God, grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.
-Serenity Prayer
An expansion so nice it’s set to hit its prime thrice?
As the anti-2018 cross-asset performance bonanza of 2019 comes to a close, the domestic equity ATH factory remains at productive capacity, tail-risk hedges are being offloaded, rate hike bets are being puked and central banks are back in full volatility suppression mode as the longest expansion and bull market in history soldiers on.
I mean, really, if the central bank put is truly back, then BTFD is again a viable strategy. And because a full decade of BTFD experience cultivated efficiency improvements such that by 2017/18, investors pretty much did the “B” before any “D” even really happened, why not dispense with all the waiting-til-May silliness and just go (lazy) long now and go away.
What could possibly go wrong within a nonlinear, late-cycle, global macro risk menagerie where everything remains obvious and nothing is what it seems …
… or maybe it is what is seems, but the conclusion is spurious because you’re viewing it from the wrong angle … or maybe it’s not what it seems because you’re viewing it from the wrong angle … or perhaps it’s exactly as it seems but the timing is wrong.
Does your process grant you the serenity to embrace uncertainty and effectively risk manage the things you cannot change, courage to continually iterate and innovate where you can, and the wisdom to know the difference?
As we look to the new year and new decade, a promise from our team to yours: The passionate and perpetual pursuit of process evolution.
Check your 2020 calendar: the day the blue collar Macro-ticians @Hedgeye stop grinding ain’t on it.
Personally and professionally, commit to being the change you’d like to see.
Don’t wait for it to come, be-come it!
Back to the macro grind ….
Following the holiday and ahead of the weekend, I just wanted to quickly recap the prevailing state of macro play.
As we roll through here, keep in mind the larger rate-of-change dynamics:
That is, while the underlying Trend will remain one of deceleration, the next couple months carry some prospective Rate of Change (RoC) upside as we lap the Confidence and Consumption cratering that accompanied the Quad 4 in 4Q18 onslaught at this time last year.
Taking a C + I + G + NX GDP-accounting centric approach to the latest high-frequency data:
(C)onsumption: Services spending continues to stick save the domestic consumption cycle in the face of flagging mojo out of Retail Sales – a multi-month withering which has seen Goods Consumption growth slow -70bps and -120bps across the Headline and Control Group, respectively, in 4Q.
On the income side, payroll growth will continue to slow while earnings grow, while choppy, will continue to Trend higher which will have the net effect of leaving aggregate private sector Income growth and, by extension, household consumption capacity, largely flattish near-term. Comps will be supportive (at least for next month) while the Savings Rate will sit as a wildcard but, given the sharp increase to close last year, will shift to a tailwind over the next few months if we hold current levels.
In other words, no acute risk of imminent collapse in the domestic consumption cycle but, given the noise and cross-dynamics at play currently, it will be another couple months before we get a cleaner read on the underlying trend.
NX | Trade: It remains hard to believe that the fates have conspired to elevate Soybeans to the protagonist role in the Trade War melodrama while also serving as the stand-in proxy for the state of progress on the fledgling re-imagination of the rules governing global commerce, but here we are. The latest data show a re-extension of the soybean olive branch as China bought some 2.6 million tons in November as the goodwill gesturing continues to take the form of China agreeing to buy stuff they need anyway.
More broadly, the Trade Balance has improved thus far in 4Q to-date although that “improvement” largely stems from a notable reduction in imports – a negative development reflecting a decline in private sector demand but one which will (perversely) sit as a support to growth in 4Q19 from a GDP accounting perspective.
(I)nvestment: Growth is slowing, margins are contracting, Inventories remain elevated, CEO confidence remains at recessionary levels, November Durable Goods Orders fell to -3.7% Y/Y (marking a 4th consecutive month of negative growth with global weakness + Boeing production suspension promising a continuing drag), pricing power is deteriorating, the Fed Regional Survey’s for December remain mixed and underwhelming at best and Business debt exceeded Household debt for 1st time in 28 years in the latest quarter .... corporate leverage up while investment is down is a difficult circle to square with respect to an expectation for a durable pickup in private non-resi investment which, after falling for the last two quarters, is quite literally in recession.
In other words, it’s not at all clear that China buying agricultural products is the catalyst to lift the uncertainty albatross and cultivate resurgent capex in the face of global growth stagnation, contracting margins and negative EPS growth.
That’s not meant as a fabricated, fire-and-brimstone assessment, its simply the prevailing trend with no clear, near-term catalyst for sustainable inflection.
There are, of course, pockets of strength and opportunity (Housing, for example, which I’ll touch on next time) but the dynamics above define the broader investment and capex condition set.
(G)overnment Spending: Not much to note beyond the simple reality that we’re currently on the wrong side of unprecedented, late-cycle fiscal stimulus domestically and we’ll simply have to cravingly wait and see if we get an exclamatory encore in the form of a blow-off MAGA profligacy top.
I would also note, again, that the policy hand-off to fiscal stimulus continues to baby-step forward, globally. To think policy makers didn’t take notice of “American Exceptionalism” (i.e. fiscal stimulus catalyzed growth divergence in the U.S. in the face of an otherwise globally harmonized deceleration ) in 2017/18, particularly as the capacity of monetary measures to support real growth has more discretely diminished, would be willful blindness.
Can we skirt a recession and mark time until progressively easier base effects and the lagged flow through of coordinated central bank easing eventually coalesce in support of a protracted rate-of-change acceleration?
Sure.
3 times is a charm and the 3rd mini-cycle of the expansion will be a welcome development. But Quad 3 remains the prevailing quantitative reality you cannot change.
We’ll attempt to offer some process serenity to kickstart 2020, detailing what you can change in allocation terms when we host our 1Q Macro Themes Call on January 7th
To serenity, courage and growth – a mutually dependent trinity.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.78-1.96% (bearish)
SPX 3165-3249 (bullish)
RUT 1 (bullish)
NASDAQ 8 (bullish)
Utilities (XLU) 62.90-65.14 (bullish)
REITS (VNQ) 88.61-92.52 (bullish)
USD 96.41-97.56 (bearish)
Nat Gas 2.17-2.42 (bearish)
Gold 1 (bullish)
Copper 2.75-2.86 (bullish)
Have a great weekend,
Christian B. Drake
Macro Analyst
