One of the most influential business op-eds of the decade was Marc Andreessen’s August 20th, 2011 piece in the Wall Street Journal entitled, “Why Software is Eating the World.” It was written during a period where business/economic people were still focused on the financial crisis, while European government debt was imploding, and while the US Congress was contemplating defaulting on the national debt. Not many people were focused on tech.

Fast forward 5 years, and “software is eating the world” and “disruption” have become business/tech gospel akin to expressions from the late ‘90s like “new paradigm.” Over that time period the stocks of Apple and Microsoft are up over 100%, Google and Netflix 200%, Amazon 300%, Tesla 800%, and Facebook IPO’ed to become a $300 billion company. Uber has a private market valuation of over $60 billion. The combined market caps of those 7 companies is over $2.3 trillion. Collectively they still have much growth ahead of them, but from a business power standpoint these companies have become like Wal-Mart and GE in the 1990′s, and they’re best thought of as incumbent titans rather than small upstarts with a large greenfield in front of them. Regulators have begun kicking the tires on the business practices of most of these companies. Even “Twitter eggs” are talking with confidence about self-driving cars and drones and virtual reality. Marc should declare victory.

The bigger business story over the next 5 years is going to be a capacity-constrained US economy where the housing sector is taking “inputs” like labor and capital from all other sectors. Ergo, housing is set to eat the US economy.

One way to show how much more growth housing, and construction more generally, has in front of us is to look at construction’s share of total employment. It’s currently 4.6%, and in every cycle ever it’s gotten to at least 5%. Given 1) the size and hence housing needs of the Millennial generation in years to come, 2) the lack of construction, of single family especially, since the financial crisis, 3) the potential for infrastructure spending from the next president, whether it’s the Hillary/Dem version or the Trump “build a wall” version, 5% seems like a reasonable conservative target for how high this will go over the next 3-5 years.

At a current total employment level of 143.9 million people (establishment survey), this means we need an additional 550,000-600,000 construction workers.

This is a problem because we’re already near record lows for construction unemployment:

How are we going to find them? 87-88% of construction workers are men, a ratio that hasn’t changed in 25 years. So we’re largely talking about men that we need.

I’ll also make the assumption that the missing male construction workers are going to be under the age of 55. Maybe it’s a bad assumption, feel free to correct me. But anyway, here’s a chart of unemployed men under the age of 55:

There are currently 3.3 million unemployed men under the age of 55. The low in the last cycle was 3.2 million in Q3 2006. In the late ‘90s it was around 2.6 million, so that provides more hope. However, the late ‘90s labor force was generally younger and less educated than today, making the pool of potential construction workers arguably larger than it is today.

The educational composition of the labor force has changed in a dramatic way over the past 20-25 years. Since 1992, the number of college grads in the labor force has gone up by 25.8 million while the number of workers with a high school degree or less has fallen by 5.5 million.

Putting it all together:

-The economic shortfall in the US right now is mostly on the housing side. Because of how important housing is to the US economy, this is why 4.7% headline unemployment doesn’t feel like full employment.

-Construction employment as a share of total employment is likely going to rise at least another 0.4% to get to a level of 5% in this cycle.

-At the current level of employment, this means we need another 550,000-600,000 construction workers.

-Construction unemployment is already near record lows.

-Demographic trends in the US – an aging workforce, a workforce that’s growing more educated, the changing mix of immigration towards Asian knowledge workers rather than Hispanic blue collar workers (29% of construction workers are Hispanic) – all act as headwinds towards finding more construction workers.

-From a labor slack standpoint, the pool of potential construction workers is probably well-represented by unemployed men under the age of 55. To get back to late ‘90s levels of male unemployment (from a level standpoint, not an unemployment % standpoint), we would need essentially every single male unemployed worker who finds a job in the coming years to go into construction. This doesn’t take into account skill, desire, education level, geography, etc.

