The Lazy Sunbathers

During his original tenure as proprietor of this space, Macro Man was often asked why he spent the time and effort to scribble his thoughts down with such regularity.   Although it was tempting to reply in jest ("how else can I convince Mrs. Macro to let me dress up in my knock-off Superman suit?"), the real answer is that he got a lot more out of it than he put in.   In other words, writing generated a startlingly high return on investment.

One of the ways in which it did so was the enforced rigor of constantly marking his views to market, lest they become outdated and subject him to public scorn.   Naturally every macro punter, whether they write or not, should perform this exercise with regularity, and Macro Man endeavoured to do so over the past several years while he was under the radar.   Nevertheless, there is nothing quite like the prospect of being pilloried and pelted with virtual tomatoes (or at least the odd scathing comment) to ensure that one's views are kept minty-fresh at all times.

Of course, Macro Man touched on this idea in the past, via the concept of the pink flamingo.   However, while some flamingos were passed because their drivers had reached their sell-by date, others came under the cosh simply because of portfolio-level de-risking decisions, while maintaining their underlying validity.  No, what Macro Man is getting at is the notion of a commonly-held idea (rather than position) that is perhaps not subjected to sufficient scrutiny by many of its adherents.  A lazy consensus, if you will.

A lazy consensus can of course beget lazy positioning that remains entrenched even as the underlying drivers have changed.   Perhaps you could consider them as the lazy sunbathers watching the pink flamingos walk by?       In any event, it useful to consider which beaches the lazy sunbathers tend to frequent, for they are likely to leave plenty of diamonds (or at least fancy shells) on the sand when the tide goes out. 

Given yesterday's discussion on NAIRU, it is perhaps worth investigating whether there are any lazy sunbathers forecasting US growth.   It seems almost axiomatic that growth will accelerate after the snow-swept Q1, and to be honest Macro Man hasn't got a major beef with that claim.  However, there seems to be a widely held belief that growth will accelerate to an above trend 3% and then stay there for the foreseeable future.

Now maybe this will happen....but then again, maybe it won't.   In any case, just because the PhD community forecasts it is no guarantee that it will come to pass.   Indeed, the empirical evidence would appear to suggest rather the contrary.  Macro Man perused the last few years' consensus GDP forecasts, presented here as a time series.   Readers are invited to determine whether they can spot a trend.



Now, as any investment disclaimer will tell you, past performance is no guarantee of future results.  Just because the strasse has overestimated growth in the past does not mean they are doing it now.  The fiscal restraint over the past few years was meaningful, as indeed was the caution engendered by the Flea Circus in Washington.  The impact of both should be lower moving forward than they've been in the past.  (Lest we rubbish the private sector unfairly, it should be observed that the Fed's track record has been, if anything, even worse:)




At the same time, 2013 saw a decent inventory build, so there could easily be some pushback on that front.  That having been said, the latest revisions to the Q4 national accounts data have made the problem look less severe than first imagined.   Nevertheless, a little composite leading indicator that Macro Man likes to use is more suggestive of trend (~2.25%) growth than the 3% forecast by the economics crowd.



Given the weight of history and poor seasonals, Macro Man would probably take the "under" on the consensus growth  figures for the next few quarters and beyond.  While it is probably too early to say with confidence that the bullish consensus is full of lazy sunbathers, the next time someone tells you how strong growth is going to be,  you might want to break out the factor 50 just in case.

(Readers are naturally invited to nominate their own group of lazy sunbathers in the comments section.)
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Polemic
admin
April 2, 2014 at 7:51 AM ×

And meanwhile  "Lazy Sunbathers" on Long Kiwi beach have just been drenched by a lactic wave of falling dairy prices.

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April 2, 2014 at 9:18 AM ×

Regarding fiscal pull-back and the stuff. What do you think of the causality? The common assumption seems to be that if not for the government then the growth would have been 2pp higher or whatever. But isn't a lazy sunbathers assumption? That is instead of starting with (fake numbers) 6% GDP deficit and going down to 3% deficit with total GDP growth of 2% in the end, why not to start with so to speak underlying natural -4% GDP growth to which government used to add +6% so that we end up with total 2%. Now, the government pushes only 3% of GDP growth and so the new result has to be around -1%.

So what comes first? Government & fiscal or private sector?

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Anonymous
admin
April 2, 2014 at 9:44 AM ×

German credit and by transitivity German Banking stocks (see CBK this morning)

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Loulou de F
admin
April 2, 2014 at 10:17 AM ×

Long GBP when a U.K. property bubble is developing? U.K. house prices rose for 15th month in March -- dragged up by London where values climbed to more than 2x national average.

