How GDP Became A Joke, In One Chart

For all the rhetoric about above-trend US growth, one month ago UBS shattered the narrative of surging GDP by showing just one chart, which revealed that excluding contributions from energy investment, which are about to hit a brick wall now that the price of oil has peaked and is reverting lower once again, US growth for the past 2 years has been slowing.

On the other hand, things get even more complicated thank to a chart released yesterday by UBS" global chief economist Paul Donovan who makes a point we have repeatedly underscored over the past decade, namely that economic data is largely worthless, and any instant snapshot reveals more about the political and "goalseeking" climate of the agency releasing the "data" than about the underlying economy itself.

As Donovan shows, here are the no less than 6 answers one gets to the question of "how fast was the US growing at the start of 2015?."

By way of context, recall that this was the quarter when the US was blanketed by deep snow, and when every "expert" was rushing to convince those who bothered to listen that the economy would suffer a sharp slowdown as a result of the weather and nothing but the weather (and yes, that included UBS). And when the number was first reported, that was indeed the case: with Q1 2015 GDP reportedly growing only 0.2%. The problem is that within just over a year, that 0.2% initial GDP print turned to -0.7%, before subsequently surging to 2% and ultimately 3.2%!

Here is the sarcastic take of UBS" own chief economist on this GDP travesty, which is even more sarcastic  - and ironic - considering his entire job is to predict the exact number associated with said travesty:

Economic data is not very precise. Economists are trying to hit a target that is moving rapidly. Economic data is being revised more often, and the revisions are larger than in the past. The following chart shows annualized US GDP growth in the first quarter of 2015.

 

Growth was initially reported very weak, below consensus and barely moving. Then the data was revised to show the US economy was shrinking – and shrinking a lot (the number was –0.7% annualized). Then it was revised to show the economy was shrinking a bit. Then it was revised to show the economy was growing, but a long way below trend growth.

 

The growth number was then revised to be basically in line with trend growth. Now, US growth at the start of 2015 is thought to be 3.2%.

 

So which number in the range of –0.7% to 3.2% is the economist supposed to be forecasting? An economist predicting 3.2% growth when the data was first released would have been ridiculed. According to the latest information we have, that economist would have been right.

In other words, that terrible weather which at the time was used to justify why the economy ground to a halt - when in reality it was all a function of China"s credit impulse crashing - would eventually serve as a the catalyst to grow the economy at a pace that has been recorded on just a handful of occasions in the past decade.

No wonder then economists - especially those who work at the Fed but all of them really - their predictions and their analyses have become the butt of all jokes; and by implication, no wonder traders and algos no longer respond to economic "data."

Frankfurt: 20 New Residential Skyscrapers Are Being Built To Meet Brexit Demand

Last month, we discussed how Frankfurt was emerging as the clear winner. When UBS staff were asked to rank which city they would prefer to be relocated to, their options were Frankfurt, Amsterdam and Madrid. Our top picks would have been Paris and Dublin, which didn’t even make the short list. On 19 October 2017, Goldman’s Chairman, Lloyd Blankfein, garnered lots of media attention after he tweeted.

"Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I"ll be spending a lot more time there. #Brexit."

If Lloyds is thinking about buying himself a smart pied-a-terre in Frankfurt, he’s going to have plenty of options as a Brexit-driven construction boom is taking place in the city. The sharp rise in residential property prices is justifying the construction of “skyscrapers”, as Bloomberg explains.

The prices for new condominiums in Frankfurt have now reached such a high level that it pays off for project developers to build high-rise residential buildings and more and more such towers are being built in the German financial capital. This emerges from an assessment by consulting company Bulwiengesa AG.

In 2017 alone, asking prices rose by 15 percent compared to the previous year. A total of eight residential high-rise buildings have been completed since 2014 in the city. 20 more could be added by 2022. Five are currently under construction and another 15 are planned. These are key findings of the study.

"The cost of building skyscrapers is about twice as high as in ordinary multi-storey housing," Sven Carstensen, Frankfurt branch manager at Bulwiengesa, said in an interview with Bloomberg. "Therefore, you also need correspondingly higher revenue."

He explains the increase in prices above all with the high demand pressure. Unlike other cities, Frankfurt offers little land potential. That applies especially in the city center, he said. Skyscraper are the answer. A factor should also be the exit of Great Britain from the EU. "The expected influx of Brexit newcomers will help to absorb the volume of high-rise housing," Carstensen said.