If we had to find 500,000 construction workers tomorrow, from a math standpoint it would be impossible. The slack isn’t there. But this isn’t the way things work in the real world. Time and market forces allow for adjustments. So here’s what that means:

-Over time, as construction employers become more aggressive they will bid away workers from similar fields – agriculture, oil & mining extraction, manufacturing. New entrants to goods-producing fields will be drawn overwhelming to construction, so as workers quit or retire from agriculture/oil/manufacturing-related industries it will create increasing scarcities in those industries.

-Goods-producing/blue collar workers will increasingly bleed from the Midwest/Northeast to the faster-growing southeast and west coast, where increasing numbers of construction jobs will be. This will put more and more of a strain on Midwest/Northeast goods-producing firms.

-With construction-friendly immigration flows not being what they were, the globalization solution will be to move ever more numbers of agricultural/manufacturing activity overseas to free up their domestic workers for construction. Neither California farm owners nor Midwest voters and governments will be happy about this.

-Construction wages/costs going up will mean higher housing/real estate costs for households and firms, leaving less of a spending pie available for the rest of the economy. If you’re spending an extra 3% of your pay on housing that’s taking business from a grocery store or a movie theater or Amazon.

-Capital will flow increasingly towards the housing sector, starving other sectors of capital. If construction can’t achieve productivity gains then labor shortages in other sectors (agriculture, manufacturing, entry level services/fast food) will mean more and more incentives to automate labor-intensive tasks to free up those workers to work in construction.

“Software eating the world” implied that digital upstarts were going to create low cost solutions to take demand away from older, high cost analog firms. Amazon eating big box stores, Facebook eating print and TV. Demand was going to shift. “Housing eating the US economy” implies that housing is going to steal your inputs. They’re coming for your workers and capital on the supply side. It’s a different dynamic but a similar outcome – housing is poised to reassert itself as the main driver of the US economy.

This transition is going to be hard, much harder than the last big one.

As retail stocks get pummeled again today it feels like we’re one step closer to the majority of the country’s malls being functionally obsolete, with many of them on the way to becoming “stranded assets.”

We’ve been through this transition before.

The last time this happened, when we transitioned from walkable downtowns and Main Streets to booming suburbia, before sprawl was a dirty word, the politics were relatively easy. There was a lot more growth in the growing places than there was decay in the declining places. The Atlanta metro area is roughly 6 million people while the city of Atlanta’s population is around 450,000. If the city of Atlanta stagnated it didn’t matter politically, because the people in the much larger suburbs were pretty happy and had more votes. And the percentage of the nation’s infrastructure stock that was obsolete was becoming a smaller and smaller percentage of the nation’s total infrastructure stock.

Today there are fewer and fewer communities that are well-functioning and thriving, perhaps 15-25% of the country. With the way things are trending, wealthy suburbs and walkable town centers will be fine, and on the whole communities in the southeast and Pacific northwest have demographic tailwinds at their back. But more and more communities are going to be left behind, whether they be lower-income suburbia or regions with poor demographic trends like states in the northeast and midwest.

There’s also the challenge of how cities will fund themselves. Residential property taxes don’t get it done. Most communities rely heavily on sales taxes and commercial real estate property and income taxes for their budgets. What happens if more and more retail sales are powered by Amazon? How will that budget shortfall be made up if 60-80% of malls go dark?

The political choice society made last time was to ignore the plight of small towns and downtowns. Not enough votes to matter. Tough luck for Detroit and Memphis.

But there are too many votes in suburban Ohio and Pennsylvania to ignore. The social and economic future of the US might be e-commerce and Sun Belt/West Coast suburbia. But the political system will have to answer to the 70% of communities for whom market forces will be insufficient to solve their problems.

The bumps we’ve seen over the past 12-18 months stem from a reality that the post-recession world we’ve built doesn’t scale beyond its current size. Consider the following:

-Chipotle wanted to be this era’s McDonald’s. Turns out scaling organic, freshly-prepared food isn’t as cheap or easy as they thought.

