This note was originally published
at 8am on May 01, 2014 for Hedgeye subscribers.
“Basically, I’m for anything that gets you through the night – be it prayer, tranquilizers, or a bottle of Jack.”
Sinatra was a beauty, but he wasn’t a risk manager. And prayer isn’t a risk management process either.
I get it. There’s no need to bring our respective religions into this discussion…
So every time you hear a consensus Old Wall economist tell you to ignore the 0.11% US GDP bomb for Q1 (and that this sucker is going to magically accelerate to 3-4% growth from here), drink.
Back to the Global Macro Grind…
Imagine being me for a second… This morning I’ll be doing Institutional Investor meetings in my 4th state in 4 days (IN, MN, CT, and NY), and I get to hear all of it. I’ll hear about what all of our competitors selling macro research think. I’ll hear how all these sell side economists knew it was “all about the weather” (but they didn’t know the number would be so bad)… and how everything is really ramping (even though the data isn’t) …
On and on and on it goes…
Empathize with me people! I’ll be like the US Dollar (on its YTD lows post Q1 GDP disaster) and get down on my bloody knees and pray for your forgiveness for having my team think for itself. I must repent!
Serious question - should I, like the bond market (yields falling to 2.66% on the 10yr as growth slows), beg thy overlord at The Fed for an un-taper too? Or will that have to wait until the weather stops being the weather in Alabama this morning?
Enough questions already. Time to show you the wood (US GDP data for Q114):
- As inflation accelerated in Q114, US GDP growth slowed, big time, to 0.11% (from 4.12% in Q3 of 2013 – that’s not just weather)
- Consumer Growth (focus of our bear #ConsumerSlowing call) slowed from 1.03% in Q313 to 0.08% in Q114
- Retail Sales Growth slowed from 2.45% in Q313 (when we were bullish on US growth) to 0.68% in Q114
- Fixed Investment (capex) got smoked back into its hole of negative -0.44% (vs +0.89% in Q313)
- Exports (which are supposed to magically rise when you burn your currency) dropped -1.07% (vs. +0.52% in Q313)
Pardon? (says the ragingly linear economist who missed last year’s US #GrowthAccelerating as both the US Dollar and rates rose too). Pardon the data, I guess – because it’s not cooperating with Keynesian academic dogma!
Before I get into more of the good stuff (data), consider the following relationships that are driving David (Blanchflower) @Dartmouth right batty right now:
- As the UK currency rips to new highs, UK manufacturing PMI (57.3 in APR vs 55.2 MAR) is accelerating
- As the US currency gets devalued to YTD lows, US Export demand is falling
Oh, and there’s this other thing going on in US Housing that Janet refuses to address:
- As rates fall, US Housing Demand is falling to fresh YTD lows (MBA weekly mortgage demand down another -5.9% this past week)
- But let’s not talk or write about that any further, because that’s a Q2 reality and it doesn’t fit the February weather excuse
Back to the tasty data that is both the US government and Fed’s definition of “inflation”:
- Allegedly, the GDP Deflator for Q1 was 1.3% (you subtract that from nominal GDP to get a real GDP #)
- But MIT’s Billion Prices Project read on inflation (much closer to ours) ripped to +3.9%
So, do the math. If America was using anything in the area code of a real world cost of living proxy (let’s say MIT academic thought is acceptable to a Princeton or Yale economist) US GDP for Q1 of 2014 would have been DOWN over 2%.
But since we’re not going to play a game of gotcha with conflicted and compromised US government data, let’s pretend for a second that it’s the 16th century again and we haven’t learned a damn thing about economic gravity.
Yep, let’s go all Copernicus on the Catholics of Wall Street forecasting, and suggest there is a solar system!
- Even if we use the Fed’s definition of CPI or PCE, inflation is going to accelerate against the easiest comps of the last 3 years (Q2 and Q3)
- When #inflationAccelerating happens in the data series, there’s a structural headwind to reported GDP (its math)
- So, there’s pretty much no way on this side of hell that 2014 GDP is going to be 3-4%, real
To get real, or nominal, remains the question. And as long as we can monitor all of our proxy baskets for US inflation (food, rents, energy, education, wages, etc.) in real-time, even a Mucker can model this in the 21st century.
But you don’t need to take my or a dead Polish dude’s (Nicholas Copernicus died in 1543) word for it. You can ask Mr. Macro Market:
- Currency market (USD Dollar) says growth continues to slow
- Bond market (long-end of the curve) says growth continues to slow
- Stock market (Russell 2000 as a proxy for growth expectations) remains down YTD
If you’re going to buy in May, please do more of what you should have been doing since January 1st – be it inflation protection (TIP), food commodities (DBA), or slow-growth-yield-chasers (XLU), it’s all working. If you have been buying Twitter (TWTR) the whole way down on the weather thing, drink.
Our immediate-term Global Macro Risk Ranges are now as follows:
UST 10yr Yield 2.63-2.73%
Natural Gas 4.61-4.85
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer