“Following the light of the sun, we left the Old World."
-Christopher Columbus
The explorer Christopher Columbus is not untarnished by history, but his pursuit of finding new worlds in many ways was still a noble pursuit. His expeditions were the first known European contact with the Caribbean and Central and South America. (The Vikings beat him to North America.) To me what is most interesting about Columbus is that he became one of the most famous explorers of his time, despite coming from a very humble background and being largely self-educated.
Setting Columbus and any associated controversies aside, the concept of leaving the Old World (or Wall) to find a new one is very relevant to our collective investing journeys. For decades, if not centuries, many of us have relied on the advice of the Old Wall without realizing the conflicts imbedded therein. This is changing and was accelerated by COVID.
As just one proxy of the growth of self-directed investing, consider the financial results of Interactive Brokers. In Q1 2020, Interactive Brokers had 760,000 accounts. Within a year, by Q1 2021, that number was up 74% year-over-year. By Q1 2023, in three short years, customer accounts had grown roughly 200%. Whether it be the fees, the conflicts of interest, or the satisfaction of having control of your own money . . . this growth is real.
The “retail” investor is no longer a derogatory term, it is in fact a class of investors that have become a real force in the markets. The Game Stop saga of 2021 was perhaps our first real dose of this, but the influence of this investor class is likely just beginning.
We were fortuitous on being early in developing a “retail” subscriber base. In as much as interactions with institutions help to make us smarter, the interactions with individuals (and small firms) does the same, especially given their collective scale and influence.
We are entering a New World of investing and while AI may play a role, the democratization of it all is even more influential. Get prepared.
Back to the Global Macro Grind . . .
Part of my job every day is write “The Morning Shift”, which is basically a daily rundown of the key macro economic data points. As part of this, I assess their rate of change (are they accelerating or decelerating) and contextualize their relevance to our current Macro thesis. If one conclusion jumped out at me this week, it was #Quad4.
Consider the inflation and economic activity data we received from Europe this week. Starting with inflation, Eurozone CPI decelerated to 6.1% Y/Y in May from 7.0% in April. This comes off the back of every major country also reporting decelerating CPIs and PPIs that, in some cases, were negative Y/Y. Now deflating prices isn’t necessarily a bad thing, especially for the consumer, but they can create trouble if they comes alongside slowing growth.
On that last point, the Eurozone Manufacturing PMIs (a proxy for economic growth) also decelerated this week. The Eurozone Aggregate Manufacturing PMI decelerated to 44.8 in May from 45.8 in April. This reading remains sharply contractionary. For context, this is the lowest level going back to late 2020 when economies were just starting to re-open. Unfortunately, as we consider the outlook we also had a sharp drop in Eurozone Economic Sentiment this week, which surprised to the downside and hit its lowest level since November 2022.
The combination of decelerating prices (and pricing power), slowing economic activity, and deteriorating sentiment at a time when the ECB remains hawkish . . . well, it isn’t exactly a great endorsement of taking on more risk in European equities.
We had a similar story in the U.S. this week where the Manufacturing surveys also slowed and went contractionary. These two quotes from the U.S. May Manufacturing PMI report about sum up what is going on beneath the proverbial hood:
- “solid contraction in new orders amid muted demand conditions”
- “input costs dropped for the first time since May 2020”
It gets worse when we consider the Chart of the Day, which looks at ISM Activity Pipeline. This is a combination of New Orders + Backlog less activity and it hit a new post pandemic low of 34.3. You’ve probably heard this about other indicators lately, but this level of activity is 3 for 3 in foreshadowing a recession going back thirty years.
Given the recent data, it is probably no surprise that the widely watched Atlanta Fed GDP Now model sharply reduced its growth estimates for Q2. Just two weeks ago, this model was at 3.0% growth (SAAR) and is now at 2.0%. What a difference a few weeks can make! In tracking weekly retail sales, we would expect this to decline further as the monthly retail sales come in.
But, and there is always a but, the services side of the economy remains strong and AI is a catalyst for profit growth (or so they say). Unfortunately, AI may not be a catalyst for semi-conductor growth in aggregate as we saw in South Korea’s May Export numbers, which on the semi-conductor side came in at down more than -30% Y/Y.
No matter the New Worlds we discover, they all remain interconnected in some way!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.78-4.05% (neutral)
UST 10yr Yield 3.56-3.86% (neutral)
UST 2yr Yield 4.15-4.60% (bullish)
High Yield (HYG) 73.09-74.56 (bearish)
SPX 4094-4245 (bearish)
NASDAQ 12,418-13,211 (bearish)
RUT 1 (bearish)
Tech (XLK) 156-170 (bullish)
Shanghai Comp 3155-3273 (bearish)
Nikkei 30,600-31,564 (bullish)
VIX 15.32-20.51 (bullish)
USD 102.74-104.71 (bullish)
EUR/USD 1.066-1.085 (bearish)
USD/YEN 137.50-141.12 (bullish)
Oil (WTI) 67.63-72.58 (bearish)
Gold 1 (bullish)
Copper 3.52-3.79 (bearish)
Bitcoin 26,015-27,867 (bearish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