-Fintech lenders promised to disrupt big banks. Turns out the lending business requires a lot of capital, and that in jittery markets that capital doesn’t like funding a growing lending business. Maybe the big bank model isn’t so bad.

-The San Francisco Bay Area is the economic center of the early 21st century. But it’s finding that scaling housing and infrastructure for workers is a lot harder than scaling servers and storage. So jobs and people have to move to cheaper metros.

-On demand startups were the solution to mass unemployment and megacity renters who demand services immediately. But they’re finding that as the labor market tightens those workers are getting harder to find, and maybe the unit economics never worked to begin with.

-Tesla wants to disrupt the auto industry. But it’s never produced more than 50,000 cars in a year, and suddenly has to meet demand for as many as 500,000 cars a year. That won’t be cheap or easy, and it’s unclear how much shareholders and lenders will be willing to finance that growth. It’s not as cheap to scale atoms as it is to scale bits.

-Uber and Facebook are the 800-pound gorillas in their respective industries. But as they grow, they’re running into problems of scale. For Uber, it’s finding drivers and fighting regulation. For Facebook, it’s eating too much of the revenue pie for content, and maybe as it grows it’s going to come under greater and greater scrutiny given its media clout. Both will argue they’re not utilities, but the vision and scale they aspire to would make them exactly that.

-Conservatism is finding that the demographic groups that believe in conservatism no longer scale to form a viable national party. Trump will soon find the same to be true for his white working class coalition. The Republican Party needs a new ideology or constituency that can scale to compete with Democrats.

It’s time to let Steve Jobs and Ronald Reagan rest in peace, and find new leaders who can build the world of the 2020′s.

Facebook wants you to think it’s going to be a leader in drones and VR, distracting you from the reality that its business model is just a newfangled Comcast, or a sibling of Netflix – a content distribution platform fighting for the attention and dollars of consumers and/or advertisers.

There have been a lot of stories lately that, when combined, paint a picture of what Facebook actually is, which isn’t what the company wants you to think it is. This is what Facebook wants you to think it is.

Social! Sharing! Messaging! Pictures! Virtual reality! Wow!

This is what Facebook actually is – a massive content referral platform, the best in the world:

Content referral is becoming a more and more important part of their business as organic sharing of personal content declines.

Original sharing of personal stories – rather than posts about public information like news articles – dropped 21 percent year over year as of mid-2015, The Information, a tech news site, reported Wednesday.

As personal sharing declines and article sharing increases, and Facebook continues to grow, it stands to reason that Facebook will come to rely upon the biggest content platforms in the world to keep its users engaged. So who are they? The usual suspects.

Hey, Buzzfeed! Second-most pageviews in the world! How are they doing? Oh, not so great?

Buzzfeed missed its $250 million revenue target last year, according to the Financial Times, and generated only $170 million.

Because of this, Buzzfeed has also halved its revenue prediction for next year from $500 million to $250 million.

Hmm.

There’s another digital media company that got its start by acquiring cheap content created by others, and then, as it got bigger, the supply of that content available to it started to shrink and it was forced into a company-altering pivot.

That company is Netflix.

Netflix’s pivot involved shifting from content created by others to content that it created and controlled. It hasn’t been cheap.

Another direction it could go in is to look at what its dinosaur peers did – the cable companies. Comcast et al are content distribution platforms. Consumers pay Comcast a monthly fee to access content that Comcast either owns (its cable channels) or buys from others (ESPN, etc), for which it pays networks an affiliate fee. Also not cheap.

The bottom line is that the current trajectory of Facebook seems to be unsustainable. Personal sharing is down, Facebook is relying upon the content of Buzzfeed et al more and more, and yet, as those companies struggle to achieve the revenue growth they were hoping for (and their VC’s/investors need for the business models to work), those companies will be forced to cut back their production of content.

At least one of three outcomes is probably inevitable:

-Facebook starts buying content companies (Buzzfeed, Vox, Business Insider, etc).