One of the highest profile of the new residential skyscrapers is the 51-storey Grand Tower which, conveniently, has been under construction since the beginning of 2016 – although the Brexit vote was not until 23 June 2016. The Grand Tower will be Germany’s tallest residential building at 172 metres and contain 401 apartments and penthouses.

It’s clear that many thousands of jobs will relocate from London, even if some banks, like UBS, are reversing their initial apocalyptic estimates (one fifth of its 5,000 strong workforce). While the exact figure is subject to debate, some commentators are predicting that Frankfurt will be the recipient of more than half. Bloomberg continues.

While it is unknown how many bankers will ultimately move to Frankfurt, there are plenty of forecasts. "We expect that at least half of London’s declining financial jobs will be relocated to Frankfurt, which will be at least 8,000 employees over a period of several years," Helaba Chief Economist Gertrud Traud said at the end of August.

According to Bulwiengesa, this year’s highest construction activity for new condominiums overall, not just for high-rise buildings, can be found in downtown Frankfurt. The consulting firm identified 24 projects with around 2200 apartments in this area. The company takes a closer look at the market once a year. The weighted average price of new condominiums is around 6190 euros per square meter in Frankfurt, according to the data.

Skyscrapers are not new for Frankfurt. In the office sector, they have long dominated the skyline. But now they are increasingly being built for apartments. Carstensen: "There are thus few acceptance problems - both from the administration and from the urban society".

While the shiny new towers will help, Frankfurt’s attempts to shake off its dull image and promote itself as a “lifestyle destination” still ring a little hollow. As the architecture magazine, Dezeen, noted.

Frankfurt lacks the cultural and lifestyle attractions of London as well as continental rivals such as Paris and Amsterdam, but is now working hard to become more appealing to high-spending financial workers.

Time will tell, but our question is how will the former London-based UBS or Goldman employee, who relocated to Frankfurt, feel on a cold Monday night as he sips a glass of Riesling 25 floors up in his glass tower?

UBS Makes A Striking Discovery: Ex-Energy, US GDP Growth Is The Slowest Since 2010

Last week, UBS released its Global Economic Outlook forecast for 2018-2019, which coming in at over 220 pages and with more than 270 charts, is rather "difficult to summarize" as UBS" chief economist Arend Kapteyn snarkily notes. Still, as Kapteyn helpfully summarizes, the 3 charts below capture some of the main themes from the report, the first of which is a doozy and crushes the Trump "economic recovery" narrative .

Message 1: The 2017 global growth acceleration was largely (70%) a commodity bounce. This applies even to the US which was 20% of the global growth improvement but, as the 1st chart below shows, it was entirely energy investment. Once you strip that out "underlying" growth is only 1% or so (ex inventories) - the slowest since 2010 - and a significant amount of rotation now needs to take place from energy to non-energy investment just to sustain the current growth pace. The surveys suggest that is possible but the surveys have also consistently overstated growth so far. As Kapteyn adds, due to "skepticism about that rotation is why we are about 20bp below consensus for US growth next year." It also means that contrary to conventional wisdom, the US consumer has not only not turned the corner, but continues to retrench and with the personal savings rate plunging to 10 years lows, there is little hope that personal consumption expenditures will be a significant driver of US growth for the foreseeable future.

More details from UBS:

In Figure 5 we show what we think the contributions to US headline growth have been from the energy sector (structures and equipment investment combined). This is depicted as the grey area. The blue line is headline growth (ex-inventories) and the red line is headline growth minus the energy sector investment contribution, which we call "underlying growth ex-energy". Taken at face value, the chart suggests underlying US growth has been slowing dramatically, from about 2.6% in 2015 to only around 1% in 2017. We do not quite interpret it that way, and view it more as a story of stability and "adding-up constraints". The economy can only produce so much, and when one sector is strong (energy), it absorbs labour disproportionately, while other sectors pull back. Furthermore, when investment is weak the consumer accelerates. US growth post-crisis has hovered around a 2% average and nothing in our recession probability models suggests that there is anything ominous going on. But the point of Figure 5 is to show that as energy investment runs out of steam, other sectors will need to accelerate 

significantly to maintain the current pace of growth.

Message 2: The one (developed market) country that no one thinks can generate inflation (Japan) is likely to create more inflation than any other developed market.

"Japan is cyclically 2 years ahead of most other countries and it has a textbook Phillips curve with higher Phillips curve wage and price coefficients than all the other countries we looked at. The labour market is already extraordinarily tight."

