Cement Shoes

"I - – I never know no Godfather. I have my own family, Senator"
- Frank Pentangeli, The Godfather

When they ‘opened the books’ one on the greatest films in history, Richard Castellano was no longer ‘a friend of ours’.

If you’re a Puzo-phile or just a cinematographic good fella, you know why Clemenza quietly went to sleep with the fishes in pt. 2, paving the way for Frankie Five Angels to deliver a capo performance for the ages.

With realized volatility and spec net long positioning in VIX going full ATL cement shoes, investors again chasing the roll-down vig on VIX contango, and the equity-bond correlation decaying alongside the mechanical unwind and normalization of the slowflation infatuation ... it’s worth re-internalizing the lessons of a veteran macro risk management Consigliere:  

You father did business with Hyman Roth the Cyclicals, he respected the Cyclicals, but he never trusted the Cyclicals” … or something like that. 

 

Back to the Global Macro Grind …

Meanwhile, in other #CementShoe news: 4Q Growth

In the wake of the latest high-frequency, domestic data our 4Q GDP nowcast is dirt-napping down at 0.31%.  

Slope centricity and RoC dependence remains @Hedgeye analytical Cosa Nostra, so let’s contextualize what global macro investors have been left to steep in during a relatively light data week:

The Data:

1. Retail Sales:  Headline Retail Sales  = ↓ -100bps to 3.1% YoY in OCT = the slowest RoC since MAY
2. Retail Sales Control Group = ↓ -40bps to 4.2% YoY in OCT =  the slowest RoC MAY
3. Headline Industrial Production = ↓ -106bps to -1.13% YoY in OCT = the sharpest annual contraction since SEP ’16
4. Manufacturing Production: ↓ -60bps to 1.5% YoY in OCT = the sharpest annual contraction since DEC ’15
5. Manufacturing Production ex-Auto’s (i.e. excluding the GM auto strike) = -0.4% Y/Y and negative for a 3^rd consecutive month. 
6. Consumer Comfort: Bloomberg Consumer Comfort has fallen in each of the last three weeks, collectively registering the largest 3-week decline since 2008.
7. Earnings:  While 3Q has arguably been “better than expected”, 4Q EPS estimates have quietly leaked into negative territory and NTM revision trends are on the lows, down -1.9% since the start of the quarter.

The Distillation:

1. Consumption Capacity: Income | Late-cycle wage inflation continues to manifest, albeit ploddingly.  Meanwhile, Payroll Growth is slowing and average weekly hours are flat-to-down. In other words, aggregate hours worked is slowing faster than hourly earnings are rising → meaning aggregate private sector income growth is decelerating.  This is perhaps more easily visualized in average weekly earnings growth (see Chart of the Day below) which continue to decelerate (if you are making more per hour but working less hours such that averagely weekly income is down, it is not a boon to your personal PnL or collective domestic consumption capacity).
2. Consumption Capacity: Credit | the Consumer Credit data from the Fed is both lagging and subject to meaningful revision, but the latest data show revolving credit growth (credit card spending) contracting in each of the last two months while also decelerating on a year-over-year basis. Consecutive months of negative growth is something we haven’t seen in at least 18-months. 
3. Hiccup or Harbinger?  Whether the revolving credit data is signaling some measure of retrenchment among consumers is still an open question, but against the backdrop of slowing income growth, slowing Retail Sales growth, the notable decline in consumer confidence and a prospective zero-handle on  GDP, the risk remains discretely and asymmetrically negative.
4. Industrial Activity:  PMI’s have flashed some fledgling stability and stabilization may indeed be the new acceleration, but it’s also possible we're simply observing muddle along conditions (L-shaped recoveries) cloaked as a faux inflections.  Indeed with Capital Goods Orders growth making lower-lows, inventory-to-sales ratio’s at cycle highs, CEO Confidence at recessionary levels, Capex Plans in the Fed Regional Surveys still falling, corporate margins contracting and the prospect of a comprehensive trade deal and re-globalization as silly as it’s always been, there are no tea leaves currently signaling near-term upside in Capex.    
5. Profit Cycle:  If labor costs are rising, the capacity to take price is falling (NFIB “Higher Selling Prices” and Fed Survey “Prices Received” are both declining), select commodity input costs are rising (Quad 3/Stagflationary dynamics), companies aren’t investing to drive productivity gains and EPS estimates are low and falling … it looks like we’ll continue to be treated to the “gradually-reduce-estimates-until-they-are-low-enough-to-beat” hustle for the foreseeable future. 

We’ll keep it tight and close it there while simply re-emphasizing that the here-to Quad2/Quad 3 straddle has conspicuously resolved in favor of Quad 3 domestically.    

And because domestic politics have become a surreal, tragicomical, polarized parity of itself and because I can’t help but take the bait:

Did Trump make Powell an offer he couldn’t refuse yesterday?   Will today’s impeachment witness go full Pentangeli in support of the Teflon Don(ald)?….

“The committee kept saying, Donald Trump did this and Donald Trump did that. So I said, “Yeah, sure. Why not?”  … “but was all lies”.

I’m not sure how to feel about the reality that some version of that is not necessary a tail probability, so I’ll just lock it deep down in the repository of repressed angst and refuse to process it.

Either way, I’ll take the original.

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

UST 10yr Yield 1.75-1.95% (bearish)
UST 2yr Yield 1.52-1.69% (bearish)
SPX 3057-3132 (bullish)
RUT 1 (bearish)
NASDAQ 8 (bullish)
Shanghai Comp 2 (bearish)
Nat Gas 2.44-2.88 (bullish)
Gold 1 (bullish)
Copper 2.60-2.70 (bearish)

Best of luck out there today,

Christian B. Drake
Macro Analyst