-Facebook starts investing in its own organic content.

-Facebook, which is better at advertising than its content partners, from whom it’s arguably stealing ad spend, starts sharing revenue with those content partners to support them and invest in their growth.

In any case, the mid 2010′s could end up representing a peak in Facebook’s profit margins, at least for awhile, as it starts to invest in the content on which it depends.

In the wonkosphere there’s a nearly unanimous view that “NIMBY” (not in my backyard) residents, typically homeowners, are greedy, self-interested people merely interested in their own property values and keeping out poor (often non-white) residents. This view is too often unchallenged, and I wanted to throw out one example to provide a different perspective.

The metro Atlanta area has a variety of communities and neighborhoods, some of which are thriving, others of which are not. Some are improving, some are getting worse. This is no different than most metro areas.

One of the things Atlanta has going for it is the infrastructure catalyst known as the Beltline, a repurposing of dormant railroad tracks that promises to connect the city in a 20+ mile loop of trails, parks, and transit. The Beltline corridor has some neighborhoods that are already thriving, and others, particularly on the south and westside of Atlanta, that are struggling and need a lot of public and private sector investment to become the sorts of places that attract residents and development.

So the question is who’s going to invest in these neighborhoods to get the ball rolling? What incentives do they have, what motivates them, what levers do they have to pull?

One easy incentive/motivation is financial – the potential for real estate appreciation. The issue, however, is that the housing stock in these communities needs a lot of work. Some of the neighborhoods have houses with “good bones” but have fallen into such a state of disrepair that they need $50-200k+ of work to become livable.

So let’s say we buy one of these houses for $25-50k and put $100k into it. We now have a livable house on a broken/abandoned street. What’s our next course of action? We’re probably going to show up to neighborhood meetings and ask to meet with local elected officials to see what can be done to make the neighborhood better.

NIMBY might mean crime – get crime out of my neighborhood. Get those broken sidewalks and streets and streetlights out of my neighborhood. Get blight and unmaintained properties out of my neighborhood. Maybe it means replacing elected officials.

After some work, maybe a community has fixed its streetlights, fixed roads and sidewalks, elected new officials, and there’s now a trickle of new residents coming in for the first time in ages. At this point the private sector takes notice and a check cashing store wants to come in. Are hardworking young families that have invested in the community supportive of this? No – so they show up to a meeting to block the check cashing place from coming in. “NIMBY!” they cry. But the community feels that it’s worked too hard to let seedy commercial elements come in.

Other developers apply for permits. A corner grocery comes in, though only after promising to provide fresh food and vegetables in addition to chips and candy. A dollar store comes in. Okay, fine. Another dollar store comes in. Then a third applies for a permit. The community petitions this one – “we have enough dollar stores” they say. The same happens with fast food applicants – the first two are approved but the third is denied. All the while, the community starts to ask when it can get a proper grocery store, and maybe a coffee shop.

I think I’ve gone on long enough to make my point. Not every community is Palo Alto, not all homeowners are limousine liberals (or the conservative equivalent), and sometimes making a community better requires empowering that community to make decisions for itself, and give it the power to block things it doesn’t want.

With markets slowing down for the first time since last summer I’m trying to step back from the day-to-day and extend my time horizon a bit.

It’s the second quarter of 2016 now, and the decade is almost two-thirds over. At this point in a decade “themes for the decade” have often emerged. So what’s the theme of the 2010′s, and what from the 2010′s will be impactful as we head into the 2020′s? To think about that, I went back and thought about the past few decades. This is more of a journaling/brainstorming activity than one of my normal snappy posts, so apologies if it’s a bit meandering. This is based on my own limited knowledge and others will have their own perspectives and/or find problems with my interpretations.

1970′s:

Key cheap/plentiful input: Infrastructure. The interstate highway boom was ongoing, Atlanta/DC/SF Bay were opening new transit lines. Suburbia and the Sun Belt were newish and booming, and there was no such thing as the Rust Belt yet.

