“A man is not old until regrets take the place of dreams.”
- John Barrymore
The paradox of life is that it can only be understood backwards but must be lived forwards (Kierkegaard).
That simple profundity presents a bit of a nested paradox vis-à-vis the headline quote as it implies optimizing one’s capacity to both “live and understand forward” in life requires pulling forward as much experience as possible.
In other words, regretting your mistakes, but only that you didn’t make them sooner. Getting old as fast as possible, in experience terms.
Back to the Global Macro Grind …
The yawning gap between fundamentals (down) and asset prices (up) has been a defining feature of the all everything performance palooza of 2019, with a notable exception.
Take a quick, pre NYE shot at identifying the owner of this cartoonishly divergent set of reported, rate-of-change realities:
- +28% Y/Y to a new 82-month RoC high
- +17% Y/Y to 144-month highs
- +8% Y/Y to a 54 Month RoC High
- +4 points to a fresh 20Y high
- +2,000 bps of relative outperformance
If you guessed the fundamental and absolute/relative performance juggernaut that is Housing in 2019, congratulations.
In order, those data points belong to the following:
- October New Home Sales
- November Single-Family Starts and Permits
- Yesterday’s Pending Home Sales Data for November
- December Builder Confidence
- Housing Complex (ITB, S15 Home Index, etc)
If you’ve been long that particular exposure alongside us since 4Q of last year, you’ve basked, unregrettably, in the warm radiance of sprightly, youthful alpha.
We reduxed the genesis and evolution of the call back in October here and after a year of broken record analytical contextualization, we’ve effectively run out of unique ways to paraphrase ourselves with respect to the slowest moving, proactively predictable anti-train wreck in domestic macro.
Suffice to say, to the extent the 2018 cratering in both fundamentals and equity performance was cultivated by an affordability crunch perpetuated by twin rate shocks and amplified by an acute crescendo in domestic & global growth angst (trade war, government shutdown, rising recession risk), rampant construction input cost inflation and ongoing existing market supply constraint …. 2019 pretty much represented the opposite/reversal of that factor set.
And with those collective dynamics being the comp and with the domestic labor market taut and still tightening, the global central bank collective conspicuously pivoting to easing mode, and interest rates down notably from year-ago levels, housing consumption has been a primary beneficiary.
You can read other nuance into it but it hasn’t really been more complicated than that.
However, having been long for the duration of this run, it's difficult not to cast an increasingly circumspect eye across the incoming data.
Through the top-down lens, the prevailing setup is basically this:
- Housing has dramatically outperformed over the past year.
- Sentiment (as measured by the Housing Surprise Index) has climbed from all-time lows and is now pushing towards cyclical peak levels
- The rate of change data will remain solid until ~February of next year simply given extant base effect dynamics
- As we move through 1Q20:
- The comp tailwind will begin to recede
- Positive seasonality (4Q/1Q period) will recede
- A further, protracted acceleration in existing market volume growth beyond the next quarter or two will be constrained absent supply relief.
- Regulatory changes across the Housing Finance landscape (FHFA) will begin to take a toll.
In other words, while the near-term data will remain strong and we don’t have any discrete, negative catalysts tangibly close on the timeline, the creep of the “what-else-are-you-playing-for” notion is slowly percolating.
For now, we’ll end the year the way we started it.
Long housing, but with aging enthusiasm.
We’ll do our best to risk manage the prospects for future regret and detail if/when you should make the allocation pivot in our 1H20 Housing Themes Call next Friday (institutional investors can ping for access).
Happy New Year and thank you for your continued trust and active participation in keeping the dream of evolving and democratizing world-class macro research alive and young!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.79-1.94% (bearish)
SPX 3181-3252 (bullish)
RUT 1 (bullish)
NASDAQ 8 (bullish)
Utilities (XLU) 63.40-65.00 (bullish)
REITS (VNQ) 89.20-92.95 (bullish)
Energy (XLE) 58.37-60.93 (bullish)
Tech (XLK) 88.45-92.49 (bullish)
VIX 11.51-15.38 (bearish)
USD 96.15-97.24 (bearish)
Best of luck out there,
Christian B. Drake
Macro Analyst
