“And, for your information, you Lorax, I’m figgering …. on biggering and Biggering and BIGGERING and BIGGERING.”
-The Once-ler, from The Lorax by Dr. Seuss
“Look”, said the Ease-ler, “There’s no cause for alarm
I bought just one bond. I am doing no harm
I’m being quite useful. This thing is called Easing.
An Easing’s a Fine-Something-The-1%-Finds-Pleasing.
It’s a Bill. It’s a Bond. It drives global flows.
But it has other uses. Yes, far beyond those.
It can boost inequality and the suppression of risk
Or financial repression and bear markets in VIX ….
… I meant no harm. I most truly did not
But it had to grow bigger. So bigger it got.
I biggered my balance sheet, I biggered my ZIRP
I biggered my QE, I biggered my NIRP.
I biggered the yield chase, I biggered the need
To bigger the #BeliefSystem on which it all feeds.”
I’m quite enjoying macro remixing this Dr. Seuss classic this morning but I’ll leave it there.
Indeed, while I switched out the nouns, I left the spirit of the Once-ler’s original message fully intact.
After all, it’s really only once(-ler) that one gets the chance to take yields from 20% to sub-zero – alongside peak demographics, peak growth in labor participation and peak leverage – in a 30 year run of consumption pull-forward’ing.
Back to the Global Macro Grind …..
I’ve never excerpted and recycled an Early Look before, but it’s the 3Y anniversary of one of my favorites (above).
And with global economic surprise indices hitting new lows, China tipping their latest move in 3-dimensional policy accommodation chess, Draghi again being forced to re-acknowledge economic (& demographic) reality, MMT (i.e. unlimited cowbell) now officially trolling for legitimization and in the wake of the largest collective, global central bank blink since I originally channeled The Ease-ler, it somehow seemed appropriate.
And as the present cycle traverses its twilight, it's also a gentle reminder that amidst this ongoing experiment in nested doll stimulus – whereby successively larger quantities of accommodation are required to subsume the prior cycles' stimulus and any/all of its derivative outcroppings/unintended consequences – past (policy) will remain prologue until string pushing reaches its terminal end and the cumulation of latent risk again reemerges in spectacular fashion.
Moving on ….
The value over growth rotation was back on conspicuous display again yesterday with the SPX down for the 4th day in the last five as the latest crescendo in beltway political theatrics officially commenced and investors apparently decided they didn’t have the stomach to rally for the 1000th time on the same “trade progress” headline.
While it was a bad day for negative Quad 3 exposures like US Retail (XRT, -1.9%), it was a great day for Bond Proxies and interest-rate sensitive Housing stocks with ITB closing +1.3%.
We’ve been chronicling the evolution of our long Housing thesis over the last 4 months with only ~20 minutes this morning, I just want to provide a quick contextual update around the latest data.
On the fundamental front, Housing remains a tale of multi-duration sensitivity. This morning’s shutdown-delayed New Home Sales data will invariably be a brick - in line with all things housing and domestic macro related in December.
Remember, however, reported data through year-end remains a lagged reflection of the prior move(s) higher in rates and the most real-time sector indicators (PHS, Builder Confidence, Mortgage Purchase Applications) have pivoted to ‘less bad’ as the Quad 4 catalyzed back-slide in rates has just begun to filter through to reported activity measures.
And longer-term, housing remains one of the most (positively) asymmetric opportunities in domestic macro.
Historically, the housing cycle has been long and auto-correlated, playing out fully from trough to peak and peak to trough. Presently, and inclusive of 6 years of steady improvement, Housing Starts sit 86% below their average peak level (vs. 22% above average trough levels). That is some sirenic asymmetry if you own your investment duration.
That extant asymmetry in new construction exists against a demographics backdrop that will remain a major tailwind for ownership in the coming five years.
Recall that the average age of first time homebuyers currently is 32-33 years old, while the average age of first time renters is 26-27 years old. As the chart below shows, there are far more 26-29 year olds than 32-33 year olds today, meaning that there will be a significant, progressive increase in demand from first time homebuyers over the next five years.
Indeed, the latest household formation data suggest that cyclical improvement has already begun to conspire with the secular, demographic demand wave in driving improved purchase demand, particularly at the entry level as millennial ownership mojo remains ascendant.
Total Household Formation increased 1.52Mn Y/Y in 4Q18, marking a 3rd quarter above 1.5 million and holding steady in the face of a decidedly harder comp.
The composition of improvement was even more encouraging as Owner Households increased +1.7mn against a net decline in Renter Households, serving to drive further recovery in both the Headship and Homeownership Rates. As can be seen in the Chart of the Day below, the post-GFC compositional trend reversed in 1Q17 and has persisted over the past 8 quarters with owner household growth outpacing that of renters by a meaningful spread.
There will certainly be chop and tradeable opportunities on both sides of Housing between here and the peak demographic impact in 2020-2023, but if you’re searching for some secular gravity to anchor your portfolio and balance against the headline hockey and recurrent, acute volatility clustering cultivated by current market structure and reactionary policy, select housing exposures should be on the preferred list.
And so long as the Ease-ler figgers on a fixed path towards biggering and the global economy remains on a fixed path towards Quad3/Quad 4, the medium term outlook for rate sensitive and/or inflation hedge assets should remain favorable.
Deep in the stimulus grass, some people say,
if you look deep enough you can still see, today,
where the Ease-ler does stand
just as long as it can
before somebody lifts the Ease-ler away …..
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now
UST 10yr Yield 2.60-2.77% (bearish)
SPX 2 (neutral)
RUT 1 (neutral)
NASDAQ 7 (bullish)
Utilities (XLU) 55.73-57.59 (bullish)
REITS (VNQ) 82.99-85.32 (bullish)
Housing (ITB) 34.25-36.15 (bullish)
Energy (XLE) 64.06-66.96 (bullish)
Shanghai Comp 2 (bullish)
Nikkei 21131-21922 (neutral)
DAX 113 (bearish)
VIX 13.32-18.11 (neutral)
USD 95.80-97.11 (bullish)
EUR/USD 1.12-1.14 (bearish)
USD/YEN 110.15-112.21 (bullish)
GBP/USD 1.29-1.33 (bullish)
USD/CHF 0.99-1.01 (bullish)
Oil (WTI) 54.66-57.97 (bullish)
Nat Gas 2.58-2.92 (bearish)
Gold 1 (bullish)
Copper 2.78-2.98 (neutral)
Best of luck out there today,
Christian B. Drake
U.S. Macro Analyst
