This note was originally published at 8am on April 16, 2014 for Hedgeye subscribers.
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!
Nothing besides remains. Round the decay
Of that colossal wreck, boundless and bare
The long and level lands stretch far away.”
The excerpt above is from one of my favorite poems, “Ozymandias”, written by Percy Shelley. As you might have been able to decipher, the poem (well sonnet really) is about the inevitable decline of all leaders and the empires they build based on personal pretensions to greatness.
The economic and military history of the world is replete with examples of great empires that have been built and then suffered decline. The most notable to us in the west is likely the British Empire, and rightfully so. At its peak the British Empire covered more than 13,000,000 square miles, or ¼ of the earth’s surface.
The second largest empire in the history of the world was the Mongol Empire. The origins of the Mongol empire were admittedly modest and started when a young boy named Temujin vowed in his youth to bring the world to its feet. Genghis Khan, as he would later be known, did that and more. The Mongol empire, although almost impossible to manage, stretched from Vietnam to Hungary and was the largest contiguous empire in history.
In modern days, empires are more commonly measured by economic output. Currently, the top three economic empires in the world are the United States with a $16.8 trillion GDP, China with a $9.2 trillion GDP, and Japan with a $4.9 trillion GDP. Collectively, these behemoths make up almost 40% of the global economy.
If history tells us anything, to the point of Shelly’s sonnet, emperors will decline. Or as a quant might say, revert to the mean. The challenge for us as stock market operators is to find opportunities in this tectonic economic shift and to be on the right side of global economic empire building and subsequent declines.
Back to the global macro grind . . .
The mighty empire of China reported some critical economic numbers last night. My colleague Darius provided a quick summary of the results below:
- APR MNI Business Indictor: 51.1 from 53.4… G -1
- 1Q Real GDP: 7.4% YoY from 7.7% vs. a Bloomberg consensus estimate of 7.3%... G -1
- QoQ: 1.4% from 1.7% vs. a Bloomberg consensus estimate of 1.5%
- MAR FAI: 17.6% YoY from 17.9%... G -1
- MAR Retail Sales: 12.2% YoY from 13.6% in DEC (most recent release)... G -1
- MAR Industrial Production: 8.8% YoY from 9.7% in DEC (most recent release)… G -1
As you can see from his short hand notation, “G -1” (growth decelerating), broadly speaking the data was incrementally bearish for growth.
In the Chart of the Day, we take a look at year-over-year Chinese growth by quarter going back ten years. As the chart highlights, it is really no secret that Chinese growth has been declining and also no surprise that the Chinese stock market is basically shrugging off the data this morning.
Most pundits are now vocal on the fact that Chinese growth has slowed and is slowing. Meanwhile, Chinese policy makers are of the view that this is the bottom in China’s economy (in as much as an economy growing 7%+ can be considered bottomed). Given that policy makers have the ability to stimulate and an early, inside look at the data, at a minimum, we’d probably not short China here.
Or as Genghis Khan said:
“If you’re afraid – don’t do it, if you’re doing it don’t be afraid.”
Speaking of being afraid, what scares me and should scare most stock market operators are the mysterious projections that many strategists of the Old Wall come up with. As an example, yesterday we took a look at the projections for real GDP growth in the U.S. From Q2 2014 to Q2 2015 the real GDP quarterly growth rate is projected as follows:
- Q2 2014 – 3.0%
- Q3 2014 – 3.0%
- Q4 2014 – 3.1%
- Q1 2015 – 3.0%
- Q2 2015 – 3.0%
Clearly, Herding 101 was a well attended class by most of these sell side economists in PH.D. school . . .
We are not ready to call for the decline in the United States economic empire just yet, but we are wise to note that the Emperor, namely the U.S. dollar, continues to weaken and, in our view, is likely front running a more dovish tone by the Fed. In that vein, the U.S. 10-year yield is down again this morning (albeit small) as well after failing to participate in the late day, low volume exuberance in equities yesterday.
For those of you that do watch the Fed closely, Grandma Yellen, I mean Chairperson Yellen will be speaking at 12:15pm this morning in beautiful New York. Our friends at Goldman Sachs are out this morning saying it will be pertinent to interest rates, and the market seems to be agreeing with (or maybe front running) that view.
Finally this morning on the inflation front, and this is a point we highlighted in our recent themes deck, we are starting to see some tightness in the labor market. According to an article from Bloomberg, businesses in some US cities are raising wages and adding benefits to attract employees as metropolitan jobless rates have fallen below the 5.2% to 5.6% level considered full employment. The article noted that 49 of the 372 metro areas reported rates below 5% in February, while four years ago just two cities were below that level. This has the potential to build what we call #StructuralInflation and it is prudent to keep your hedgeyes on this trend.
Our immediate-term Global Macro Risk Ranges are now:
Good luck empire building today!
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research