Key expensive/scarce input: Almost everything. Labor, capital, energy, “bureaucracy.”

Major capex theme: Investing to keep up with booming demand from the young Baby Boomer generation and to beat back the inflation strangling the economy.

US policy themes: “FDR Democrat excess” which started to unwind at the state/local level in the late ‘70s (CA Prop 13 passed in 1978)

Global highlights: Rise of Japan

Legacy: Middle East/oil problems, Japanification of the auto industry, massive capex spend paves the way for end of inflation in the early ‘80s, beginning of the decline of the American manufacturing worker, American cities in crisis

1980′s:

Key cheap/plentiful input: Asian labor. Asset prices. After inflation peaks, credit gets cheaper, commodities get cheaper.

Key expensive/scarce input: American labor.

Major capex theme: Plunge in inflation/interest rates/energy creates even more consumer demand from 30-something Baby Boomer generation, and corporations race to keep up. Rise of the personal computer.

US policy themes: Supply side-ism. Tax cuts and deregulation.

Global highlights: Japan peaks, commodities bust

Legacy: Many of the problems the US is dealing with today stem from forces that accelerated in the ‘80s. The hollowing out of manufacturing and the Rust Belt, the rise of Wall Street and elites, rigid GOP ideology.

1990′s:

Key cheap/plentiful input: Chinese labor. Commodities. Credit/leverage. Personal computers.

Key expensive/scarce input: American labor.

Major capex theme: suburban infrastructure (houses, malls, office). Personal computer technology. Telecom infrastructure.

US policy themes: neo-liberalism

Global highlights: the decade of the American Baby Boomer, rise of China

Legacy: Financial sector innovation/deregulation and tech/telecom investment paved the way for the 2000′s

2000′s: 

Key cheap/plentiful input: Leverage, emerging market labor, bandwidth/computing power

Key expensive/scarce input: Suburban homeownership, risk assets

Major capex theme: China/commodities, EM infrastructure, exurban US housing, digital infrastructure (mobile/servers/cloud)

US policy themes: neoconservatism/neoliberalism excess

Global highlights: China/commodities/leverage boom ends in a global financial crisis

Legacy: The world is still recovering from a global bust.

2010′s:

Key cheap/plentiful input: Just about everything. Labor/credit/increasingly commodities/digital infrastructure

Key expensive/scarce input: Physical infrastructure, end demand, well-functioning government

Major capex theme: A commodities boom goes bust, digital infrastructure/software, infrastructure for high-earning 20-something Millennials without families, increasingly perhaps transportation/self-driving vehicle capex

US policy themes: Austerity turns to gridlock, possibly populism

Global highlights: Struggles everywhere as the financial crisis and post-crisis regulatory changes lead to demand shortfalls and inadequate government response, aging of the Baby Boomers

Legacy: As we enter the latter part of the decade commodities have become cheap, credit is still cheap (with many DM government yields now negative), labor is getting increasingly scarce, and in the US a housing/infrastructure shortfall is becoming more painful. 

More 2010′s/2020′s thoughts:

Trump/Sanders primary surprises suggest a growing demand for a different policy direction, yet with the likelihood of a Clinton victory it’s unclear if this will happen in the near future. What’s notable is that it’s not clear either the public or private sector has made investments this decade that will lead to growth in the 2020′s. The 1980′s were powered to some extent by the heavy capex of the 1970′s. The 1990′s consumption/tech boom was powered by investments made in the 1980′s. The broadband internet/tech boom of the 2000′s doesn’t happen without the telecom investments of the 1990′s. And FANGs/Uber/$30-40 oil don’t happen without investments made in the 2000′s.

Demographics suggest a Millennial family formation boom in the 2020′s plus acute infrastructure and healthcare needs for Baby Boomers approaching their 70s-80s, and infrastructure needs are undeniable, yet the key “investments” being made this decade seem to be corporate stock buybacks, infrastructure for a phase of life Millennials will soon outgrow, and software development at “unicorns.”

