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Earlier today Keith and I were on the road visiting clients in FL and debating some noteworthy victory laps by several of our [bullish] competitors.

Unlike said competitors, our process doesn’t leave a ton of room for cherry-picking data. As you may know, we run a predictive tracking algorithm on every relevant data point from every relevant economy in the world. The goal of that algorithm is three-fold:

  1. To contextualize sequential deltas as accelerating or decelerating;

  2. To contextualize the trend in any given data set as accelerating or decelerating; as

  3. To determine if the absolute value of the latest data point(s) is at/near a probable mean reversion level.

With respect to “global PMIs”, the table below compiles GDP-weighted Composite PMI data in the context of the aforementioned process:

Global Growth Has Not "Bottomed" - Composite PMI Summary

With respect to said process:

  1. Global PMIs did indeed broadly accelerate on a sequential basis in OCT. That is positive for the global growth outlook. Good.

  2. Global PMIs are still broadly decelerating on a trending basis as of OCT. That is negative for the global growth outlook and implies that the aforementioned uptick is not sustainable – at least not yet. Bad.

  3. Global PMIs are still far from “bottoming” given the average and median percentile readings in the far right column. In fact, economies like the Eurozone, Japan and U.S. are far from “bottoming” given where the latest data points fall within their respective cycles. Not good.

With respect to #2:

  1. According to the JPM Global Composite PMI series, global economic growth is still decelerating on a trending and quarterly average basis (1st chart below). Bad.

  2. According to the JPM Developed Market Composite PMI series, DM economic growth is still decelerating on a trending and quarterly average basis (2nd chart below). Bad.

  3. According to the JPM Emerging Market Composite PMI series, EM economic growth is still decelerating on a trending and quarterly average basis (3rd chart below). Bad.

  4. According to the ISM Composite PMI series, domestic economic growth is still decelerating on a trending basis. Bad.

  5. In fact, when analyzing each individual country’s benchmark Composite PMI series, economic growth across the balance of G20 economies continues to decelerate on a trending and quarterly average basis (5th chart below). One month of good data does not a trend make. Bad.

Global Growth Has Not "Bottomed" - GLOBAL COMPOSITE PMI

Global Growth Has Not "Bottomed" - DM COMPOSITE PMI

Global Growth Has Not "Bottomed" - EM COMPOSITE PMI

Global Growth Has Not "Bottomed" - ISM COMPOSITE PMI

Global Growth Has Not "Bottomed" - G20 COMPOSITE PMI

In short, when considering the preponderance of the data, any “bottoming” call with respect to global growth:

  1. Blatantly disrespects the TREND in domestic and global growth data.

  2. Blatantly disrespects the absolute level of the data – especially considering that most investors who are now calling for a “bottom” failed to identify what was an obvious top back in early 2015.

  3. Blatantly disrespects the risk of incremental #StrongDollar debt deflation – almost in cavalier fashion, especially given that the unwind of a #WeakDollar global leverage buildup is what got us in this mess in the first place.

After having done about 30+ meetings all over the country since we introduced our Q4 Macro Themes in early October, Keith and I remain of the view that #3 is arguably the most misunderstood and mispriced risk across asset markets today.

We are the authors of this view and suspect that most equity and credit investors still fail to grasp what macro investors view as a simple concept: a rising U.S. dollar tightens financial conditions globally.

Ten-plus years of financial repression in the U.S. created 10+ years of commensurate financial repression across the global economy (to prevent “Dutch Disease”) – especially in emerging markets (namely China). Such easy financial conditions perpetuated the world’s largest stock of USD and local currency denominated debt and, as a result, unprecedented levels of global demand. Now that cycle is in the process of coming undone, just as every cycle before it.

Global Growth Has Not "Bottomed" - Global Dollar Tightening

Required reading on this subject:

  • Two Schools of Thought Part II (6/8/12): We continue to view a sustained breakout in the USD as the most asymmetric and contrarian outcome facing global financial markets over the long-term TAIL.

  • Emerging Market Crises: Identifying, Contextualizing and Navigating Key Risks in the Next Cycle (4/23/13): We currently see a pervasive level of risk across the emerging market space at the country level and have quantified which countries are most vulnerable. As such, we find it prudent for investors to reduce their allocations to emerging market equity and currency risk in favor of US equity and US dollar exposure. #StrongDollar and commodity price deflation have been and should continue to be key catalysts for EM underperformance.

  • Are You Prepared for #Quad4? (8/5/14): Developing quant signals and fundamental data are supportive of investors adopting a defensive allocation w/ respect to the intermediate term.

  • #EmergingOutflows Round II: This Time Is Actually Different (12/16/14): In the context of our expectations for European and Japanese monetary policy, we think the rally in the U.S. dollar – which, now more than ever, has a profoundly negative impact on EM asset prices and economic growth – has legs.
  • 1Q15 Macro Theme: #GlobalDeflation (1/8/15): Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds (TLT, EDV, ZROZ, etc.).·

  • Are You Prepared for a Deepening of the Global Earnings and Industrial Recessions? (10/22/15): Don’t be fooled by today’s price action in the DOW (which KM shorted into the close today). To the extent the ECB and BoJ incrementally ease monetary policy as our models suggests they will at some point over the next 2-3 months, the ongoing monetary policy divergence across G3 economies is likely continue perpetuating a severe tightening of credit conditions globally via a stronger U.S. dollar. Moreover, that is likely to perpetuate a deepening of the ongoing global earnings and industrial recessions.

  • 4Q15 Macro Theme: #GameOfSlowing (10/8/15): With the Street, IMF, World Bank and OECD all still forecasting global growth of around 3% for 2015, we find it appropriate to reiterate our call for global growth to come in at or below half that rate. Moreover, while China's August CNY devaluation effectively made our #EmergingOutflows theme a consensus bearish cog in the global economic outlook, we do not think investors are appropriately positioned for a likely trend of negative revisions to the respective growth outlooks in the U.S., Eurozone and Japan throughout the balance of the year.

Moving along, the more we are right on our #EuropeSlowing view, our view that Abenomics will fail to achieve “5% Monetary Math”, or our view that the BoE is poised to shift dovish in conjunction with a rising probability of a U.K. recession, the more we will continue to be right on our structurally bullish bias on the U.S. dollar. Despite our bearish view on the U.S. economy, we believe the Yellen Fed is too far out in la-la-land with respect to its “dot plot” and GDP forecasts to implement QE4 quickly enough.

Global Growth Has Not "Bottomed" - Dot Plot vs. Fed Forecasts

Moreover, the more we continue to be right on our structurally bullish bias on the U.S. dollar, the more we will continue to be right on our structurally bearish bias on inflation expectations and the respective growth rates of global capital expenditures, global leverage and EM consumer demand associated with said inflation expectations globally.

In short, the global economy might’ve recorded a few “green shoots” in OCT, but the TREND in global growth is decidedly lower with respect to the intermediate term.

We are hopeful that this late-night rundown of the "data" helps clarify any confusion our competitors may have caused. Yes, this is the same "data" some of them told you to "ignore" and failed to identify as slowing 6-9 months ago.

Keeping it real,

DD

Darius Dale

Director