“I know how hard it is to know something.”
- Richard Feynman

That’s a quote from one of the greatest American Physicists of all-time. The guys who wrote The MVP Machine (How Baseball’s New Nonconformists Are Using Data) use Feynman’s brevity to introduce one of the best chapters of the book, “First Principles.”

By the time I’m long gone from this profession, I’m betting Full Cycle Investors will care much more about Phase Transitions and Fractal Geometry than they will having an Old Wall Econ “call a bottom” in the ISM.

In the meantime, at the top of every risk management morning, I’m tasked with using modern day math and computing power to find the most important things to know about in macro: The Turns In The Cycle.

The Consumer Is In #Slowing Shape - 01.10.2020 eye on the cycle cartoon

Back to the Global Macro Grind…

After 3 days of meetings with Darius in New York City, it became quite clear to us that:

A) Many people are focused on the turn in the Industrial Cycle that is, in some cases, 2 years old now vs.
B) The biggest turn that matters to the US economic cycle is the US Labor and Consumption Cycle

Said by even the most sophomoric journo on CNBC, daily: “The Consumer is in great shape.”

While that is true at the full and proper #LateCycle peak of every full employment Labor Cycle, it should mean absolutely nothing to those who have a ROC (rate of change) risk management process.

What matters for the C (Consumption) in C+I+G+NX (i.e. GDP) is whether it is:

A) Accelerating or
B) Decelerating

At this stage of The Cycle, The Consumer is in slowing (decelerating) shape.

Since most people who don’t build predictive tracking algos to trump their emotional, political, and investment style biases probably don’t know this, let me review 3 of the heaviest weights (features) in the Hedgeye GDP Nowcast model:

  1. US Retail Sales Control Group = #2 feature in our model and continues to #slow to new cycle lows
  2. US Jobless Claims = #3 feature in our model and continues to #accelerate to new cycle highs
  3. US Hours Worked = #7 feature in our model and continues to #slow to new cycle lows

Why do Aggregate Hours Worked matter more than the 15th ranked feature in our model (i.e. the ISM which, btw, just hit a 127-month low anyway!)? That’s easy. Because its marginal accuracy of determining the rate of change in GDP does.

Why are Hours Worked such an awesome coincident indicator? As you can see in the Chart of The Day:

  1. They #accelerated alongside US corporate profits (and GDP) from the back half of 2016 to The Cycle peak in Q318
  2. They started to #decelerated from the profit (and GDP) cycle peak in Q4 of 2018
  3. They’ve #slowed at their fastest pace as US corporate profits #slowed to negative on a year-over-year basis

Not to be confused with the Old Wall where some people are working more hours to get paid less, the Hourly Wage worker in America gets more hours (and compensation that they can then spend) when their boss gives them more hours.

American Capitalists aren’t all ESG people. They selfishly seek profits and flex their labor expenses accordingly.

I know, this is probably too “wonky” for the super smart journo who doesn’t do math or build predictive models. They’ll probably get my point a little quicker by looking up what one of their favorite “stores” said yesterday. Here’s what Target (TGT) said:

  1. Traffic was ok (i.e. not down, which is the new up), but we have no pricing power
  2. We’re guiding same store revenues down to around 1% vs. 3-4% prior
  3. Oh, and since we have to pay our people more than ever before, that’s bad for our earnings

Not ironically, the Old Wall was “expecting” +3-4% revenues out of Tar-geh, and also expects +3-4% earnings growth out of the SP500 in the aggregate this quarter. Here’s the real-time update on Earnings Season:

  1. 24 of the SP500’s companies have reported an aggregate year-over-year profit recession of -4.8%
  2. That’s a rate of change #slowdown from last quarter’s -1.1% year-over-year decline
  3. Profits remaining negative year-over-year are the #1 catalyst for US Jobless Claims to #accelerate

We all know how hard it is to know something new. But knowing about the ROC (rate of change) relationship between profits, jobs, and consumer spending is pretty simple to understand.

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

UST 10yr Yield 1.76-1.85% (bearish)
SPX 3 (bullish)
Utilities (XLU) 64.02-66.21 (bullish)
REITS (VNQ) 91.35-94.25 (bullish)
Energy (XLE) 59.06-61.10 (bullish)
Tech (XLK) 91.71-96.43 (bullish)
VIX 11.70-14.90 (bearish)
USD 96.04-97.37 (bearish)
Oil (WTI) 56.85-64.26 (bullish)
Gold 1 (bullish)
Copper 2.79-2.89 (bullish)
Bitcoin 7 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

The Consumer Is In #Slowing Shape -  7 Aggregate Hours Worked