AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM?

Takeaway: Commodity deflation has provided and may continue to provide a stimulus to the still-fragile global economy.

SUMMARY BULLETS:

  • From the right PRICE, pending our quantitative signals, you could see a positive revision(s) to our global GROWTH  expectations with respect to the intermediate-term TREND, as further deflation of food, energy and raw materials prices provides an economic stimulus via disinflation in actual consumer and producer prices.
  • You’re seeing this potential GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total). Broadly speaking, the service sector continues to outperform manufacturing, as it has done since mid-2011. We portend this is largely a function of the decline in commodity prices over that period (consumption tailwind and commodity-related capex declines).
  • Aside from the necessary PRICE, VOLUME and VOLATILITY signals, what would get us really bullish on “risk assets” from here? More of the same. The less global financial markets have to react to the conflicted and compromised whims Bernanke, Geithner, Obama, Pelosi and Boehner, the more we are likely to see further upside in the USD and further downside across the commodities complex.
  • Additionally, “VIX-15” and an asymmetrically stretched bull/bear sentiment spread (in favor of the bulls) remain key contrarian indicators to intellectually wrestle with at the current juncture. Investors are broadly bullish and/or complacent, so it’s likely that some degree of improving global economic fundamentals is priced in.
  • In grossly uncertain times like these, it’s best to double-down on your process (assuming it is effective); in that light, we will continue to manage the risk of the ranges across a variety of securities and asset classes, with an keen eye for potential breakouts in light of the aforementioned global economic scenario.

Be it Deflating the Inflation (2Q11), Bernanke’s Bubbles (2Q12) or Bubble #3 (4Q11), we have been consistently and appropriately making bearish cyclical calls on the commodities complex over the past 18-24 months, with the latter theme extending our view to the TAIL duration as well. For the record, the CRB Index is down -17.7% since the start of 2Q11 and down another -4.3% quarter-to-date.

From the right PRICE, pending our quantitative signals, you could see a positive revision(s) to our global GROWTH  expectations with respect to the intermediate-term TREND, as further deflation of food, energy and raw materials prices provides an economic stimulus via disinflation in actual consumer and producer prices.

AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM? - 1

Additionally, it just so happens that our baseline GIP model (driven by predictive tracking algorithms) is now pointing to a directionally positive economic environment over the intermediate term as new global GROWTH data has rolled in over the past few weeks.

AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM? - 2

You’re seeing this potential GROWTH pickup confirmed across a large swath of PMI readings (we track 31 in total). For the month of NOV, the median PMI reading came in at 51.4, up from 50.4 in OCT; the median sequential delta for the month came in at +0.5 percentage points. Broadly speaking, the service sector continues to outperform manufacturing, as it has done since mid-2011. We portend this is largely a function of the decline in commodity prices over that period (consumption tailwind and commodity-related capex declines).

 

AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM? - 3

 

AMID RECESSION FEARS, COULD GLOBAL GROWTH SURPRISE TO THE UPSIDE OVER THE INTERMEDIATE TERM? - 4

Aside from the necessary PRICE, VOLUME and VOLATILITY signals, what would get us really bullish on “risk assets” from here? More of the same. The less global financial markets have to react to the conflicted and compromised whims Bernanke, Geithner, Obama, Pelosi and Boehner, the more we are likely to see further upside in the USD and further downside across the commodities complex.

That’s a better, more sustainable bull case than the current one which largely consists of corporate management teams [potentially] levering up to pay “special dividends” and mass layoffs.

That being said, it remains to be seen whether or not an arrest of central planning is possible – especially with the Keynesian Cliff (Fiscal Cliff and Debt Ceiling domestically) hanging in the balance. For our latest deep-dive thoughts on this topic, please refer to our 11/16 note titled: “DEBT CEILING UPDATE: WILL SANTA’S SACK BE FILLED WITH COAL?”.

Additionally, “VIX-15” and an asymmetrically stretched bull/bear sentiment spread (in favor of the bulls) remain key contrarian indicators to intellectually wrestle with at the current juncture. Investors are broadly bullish and/or complacent, so it’s likely that some degree of improving global economic fundamentals is priced in.

In grossly uncertain times like these, it’s best to double-down on your process (assuming it is effective); in that light, we will continue to manage the risk of the ranges across a variety of securities and asset classes, with an keen eye for potential breakouts in light of the aforementioned global economic scenario.

Darius Dale

Senior Analyst