If unemployment goes to 2.5% by end-2018 UBS sees (BoJ) core inflation going up towards 1.5% (70bp above consensus) and Yield Curve Control starting to get tweakend (10y  JGB to drift higher.

Message 3 : The Fed is going to $4 trillion in US Treasuries by 2025 even absent a recession, $1.5 trillion more than they hold today. The is because the Fed will hit a trough determined by the "floor system" for monetary policy coupled with some other balance sheet changes, of around $ 3 ¼ trillion by mid-2020 and currency in circulation growth then starts to drive the dynamics of the balance sheet. If they still want to roll off the MBS book they need to buy UST. That is part of the reason that the aggregate size of the G3 central balance sheet by 2025 will still be roughly as large as where it was late last year. And that"s with some fairly aggressive assumptions about BoJ balance sheet roll-off. So good for term premium.

Steen Jakobsen On The Next 30 Years: "Everything Is Deflationary"

Authored by Mike Shedlock via MishTalk.com,

Steen Jakobsen, Saxo Bank chief economist and CIO just pinged me with a PowerPoint presentation on the preceding and next 30 years.

He commented “I somehow to my own surprise came to one single trend I believe in: everything is deflationary. Enjoy the “funny pictures” and the outlook.”

30 Years Ago

Current and Foreward Trends

Mish Comments

I agree with Steen that the trends are deflationary from a CPI perspective.

Compare the GMO 7-Year returns estimate to the John Bogle view. I believe GMO has this correct.

Public pensions are in serious trouble even on the more optimistic view.

Credit Impulse

Pay close attention to the global credit impulse chart. Credit impulse is the “Rate of Change of Change” of global credit creation/QE.

The Stevens Report discusses the topic in Why “Credit Impulse” Matters to You.

There are many analysts and investors who believe that the entire ’09-’17 stock rally is nothing more than the result of a historic, globally coordinated credit creation event from the world’s major central banks. Put in layman’s terms, every major central bank in the world has done QE at some stage over the past eight years, and pumped the world full on cash. So, all they’ve done is create massive asset inflation in bonds, stocks and real estate.

While there is no hard proof that this global expansion of credit has powered US (and now global) stocks higher, there certainly is at least a casual relationship if we look at history.

The reason I am pointing this out is simple: There are growing signs that the near-decade-long global credit creation/QE cycle appears to be nearing the end. First, there are the central bank actions. The Fed is hiking rates, and likely taking steps to reduce its balance sheet, draining liquidity from the system.

Second, the ECB appears to be on the verge of tapering its QE program, and while that will still result in a net credit increase for the next year, the pace of credit creation will slow. Finally, and perhaps most importantly, China continues to aggressively reduce credit in its economy, and I’ll again remind everyone the last time they did that, we got the volatility in 2H ’15.

This is where the “Credit Impulse” comes in.

Credit Impulse is a term used by various research firms that measures the “Rate of Change of Change” of global credit creation/QE. Put simply, while the global amount of credit may still be rising, the pace of the increase has not only slowed… it’s turned negative. Similar to taking your foot off the gas while you’re still going forward. It’s just a matter of time until you stop.

Getting more granular, UBS has been out front on this issue, and back in February noted that Credit Impulse turned negative. In a much-anticipated report out last week, the firm said that the decline over the past three-to-four months has accelerated, with Credit Impulse dropping to -0.6% annualized over the past three months.

Now, Credit Impulse is a composite of various measures of credit, including loans, loan demand, and other metrics, so this is not a hard-and-fast number. And the fact that it has turned negative doesn’t mean we’re looking at an impending collapse in stocks.

But if we look at the entire picture, negative Credit Impulse; a more-hawkish-than-expected Fed that’s apparently committed to reducing its balance sheet, a Chinese central bank that is apparently committed to reducing credit in that economy, and an ECB that will begin tapering QE in 2018… the fact is we appear to be nearing the end of the post-financial-crisis credit expansion, and with economic growth where it is, I cannot see how that will be positive for stocks longer term.

Bottom line, I’m not turning into ZeroHedge (although they are all over this), but the fact is that I sense a lot of complacency regarding the end of this global credit creation cycle.

Credit Impulse Update

Also consider comments on the Global Credit Impulse by Adam Tooze.

In late Feb 2017, UBS’ analyst Arend Kapteyn reported that a measure of global credit impulse covering 77% of the world economy was behaving rather alarmingly. After growing vigorously in 2015 and 2016 thanks to another round of Chinese stimulus the credit impulse had collapsed to zero.

