoking on planes not too long ago, and only after the fact.       

With peak resolution season just a week away, take advantage of the metabolic priming effect of breakfast.

Macro-bolically, let’s front-load some positive returns here in early 2019, prime the PnL metabolism and modulate the probability for reactionary and hangry compensatory investing later in the year. 

Back to the Global Macro Grind

So, it’s quarter after half-past 6am, the day after two days before Saturday, and markets weren’t not unsuccessful in not not fading Wednesday’s epic, counter-trend ebullience.  

Got that?  … good, because it’s critical to answering the question all investor’s who live to see such phase transitions are forced to confront:  1 zombie-sized chicken or 100 chicken-sized zombies?   … one 50% decline or fifty 1% declines? 

In other news, Monday’s price cratering, Wednesday’s manic melt-up and Thursday’s late session rebalancing miracle are all consistent with underlying fundamentals and efficient markets and, based on pundit commentary and headline counts, #TheMachines were singularly responsible for Monday’s sell-off but not Wednesday’s melt-up … nor have they been affable co-conspirator in supporting the longest bull market run ever, apparently.  

Alright, enough empty (analytical) calories ….

Comp-nado:  If you were looking for a month of green shoots heralding a durable inflection in the housing market, December wasn’t it.  January won’t be either. 

The recipe for a negative second derivative is simple and it’s the macro-nutrient equivalent of a high-fat + high sugar diet:   Slowing Organic Growth + Harder Comps.

Put on some spandex and look in the mirror after a month of holiday indulgence.  That’s your (fundamental) truth serum starring back at you and your visual metaphor for the attractiveness of your chart of housing fundamentals at the end of December.

In truth, housing was setup to fail in November if only because escape velocity is always insufficient to overcome (increasing) base effect gravity when acceleration is already negative. 

Check out the comp dynamics across the Existing Market, New Home and New Home Construction markets for November below. 

Breakfast Club - CoD1 Builder Confidence

Breakfast Club - CoD2 EHS

Breakfast Club - CoD3 SF Starts

New Home Sales data for November was slated to be reported earlier in the week but is delayed until Census Bureau workers are back on the job. 

The rate of change number won’t be good. 

But then again, If growth slows in a government shutdown forest and no one is there to report (and, therefore, see) it … did it really slow? 

If you follow the base effect progression forward, you can see some silver lining at the end of the comp tunnel ~2Q19.   For now, let’s just refrain from reporting reality and/or remain willfully blind and agree to agree that the reported fundamental data is likely to remain decidedly underwhelming at least until then. 

Now, as we’ve highlighted recurrently, housing investing in Quad 4 is an exercise in both risk management and cognitive dissonance. 

The markets acknowledgement and begrudging acceptance of slowing growth in the face of the persistent reporting of Quad 4 data drives a protracted leak lower in rates and a repricing of the trajectory of monetary policy. 

With 10Y yields -40bps lower and the Eurodollar curve now inverted in 2020, you’ve seen both of those dynamics manifest over the past 3 months. 

Historically, you see those same dynamics begin to get discounted in housing equity performance …. even though fundamentals have yet to inflect. 

Indeed, as we’ve printed the multi-year/cycle lows in growth highlighted above, housing has actually outperformed.  On a relative basis, housing has outperformed by ~200bps over the last month.   

Moving on …

Liquid diet:  Liquidity has been a favorite topic of discussion for a while now and we’ve hardly been the only firm to profile extant dynamics.  It’s a discussion that sits largely tangential to our process in the sense that an accurate growth and inflation outlook solves for most of the primary implications of tighter/more volatile liquidity conditions, but it remains an interesting topic as it intersects a number of macro touchpoints. 

At the market structure level, post-crisis regulation has left the aggregate balance sheet of banks at a fraction of its former size.  This well known-known has been confronted with a discrete decline in book depth (book depth is simply a measure of the number of buy and sell orders at each price level .. the more orders the more liquidity, ostensibly) since the volatility implosion rout in February and has yet to recover.  Moreover, those dynamics are occurring against a backdrop of declining aggregate share count and the pervasive rise in systematic trading which, together, effectively means there are less shares to trade, less (more price sensitive) people to trade them discretionarily and more people on the same side of the order flow, particularly when volatility begins to percolate.   

At the Policy level, Fed balance sheet normalization (I give you bonds, you give me dollars) and increased treasury supply (I give you bonds, you give me dollars) are both pressuring dollar liquidity at the same time that protectionist trade initiatives (if U.S. imports and/or global trade is down, that means less dollars flowing into the global economy) look set to amplify that dynamic.  It’s difficult to argue rising interest rates and declining dollar funding as a positive for a post-crisis, global economy increasingly encumbered in dollar debt. 

At the Macro level, Fed tightening should naturally lead to decreased lending activity and thus less credit/dollar creation.  Tighter financial conditions and a transition to restrictive monetary policy may perpetuate the late-cycle slowdown while driving lending standards higher and cultivating a further rise in credit spreads which, in self-reinforcing fashion, will further curtail lending and credit creation and serve to slow or reverse new dollar liquidity.  And tighter standards, rising spreads, slowing growth and falling capacity for debt service all feed into the macro topic du jour of deteriorating conditions in an inflated leveraged loan market which has come under increasing and conspicuous duress since the cycle peaked in September.   

Of course, none of this matters when growth is accelerating, volatility is bearish Trend and the flow of portfolio capital and central bank asset purchases is ceaseless and unidirectional. 

Also, of course, with equities in a 10Y bull market and volatility suppression siting as an implicit/shadow Fed mandate alongside active QE, the implications to liquidity from the factor constellation above have never really been stress tested.  

This liquidity digression has gotten away from me a bit here so we’ll cap it there.   Suffice it to say, simply expect more overshooting and greater reflexivity in prices in both directions and make flash crashes and price vacuums an embedded expectation and you’ll be in better position to risk manage those eventualities.   

And view this simply as an appetizer.  We’ll be serving up the full analytical entre next week on our 1Q19 Macro Themes call where we’ll detail the Top 3 Macro delicacies for the quarter.

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

UST 10yr Yield 2.70-2.90% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6155-6886 (bearish)
Utilities (XLU) 51.02-56.47 (bullish)
Consumer Staples (XLP) 48.09-54.00 (bearish)
REITS (VNQ) 71.23-80.10 (bullish)
Industrials (XLI) 60.09-66.99 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 186 (bearish)
DAX 107 (bearish)
VIX 20.05-37.02 (bullish)
USD 95.56-97.40 (bullish)
Oil (WTI) 41.58-47.78 (bearish)
Nat Gas 3.30-4.05 (neutral)
Gold 1 (bullish)
Copper 2.61-2.77 (bearish)

To secret sauce - it’s creation, divulgence and democratization, 
Christian B. Drake

Breakfast Club - CoD Nov NHS