The one “output” of the 2010′s worth thinking about is gushing corporate profits that could fuel a future investment boom. If the 1980′s were fueled by the capex of the 1970′s, the 1990′s consumption fueled by the wealth generation of the 1980′s, 2000′s tech fueled by the telco/dot com boom, and 2010′s “Facebook/Uber on a smartphone” fueled by tech investments of the 2000′s, perhaps 2020′s capex/infrastructure needs will be funded by all the cheap capital generated in the 2010′s.

For the first time in this employment expansion, in March the manufacturing sector showed lower payrolls year-over-year. This contraction will probably continue for the rest of this expansion and into the eventual recession.

This must be because of all the global problems we’ve heard about lately, what with the strong dollar, export weakness, and the oil depression, right? Surely this is bad news for manufacturing workers.

Actually, it’s not. The unemployment rate for manufacturing workers (not seasonally adjusted) is still near this cycle’s lows.

And the unemployment rate for manufacturing workers is still falling year-over-year.

We haven’t seen a major decrease in hours worked for manufacturing workers…

And overtime hours are holding steady…

Wage growth is actually stronger for manufacturing workers than it is for private sector workers as a whole, and it’s accelerating:

What about at the state level? Michigan’s one of the most important states for manufacturing in the country:

And yet in a reversal from the last cycle, Michigan unemployment has been falling faster than the country as a whole. The Michigan unemployment rate is lower than the overall unemployment rate for the first time since 1999-2000.

So what’s going on? My view, 3 things:

-The manufacturing workforce is older and more prone to retirements than the workforce as a whole – this is putting downward pressure on the unemployment rate.

-On the margin, some manufacturing workers are finding better employment opportunities in other sectors (especially for younger/less-specialized workers).

-New entrants to the workforce are finding better opportunities in other sectors, making it harder for the manufacturing sector to find workers. Especially, say, the construction sector.

It’s a lot easier to move manufacturing jobs to other countries than it is to bring construction workers to the US right now, so maybe we’ll see the manufacturing sector in the US shrink faster to support growth in the construction sector. That’s the way markets work. Life goes on.

It’s finally happened. I’m starting to look for signs of economic overheating, overly aggressive monetary policy tightening, and eventually, recession.

First, overheating. Despite continued drags from dollar appreciation and the decline in energy prices, core PCE has ticked up strongly in recent months, in part due to rises in medical care costs, which have a bigger weighting in core PCE than core CPI. The 2% target is in sight.

Second, below is a chart looking at what percentage of new employees last month came from outside of the labor force (vs unemployed). It hit a new all-time high of 72%, vs 56% at the lows of 2009-10. To find workers employers are having to look harder than ever. At some point even this shadow slack will run out and wage increases will be the last option available to them.

This has been the case in the construction industry for awhile. Unemployment for construction workers is non-seasonally adjusted, but we saw in February that construction unemployment nearly matched its low for this data series set in February, 2006. If we’re going to find more construction workers we’ll have to find them from outside the industry.

My view is that the housing cycle is the business cycle, and on this basis “potential output” should be much, much higher than it is today. We’ve underbuilt housing, particularly single-family, for years, and Millennial housing needs will be immense for the next two decades.

But because of how much damage occurred in the housing sector and how slow and long the recovery took, other industries absorbed housing sector resources. And now we’re nearing overall US economic resource utilization levels that typically makes the Fed uncomfortable.

Over the next several months as energy and currency-related headwinds subside and the US hits full employment the Fed will begin to snuff out this expansion, which is what they see their job being. Economic growth in 2016 should be pretty good, and there’s a good chance 2017 will be as well. But by 2018? There’s a reasonable chance that by then, if the economy doesn’t fall into recession on its own the Fed will put us there. So that’s beginning to make me cautious in my outlook.

