Precision Macro LLC is an independent macroeconomic investment research fir m established in 2015 by Henry Hancock, CEO & Head of Research, and bac ked by Chris Shumway, Founder and CIO of Shumway Capital. Henry was senior macroeconomic strategist at Autonomy Capital, Eton Park Capital Management, and Shumway Capital Partners. The Precision Macro’s advisory board i ncludes Chris Shumway; Joe Rooney, formerly senior strategist for eight yea rs at Autonomy Capital; and Bill Richards, Senior Managing Director and Adv isor to hedge funds at UBS. Precision Macro’s clients include a selec t group of leading global investment firms, consisting of some of the large st hedge funds and family offices in New York, Greenwich, London, and Genev a. Precision Macro is a New York based company, with offices in New York Ci ty and Greenwich, Connecticut. The Precision Macro product is comprised of fundamentally driven global macroeconomic research. The research process in cludes intensive quantitative and conceptual analysis that is focused on id entifying major dislocations between fundamentals and pricing, which provid e the basis for market inflection points and asset price trends. Precision Macro is different to other macroeconomic research providers because of the systematic and rigorous nature of its research process, the very limited d istribution of its intellectual capital, the close two-way dialogues with i ts client partners, and the fact that its founder and employees have highly successful buyside track records.
Hernry Hancock's latest oped in Financial Times:
Although th e central bank is set to raise rates, inflationary pressures are fading
June 13, 2017
by: Henry Hancock
In stark contrast to market expectations, US inflation is in the midst of a big downturn. Core inflati on is likely to end this year close to 1 per cent, far below the Federal Re serve’s target of 2 per cent.
It is a prospect that will have significant ramifications for Fed policy, as well as the bond and equity markets.
With such l ow inflation at this late stage in the economic cycle, longer-term bond yie lds will reach further lows. In an environment in which prices and incomes are increasing more slowly relative to debt servicing obligations, record h igh levels of indebtedness will exert greater downward pressure on economic growth. The Fed, widely expected to raise interest rates this week, will s top raising them. Finally, lower interest rates, and hence cheaper capital, may prolong the appreciation of assets perceived as being leveraged to gro wth, such as technology stocks.
As we approach the end of the first half of the year, the downward pressures on inf lation are building. Prices across many of the largest components of core inflation are in clear and, in several cases, accelerating downtren ds. Take education. Costs rose 2 per cent in April from a year earlier, dow n from 4 per cent in September 2015. Or look at car prices, which fell 1.4 per cent in April from a year ago, compared with a 0.6 per cent increase in January 2016.
These downward price pressures are partly the result of structural disinflationary pressures (such as high debt levels), but the y are also spurred by sector specific developments including, in the case o f education, the unaffordability of college tuition and big stresses in the student lending market. Within the car industry, excess inventories and in tensifying credit stresses are exerting downward pressure.
However, the most important sector-specific development is that the rate of increase in the cost of shelter — or rent — has turned down. Since the credit crisis, core inflation has only ever approached 2 per cent because t he cost of shelter has been rising quickly. But over the past six months sh elter price inflation has decelerated sharply. This is likely to continue.< /p>
A critically important disinflationary dynamic is paltry wage growth . Nominal wage growth has turned down this year, and real wage growth has c ollapsed from 2 per cent in July 2016 to 0.3 per cent in April. It is not h ard to see why consumer spending growth is weak.
Wall Street economi sts have repeatedly called for an acceleration in wage growth, and thus inf lation, over the past five years. And the argument is always the same: the slack in the labour market has gone as evidenced by the low unemployment ra te, meaning wage pressures are on the cusp of boiling over.
But no o ne really knows how much slack remains in the labour market. The reason is that the percentage of the population either employed or seeking employment (ie the labour force participation rate) is over five percentage points lo wer now than it was before the credit crisis.
Although demographic s hifts undoubtedly account for a large part of the decline in this rate, man y have dropped out of the labour force because they simply cannot find empl oyment or are unwilling to do so. And in cases where people will not find j obs, it is usually because wages at the low end of the income spectrum are so pitifully low.
Note, too, that the participation rate has moved s ideways since 2014. This is at odds with the consensus view that the whole decline from 2008 onwards has been the result of long-term demographic shif ts. It also suggests that an increase in the participation rate is entirely plausible. If it rises by just one percentage point, the labour force woul d expand by nearly 2m people. There would be big downward pressure on wage growth.
Two other structural dynamics are keeping wages depressed: w oefully low productivity growth and globalisation . Why would companies pay American workers more when their real output is n ot increasing materially and when other people in other countries can make the same things more cheaply?
Other significant disinflationary forc es include the lagged effect on prices of last year’s dollar apprecia tion and the decline in commodity prices being driven, in large part, by th e tightening of economic policy in China.
The development that could push inflation higher in the near term would be the timely delivery of a b ig fiscal stimulus in the US. But the likelihood of this happening is dimin ishing by the day — given whatever stimulus materialises will be the product of an increasingly acrimonious and chaotic US political process. In the meantime, inflation and bond yields will keep falling.
Henr y Hancock is the founder and head of research at Precision Macro LLC
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