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Polemic
admin
April 2, 2014 at 10:22 AM ×

Talking about housing bubbles, commentary appears to have gone from "Property doom, we need prices to rise" to "Property bubble we need prices to fall" without passing through the nirvana of "property prices are just right, let's rejoice". Did that happen or was I asleep and missed it?


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Anonymous
admin
April 2, 2014 at 10:44 AM ×

Off-topic but anyone else had their Liffe feeds forcefully delayed by ICE as they renegotiate contracts? Unacceptable behaviour you ask me.

Welcome back MM, and I certainly count myself in the new normal camp of lower growth. I am constantly (altho I should no longer be) amazed at how out of touch the PhD gang seems to be and how much their forecasts continue to be relied on.

JL

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Anonymous
admin
April 2, 2014 at 12:32 PM ×

Ramapagingruss says:
I agree with your analysis, but you pick out the PhD crowd as being the lazy sunbathers. My bet would be the lazy shorts in treasuries. Everyone seems to still assume 3.5% on the 10 year - more likely moves to 2% in my view....

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abee crombie
admin
April 2, 2014 at 1:10 PM ×

Here is my list of current assumptions, some are lazy and others are not

US stock market doesnt have a deep correction without a recession. Since there is no imminent recession, buy stocks

Sell all hard commodities on lower China growth, increased production

Abenomics is OK, if you want to blow up your currency we will help by shorting your currency and buying stocks

Buy Modi and Widodo, sell Rousseff
on elections

China will muddle through, and they cant have a big credit event bc the financial system is closed

But I see the real Kool-Aid in the tech /bio tech sector now. For sure there are some great businesses and business models (a new must have app's economics are insane) but there appears to be no focus on sustainable business models anymore. Eyeballs/90's = Users/2010's. Biotech same thing. Assume your drug that treats a rare lung disease will be able to generate $60K per patient. Health care costs are unsustainably high, new technology = price pressure, IMO. The science is real in both fields but the numbers are not

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Leftback
admin
April 2, 2014 at 1:41 PM ×

LB's Lazy Sunbathers, at least for the time being:

Dollar Longs
"Great Rotation" merchants
Treasury Shorts and YC Steepeners
Eastern Europe Bears
Muni Bears
ECB QE Cheerleaders
US Small Cap and Growth Stock Pumpers
China Crash Callers

How about a Q2 where "not much happens?". No crashes, no wars, no US escape velocity, no new QE initiatives..... it has been known, you know.

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Turkish
admin
April 2, 2014 at 2:28 PM ×

Could it be a Lazy Sunbather's assumption that the market is still on the whole lazily short in tsys and looking for 3.5% - a lot has changed since the beginning of the year and would take particularly deep pockets to wear both the price action and the painful carry... Would imagine a lot of short covering has already been done and positioning is far cleaner than it was a month or two ago.

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Anonymous
admin
April 2, 2014 at 3:33 PM ×

VIX term structure...

http://www.vixcentral.com/

SoGen "the period of low volatility is coming to an end"

http://tinyurl.com/leug8md

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wcw
admin
April 2, 2014 at 10:03 PM ×

"..widely held belief that growth will accelerate to an above trend 3% and then stay there" -- really? Who thinks that? I'd put good money on trend being closer to 2 than 3, but I am not sure the market isn't also expecting 2.

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Macro Man
admin
April 2, 2014 at 10:16 PM ×

According to my ECFC function on Bloomberg, the consensus forecast for 2015 is 3% (both mean and median)and close to that in 2016 (median of 3.00% and mean of 2.96%.) 83 observations for the former, 35 for the latter.

Vive la difference between the market and the PhD's!

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Anonymous
admin
April 3, 2014 at 12:39 AM ×

Yen Bears and it's not even close.

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Antipodean
admin
April 3, 2014 at 1:54 AM ×

Having not been in the markets long enough to have ever seen a economic cycle where the US truly led global growth, I often find myself deferring to the belief (which I think is prevalent amongst said sunbathers), that this is still a realistic possibility in this day and age.

There are some very real challenges to growth this year, which are being explained away currently by the aforementioned belief in the primacy of US growth.

I have a great deal of sympathy for El-Erian's view about the uncertainty in the growth hand off from official support to genuine private sector growth.

Perhaps the hand applying sunscreen to the beachgoers is changing and they could find themselves exposed.

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