“Is it real, son? Is it really real, son?”
- Method Man
Snark is a sultry but finicky literary temptress.
Too much and you risk degrading and diluting the message. Too little and the attempt rings flat and hollow. But deployed deftly and in delicate balance, she flowers into something beautifully sirenic.
Selective snark and subtle sarcasm pervades a lot of our work. It’s not some gratuitous attempt at click-bait sensationalism. We try to employ gently and in the service of entertainment value, readability and within a larger analytical arc.
And frankly, we do it mostly for ourselves. If you can’t have fun doing what you’re doing, you probably won’t be doing it for very long … or be very good at it.
We’re open to being on the receiving end also. No masks, no pseudonyms, no (analytical) bodyguards. 1 High Ridge Park is the address for anyone who wants to go in the booth and thoughtfully debate the evolutionary path in risk managed C.R.E.A.M accumulation.
God was in a good mood the day he conjured transparent, real-time macro risk management.
Back to the Global Macro Grind …..
So, sell in May and go away?
If that’s your inclination you’re justified and certainly not alone … except you can’t. Go away, that is. So might as well keep scalping macro research alpha.
A great thing about domestic labor market dynamics and broad macro dynamics in general is that they are equally and simultaneously amenable to the most straightforward and nuanced of treatments.
Take yesterday’s Jobless Claims data:
Initial Jobless Claims were 2.98M in the latest week, marking a 6th consecutive week of “less bad” while holding at grievous multiple of anything observed historically.
The cumulative 8-week total now stands at 36.5M with more than a quarter of would-be American workers without a job or employed at significantly reduced hours.
The (notable) silver lining in the release was Continuing Claims, which only increased by +456K and ostensibly suggests the PPP and other policy and rehiring initiatives may be working to offset new job loss.
- Is it true that initial Claims figures are inflated and, due to technical challenges and repeat applications, overstate the magnitude of underlying job loss? Yes.
- Is it similarly true that due to ineligibility and a failure to capture the effect of significantly reduced hours that Continuing Claims understate the magnitude of job loss and reduced consumption capacity? Yes.
- Do PUA claims and increased usage of Workshare benefits further complicate a comprehensive understanding of shifting labor market internals? Again, Yes.
Does it really even matter?
Trying to precision parse and reconcile the countervailing dynamics between the Initial and Continuing Claims series in an attempt to arrive at some underlying quantified “truth” is a quixotic and ultimately superfluous exercise.
Whether ‘true’ job loss is 24 or 27 million is wholly beside the point vis-à-vis any attendant macro or investment implications.
We know that some amount of “temporary” job loss will invariably transition to permanent, total job loss and lost consumption capacity is greater than that reflected in the Continuing Claims figures, the associated near-term Quad 4 vacuum remains unlike anything observed in living memory, and more policy support will be required.
And the asymmetries extend beyond the separations side of the domestic labor market.
Consider the following constellation of common sense considerations:
- Consumer/Corporate Retrenchment: The risk for network effects associated with the collapse are large, asymmetrically negative and suggest some measure of protracted slump. The notion that we’ll see a full and expeditious recovery and that consumers and businesses don’t retrench – favoring some measure of savings and cushion building over consumption, investing and/or incremental hiring – isn’t particularly plausible.
- $USD: In addition to cultivating financial tightening and disinflationary conditions globally, the strong dollar will continue to weigh on OUS profits. Recall, greater than 40% of SPX constituent revenue is sourced internationally.
- Regulation: The post-crisis regulatory pendulum almost always swings in the direction of more, not less, regulation. Increased regulation and any associated compliance burden is never costless or margin positive.
- Election Risk: With the economy weighing on incumbent re-election bids and betting markets moving towards even odds of Democrats taking the Senate, some measure of higher taxes and redistribution initiatives have become more probable on the margin. Lower demand and higher taxes are not sanguinity cocktail vis-à-vis the margin or profit outlook.
- Buybacks: The singular source of net equity demand over the course of the expansion has been effectively sidelined. The demand vacuum and COVID catalyzed liquidity crunch has neutered the (near to intermediate-term) capacity for the real-life PPT to further amplify an otherwise underwhelming, underlying earnings growth cycle.
- Trade War: Virus blame-casting, the threat of punitive measures and financial market restrictions has U.S.-China relations simmering again. Since it worked out so well for global commerce the first time, its only makes sense we having another go at it less than a year on from the cessation of prior trade hostilities and amidst the largest macro shock in a century.
- Deglobalization: The deglobalization push characterized the populist resurgence, helped propagate the U.S. China trade war and drove global commerce to its weakest level in a decade, leaving both the U.S. & global economy at peak fragility heading into 2020 and the precipice of the COVID cliff. Deglobalization, some measure of supply chain re-domestication along with some measure of wholesale shift in office/operations management, all in an effort to robust-ify operations against future health threats are margin negative and uses of cash with litte-to-no associated (near-term) revenue upside.
China reported April Retail Sales this morning at -7.5% Y/Y. That non-V shaped improvement sits as the ghost of U.S. Consumption future (May/June) given the offset in the respective shutdowns and reopenings.
We’ll get a first look at the peak salvo in COVID-19’s onslaught against domestic consumption with domestic Retail Sales for April this morning.
It will be deep Quad 4. But then it will be less bad … in a better-than-April-but-still-worse-than-pretty-much-any-other-month-ever “less bad” kind of way.
As we highlighted last week, the trudge toward labor market and economic renormalization is going to be painfully longer than both the expedited drawdown and bounce in domestic financial markets, and littered with financial market chop.
The shock is real, son, and the macro and profit recovery will be really real (long).
But then again, I’m just a dude in a room with a computer, binge-watching and quoting Wu-tang Clan documentaries so .. you know, salt grains.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.74% (bearish)
UST 2yr Yield 0.12-0.20% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 8 (bullish)
Healthcare (XLV) 97.12-101.30 (bullish)
Tech (XLK) 88.94-96.00 (bullish)
Consumer Staples (XLP) 56.05-58.34 (bearish)
Financials (XLF) 20.24-22.48 (bearish)
Industrials (XLI) 58.66-63.55 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 190 (bearish)
DAX 104 (bearish)
VIX 26.74-38.97 (bullish)
USD 99.15-100.89 (bullish)
Oil (WTI) 20.47-29.50 (bearish)
Nat Gas 1.61-1.90 (bearish)
Gold 1 (bullish)
Best of luck out there today and have a great weekend,
Christian B. Drake
Macro Analyst