Since then the news is worse with the global credit impulse indicator falling earlier this month to negative numbers not seen since the dot.com bubble burst. This should be a strong leading indicator of a fall in investment and contractionary pressures in the world economy.

Wrapping up the global credit impulse, ZeroHedge discussed it in Why The (Collapsing) Global Credit Impulse Is All That Matters: Citi Explains.

Complete Powerpoint

Once again Steen made an excellent presentation. It consists of 28 slides. I used 14 of them.

Click on Investment Returns Plus/Minus 30 Years for Steen’s full presentation at the 30th Anniversary CFA Annual Forecast Event, Singapore July, 2017.

Thanks, Steen!

These Are The 10 Most Crowded Long And Short Trades According To UBS

In this market where fundamentals long ago ceased to matter, and where positioning remains one of the few remaining sources of alpha, investors have been focusing on lists showing the most over and under-owned stocks. However, contrary to the narrative that the most heavily owned stocks outperform the most shorted, or underowned ones, and vice versa, recently BofA calculated that for the third year in a row, "the Top 10 most overbought stocks have trailed the S&P for each of the past three years, while the Top 10 "most neglected" stocks outperformed the S&P on average by 11.6%."

This is what BofA"s quant team found:

As flows from active to passive funds have accelerated, one strategy that has worked unusually well for the last several years is a simple positioning trade of selling the 10 most overweight stocks and buying the 10 most underweight stocks by active managers. This single trade has yielded over 16ppt of alpha year-to-date. And implied derisking/ outflows on Brexit alone have been fierce, with the same strategy generating 5.2ppt of alpha just since last Thursday’s close. Even if Brexit’s impact on funds is limited from here, we believe that crowded stocks will likely continue to underperform neglected stocks: a whopping two-thirds of US large cap AUM still resides in active funds - there is likely a lot more to go in the rotation from active to passive.

Visually:

As such, a useful trading framework, would be to look at the Top 10 most crowded trades of active managers - on either side of the ledger - and to short the 10 most overweight, while going long the 10 most underweight stocks.

Conveniently UBS has updated its list of the Top 10 most crowded trades, revealing "where are the largest active positions." How does UBS  measure the most active positions?

Using the institutional ownership data provided by FactSet, we form an active trading portfolio by aggregating positions across global active managers. Essentially, we sum up all the holdings in dollar value across all the active managers and calculate the weights of stocks in this active trading portfolio. We then compare this weight with the relevant equity index benchmark to form the active weight.

So, without further ado, here according to UBS are the Top 10 most crowded long and short trades, and not surprisingly, it"s all tech among the top 5 longs, which include Google, Alibaba, Amazon (a jump from 8th spot as of the last ranking), Facebook and Visa (with AAPL sliding into 6th spot), while on the short side one name stands out: Tesla in the perennial top slot, which may explain why no matter how bad the news, even the smallest glimmer of hope, whether a tweet from Elon Musk or an upgrade, prompts a sharp squeeze, like today for example.

Based on UBS data, this is how these two baskets have performed on a YTD basis:

Finally for those wondering, here is a breakdown of how levered hedge funds are as mid-July courtesy of JPM Pribe Brokerage. It will probably not come as a surprise that every single category has increased its leverage on a 3M, 6M and 12M basis.

Exposing Who's Behind Surging Subprime Delinquencies (Hint: Rhymes With 'Perennials')

For months now we"ve been writing about the mysteriously rising subprime delinquencies afflicting auto ABS structures despite repeated confirmations from the Fed and equity markets that "everything is awesome" (see "Auto Bubble Burst Begins As Subprime Delinquencies Soar To 2009 Levels" and "Signs Of An Auto Bubble: Soaring Delinquencies In These 266 Subprime ABS Deals Can"t Be Good" for a couple of recent examples).  Shockingly, as confirmed by the chart below from UBS strategist Matthew Mish, 2016 vintage subprime auto ABS structures are even underperforming 2007/2008 vintage securitizations.

Now, Mish is back with more survey data explaining the who/what/when/where/why"s of spiking loan delinquencies. 

Ironically, survey results suggest that households making over $100,000 per year are 2.5x more likely to default on loan payments over the next 12 months than those making under $40,000...because making more money just means you can afford more debt, right?

First, the survey evidence suggests the rise in consumer default perceptions has occurred primarily in the middle and upper household incomes cohort. And those consumers concerned with missing a payment are highest in the upper income category (household incomes of $100k+). In particular, the most elevated readings occur at the lower ends of the middle and higher income categories (i.e., 50-74k and 100-149k, respectively.

