Conclusion: Given both economies' leading-indicator status, the latest Hong Kong and Singapore manufacturing and trade data is likely to be a canary in the coal mine that it won’t ultimately pay to ignore. Furthermore, an introduction of QE3 from current levels of inflation may send the global economy into a recession on a real-adjusted basis, given current low levels of economic demand.
Positions: Short U.S. Equities (SPY); Long the U.S. Treasury Curve Flattener (FLAT); Long 20+ Year U.S. Treasuries (TLT)
When we look for read-throughs on where U.S. and E.U. demand might be 3-6 months for now, we don’t take corporate America’s word for it, largely because: a) most corporate executives don’t have a Global Macro process to accurately forecast inflection points and deltas within the economy; and 2) they rely heavily on both consensus and gov’t forecasts, which we’ve shown to be incredibly inaccurate at the turns of 2008 and 2011.
Take CAT, for instance, whose earnings and guidance yesterday got a lot of equity bulls horned up (pun intended). This is the same CAT that in 2Q08 raised both revenue and earnings to the high end of each guided range – six months into the deepest t U.S. recession since the Great Depression! Without explicitly stating that this time is or isn’t different, the point remains the same: using the wrong sources can lead one to a dramatically incorrect conclusion.
Is the Global Growth Slowdown Accelerating?
As it relates to Hedgeye’s sources for the outlook for global growth, a great deal of our signals stem from how securities and asset classes trade relative to their quantitative setups. “Last price” rules. In addition to market-based data, we’ve figured out where to mine for some of the more prescient economic data globally.
To that effect, Singapore and Hong Kong trade and manufacturing data remain some of the better forecasters in all of Global Macro. We use them as front-runners for the slope of global growth given that they are arguably the world’s two most trade-heavy economies.
It’s beyond trivial to state that the stuff Asia makes and ships all over the world winds up being consumed by consumers on a 1-3 quarter lag. Consumers can’t consume what hasn’t first been produced and shipped to them. This common sense relationship is what makes Asian trade and production data invaluable as leading-indicators of the global demand cycle. As we’ve highlighted in previous notes (Nov. 2010: Slowdown in SE Asia: A Leading Indicator For Global Growth?; Jan. 2011: Asian Trade Data Exposes Façade of U.S. Growth):
- Exports account for roughly 40-45% of Asia’s GDP in aggregate;
- The U.S. and E.U. combine for roughly a third of Asia’s export destinations; and
- 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region, increasing the U.S. and E.U. share of Asian exports to somewhere closer to 2/3rds.
Going back to our two favorite leading-indicators (Singapore and Hong Kong) specifically, consider the following metrics pertaining to the openness of both Singapore and Hong Kong:
- As of 2010, exports of goods and services accounted for 211% of GDP in Singapore and 223% of GDP in Hong Kong (both ratios completely dwarf other trade-heavy Asian nations: Japan at 13%, China at 29%, S. Korea at 50%, and Thailand at 71%);
- Per the latest available data from the American Association of Port Authorities, Singapore and Hong Kong are home to the world’s busiest and third-busiest shipping ports, with 25.9 and 21.0 thousand TEUs, respectively; and
- Given their setups as trade hubs, both economies account for a disproportionate share of global exports relative to their share of global GDP (Singapore at 6.7x and Hong Kong at 7.2x, which compares to 1x for China, just under 2x for S. Korea, and ~2.5x for Thailand).
Unfortunately, neither economy is cooperating with the V-bottom melt-up in equities globally since Keith made another Short Covering Opportunity call on October 4th. This morning, we received not one, but two ominous data points out of both economies:
- Hong Kong export growth slowed to -3% on a YoY basis in September. This is the first yearly decline since October ’09 and is eerily reminiscent of when the territory’s export growth went briefly negative on a YoY basis in June of 2008; and
- Singapore’s YoY industrial production growth got halved in September, falling from +22.8% to +12.8%. The slowdown was driven by continued weakness in electronics production (-26.5% YoY vs. -21.9% prior).
This data rhymes with the recent string of nasty trade and production data we’ve seen out of both economies:
- Singapore’s non-oil domestic export growth slowed in September to -4.5% YoY vs. +3.9% prior and, like Hong Kong, this was the first yearly decline since October ’09;
- Singapore’s manufacturing PMI ticked down in September to 48.3 vs. 49.4 prior – the lowest reading since March ’09; and
- Hong Kong’s manufacturing PMI also ticked down to a multi-year low in September: 45.9 vs. 47.8.
It is data points like these that have proven instrumental to us maintaining our conviction in our various Global Growth Slowing research calls amid the forceful counter-trend rallies of 2008 and 2011. For those investors who remain long-term enough to look past the short-termism and irrational expectations associated with this latest rally, we think the trend in equities as an asset class remains negative over the intermediate term.
Will QE3 Send The Global Economy Into Recession?
As recently as yesterday, there was a great deal of speculation surrounding the prospect of the Federal Reserve perusing incremental forms of monetary easing. Our omission of the word “stimulus” is highly appropriate. Recall in our November 2010 note titled, “Chinese Inflation Data Confirms What We Should Already Know: QE2 Will Slow Global Growth” we published a simple, common sense equation that was being grossly misunderstood by many market participants at the time:
Quantitative Guessing = inflation [globally] = monetary policy tightening [globally] = slower growth [globally]
Inflation readings on a global basis were much lower in August of 2010 when QE2 was announced. Now, with global CPI readings elevated on an absolute basis, we think it’s worth flagging the risk that a pickup in inflation from current levels might completely eradicate what little real GDP growth is left – particularly in the developed world.
It’s important to remember that real GDP is simply the difference of nominal GDP less the GDP deflator – a commonly-obfuscated measure of inflation. If the Fed chooses to further inflate global GDP deflator readings from current levels without a commensurate pickup in demand (see analysis above), we could potentially be entering a scenario whereby global growth becomes negative on a real-adjusted basis.
That is a key risk to consider coming off the hopeful melt-up we’ve just witnessed.
Our updated analysis continues to leave us with the conclusion that any form of QE3 is likely to be a 2012 event (if at all), and from much lower prices – both market (S&P 500) and consumer (headline and core CPI). Moreover, some deterioration in the labor market – of which we’ve had none YTD – is likely necessary given their dual mandate.
This doesn’t preclude Chairman Bernanke and his ultra-Keynesian Fed-head cronies (Bill Dudley of New York and Chuck Evans of Chicago) from hinting at or even jumping the gun and perusing additional measures of quantitative easing. If they do decide to buck the mounting rhetorical resistance emanating from the political right, they risk completely wiping out any U.S. real GDP growth heading into a pivotal election year – an outcome that is likely to have a disastrous effect on Obama’s chances of reelection.
As Keith has penned many-a-time in his Early Looks, just because you think a bureaucrat won’t do something, doesn’t mean he/she won’t try. Their incessant trying [to get re-elected and re-appointed] remains one of the largest headwinds to structural organic economic growth over the longest of long terms. Just as politicians get paid to politic, central bankers get paid to central bank and it’s important to avoid overlooking this very simple concept.