I’ve been saying for awhile now that I thought 2016 had the potential to be a “political 2008/Lehman event,” and with Bernie fading it seems like the only way that plays out is if Trump gets the nomination/wins in November, so I’ve been thinking some more about this.

After Lehman fell an older friend and I were talking about the turn of events, and he said that what Lehman represented was the economy failing for the top 1%. The poor are always poor, the manufacturing class had been hollowed out for decades, the middle class had peaked in 1999-2000, and the housing/credit markets by 2008 were already in recession, but Lehman was the event that put fear into economic elites, at which point policy responded.

And I think that analogy works for what we’re seeing now. Many people are outside of the political system and perennially feel voiceless. Post-2010 confidence in government has been very low. Wall Street has remained on edge due to subpar fiscal policy and occasional threats of not raising the debt ceiling or government shutdowns, but all along the political system has mostly worked for the top 1%, a point on which all of the major candidates would agree and are campaigning on. But a Trump nomination/election represents the political system failing for the top 1%. Their control, their sense of entitlement, their pro-immigration/trade/tax cut agenda would all be threatened by a Trump win.

It’s interesting how in a perverse way Trump “solves the equation” of so many issues that people have identified in the political system over the past several years. He’s defeated corporate Super PACs and the Bush dynasty. He scrambles the deck on partisan polarization and what constitutes left/right. He speaks to the white working class. He represents a chance of addressing income inequality and getting fiscal policy moving again. He’s the first Republican actually willing to talk about doing more on healthcare than just repealing Obamacare. And if you’re a media/academic liberal taken aback by campus safe spaces, you’ve probably got an ally there in Trump.

We’ll see where this goes.

In a past life I was primarily a technical analysis guy. Now I’ve mostly gone in the opposite direction, but I still find charts helpful to see what’s actually happening and to test out if our fundamental/tops-down views are being validated or refuted by the market.

We’ve been of the view for awhile that momentum/growth/tech factors were over-extended relative to value factors, and have been waiting for those to reverse. Given the large market cap weightings of large tech stocks we expected that this reversal would put pressure on the overall market just from a cap weighted/arithmetic/deleveraging standpoint, but ultimately was what we’d need if some of our value positions had a chance of working. From that standpoint, this week’s losses were well worth it. The hope is that this churn and change in leadership is ultimately a sign that markets won’t continue to head straight down, but are building the foundation for something new/different.

The best news of yesterday was the severe underperformance of momentum tech growth names.

MTUM/VLUE got crushed:

As did QQQ/SPY:

Even within tech, the “safe tech” of the S&P 500 outperformed the riskier/momentum names in the Nasdaq 100, continuing a YTD-long pattern:

It may be confusing to see consumer discretionary get crushed on a strong wage growth print, except for the fact that the XLY ETF is loaded by popular momentum names like AMZN, HD, MCD, NKE, and SBUX, all of which got crushed with its momentum peers yesterday.

While MTUM/VLUE may just now be reversing, small cap value has been outperforming small cap growth for awhile:

There are no safe stocks, only safe prices – people rushing for the “security” of consumer staples may be forced to learn this lesson:

Same goes for utilities:

Two of the most promising signs of yesterday were the extreme outperformance of the materials sector:

And the industrials sector. This was not a run of the mill “risk off” day:

The Dow outperforming the S&P so strongly has a lot of information embedded in it. It’s loaded with a combination of value stocks, industrials, large caps, and “defensives.” The part I trust is the value/industrials portion, whereas technical/macro bears would probably lean more towards value/large cap/defensives.

And finally, small caps continue to underperform.

If we’re to break this bear panic and enter into a new sustained bull market what I’d like to see would be outperformance by small caps, financials/housing, industrials, maybe energy/materials, and “value factor” more broadly, with tech, expensive consumer staples/utilities, and “momentum factor” underperforming. Yesterday was a sign that some of this transition could be underway, and while tech/momentum deleveraging may be nowhere near complete gives me hope based on market factors for the first time in awhile.