Of course, the most "shocking" results of the survey suggest that our precious snowflake millennials are over 5x more likely to default than folks aged 45 and above.  That said, we suspect that many of those defaults may come from student loan debt...which is totally bogus because higher education should be "totes free", right?

In another shocking discovery, people with the most debt were also found to be most at risk of default...who knew?

Oddly, however, households who reported being able to cover their monthly expenses were more at risk of default than households burning through cash each month...sounds like these folks have picked up some valuable lessons from Tesla on how to burn through cash without defaulting...

Finally, this last chart was intended to shed light on why certain households are more likely to default but, in the end, the "no specific reason" category dominated responses leading UBS to conclude that people are just far more comfortable defaulting on debt, in general, in the post-crisis era.

This mosaic seems quite consistent with the reported concerns earlier around limited positive cash flow (income vs expenses) and the broader reality that real median wage growth has been largely non-existent in recent years (and for several decades) despite rising debt levels. However, the most commonly cited reason continues to be "no specific reason". While difficult to prove decisively other survey results on the millennial generation specifically seem to be consistent with the thesis that US consumer willingness to default (or the lack of stigma associated with bankruptcy) may have increased further in the post-crisis era.

To summarize the UBS survey results, increasing delinquencies are being driven by millennials who graduated college with massive student debt balances, but were making decent money so they levered up even more to buy a house (or 2), a couple of cars and a timeshare.  That said, now that the earnings growth they expected has failed to materialize, their sense of entitlement has taken over and they"ve decided to socialize their debt burdens while completely ignoring the stigmas associated with such actions.

Eric Peters Calls it: "The Change Of Change Is Now Negative"

Ahead of what we hope will be a relatively quiet week following the juggernaut from the past 7 days, we present readers with another excerpt from the latest weekly note from Eric Peters, CIO of One River, which is not only appropriate in the context of recent observation by UBS, involving the sudden collapse of the global credit impulse, but far more importantly, may be critical for those who are in the business of timing key market inflection points.

From Weekend Notes by Eric Peters

“The change of change is now negative,” said the CIO.

“Global growth is still rising, but the rate of improvement is slowing,” he explained. “Same holds true for global inflation, oil prices, copper, iron ore. Credit growth is slowing in the US, Europe, Japan, China.”  If these things were all contracting, we’d plunge into recession, but we’re not there. We’re simply at the point in the cycle where the rate of acceleration is slowing - which is both evidence of a pause, and a precondition for every major turn.

“The last time we had a major shift in the change of change was a year ago.” In Jan/Feb 2016, China was imploding. Commodity prices were tanking with equity markets, the dollar soared alongside volatility. Then China unleashed explosive credit stimulus, while the Fed blinked, guiding forward interest rates dramatically lower.

Within a short time, the change of change turned positive. Which is not to say things immediately accelerated, it’s just that they started contracting more slowly. And that marked the time to buy.

“Pretty much everything that happened in 2016 can be explained by two things; China and oil prices,” he said. “Literally, that’s it.”

China’s stimulus-induced rebound and the oil price recovery is all that mattered.

“Brexit was a joke. Trump was a joke. In fact, the only real significance of those events was that they provided investors with opportunities to jump on board the reflation trade at back near Q1 prices.” The reflation trade quietly began in the Q1 collapse, and accelerated off the extreme post-Brexit summer lows in global interest rates.

“That’s what made last year remarkable. Even investors who missed the first opportunity, had two chances to make a lot of money.” You see, that reward is usually reserved for those who act on the first signs of a change in the change of change.

Summary: as Peters helpfully points out, the change of change - that "green light" to buy risk one year ago when it flipped positive - is now negative. Or, as UBS summarized it simply in just one chart several weeks ago...

Amazon & Alibaba Are The World's Most Crowded Trades

While everyone in the world appears convinced that (and positioned for) bond yields go higher, stocks go higher, gold goes lower, and risk has been vanquished, UBS notes that the world"s largest, most active overweight crowded trade is in Amazon.com stock (followed cloesly by UnitedHealth.

At 175x P/E what could go wrong?

Notably, while Amazon is the most crowded long in the developed markets, Alibaba is the most over-crowded in global emerging markets...

UBS explains: How do we measure the active positions? Using the institutional ownership data provided by FactSet, we form an active trading portfolio by aggregating positions across global active managers. Essentially, we sum up all the holdings in dollar value across all the active managers and calculate the weights of stocks in this active trading portfolio. We then compare this weight with the relevant equity index benchmark to form the active weight.