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“Archaic humans did not initiate any revolutions.”

-Yuval Noah Harari

And archaic economists certainly didn’t initiate an ability to call economic slow-downs, market crashes, or recessions in the last 20 years. As you know, the Federal Reserve hasn’t proactively predicted ANY recessions over that time span, and Old Wall consensus macro missed calling 3 US economic cycle peaks in a row (2000, 2007, and 2015).

Yes, you can become Trump style you-ge! on Wall Street by selling people who are in the business of being long reasons to be bullish. You just need to keep changing the reasons. It’s actually a good business. So is selling porn. As Harari reminds us in Sapiens, “the ability to create an imagined reality out of words enabled large numbers of strangers to cooperate.” (pg 32)

After doing an entire day of meetings with Institutional Investors in New York City yesterday, I realized that the same group of people who dismissed our Industrial #Recession call as “being a small part of the economy” are now hanging their entire bull case on industrials, PMIs, etc. “bottoming.” In other news, Costco (consumption side of the economy) comped 0% in February.

Establishment Economists - 4  growth cartoon 03.02.2016

Back to the Global Macro Grind

“Phew” wrote Nancy Lazar, “the US economy appears to be picking back up.” Thank goodness for that, eh? Let’s pass that note around to all the bottom-up “value” stock pickers who have been getting crushed for the last 3-6 months. They’ll feel relieved.

Was it the new cycle low in US Consumer Confidence of 92.2, a 17-month low in growth in signed contracts for Pending Home Sales, the Markit Services PMI going sub-50 for the 1st time since 2009, or the Russell 2000 crashing in February that revealed that the 70% of the economy that really matters isn’t slowing from its cycle peak?

Just to knock down the pins on our views vs. the same economist who was looking for what “felt” like 4% US GDP growth in 2015, here are my Top 3 rebuttals to her very huge and excellent perma bull research note yesterday:

  1. “A pick up in US real consumer spending” – as you can see in the Chart of The Day, everyone and their brother/sister who does macro math should know by now that Real Consumption Growth was great at last year’s cycle peak of 3.32%; in rate of change terms the top is in; saying it’s “picking up” vs. the cycle peak is an obfuscation of the bigger picture
  2. “A rebound in construction spending” – as you all know (see our bullish research on US Housing for all of 2015), Autos & Housing aren’t “rebounding” – they’re slowing from their 2015 rate of change cycle peaks. For details see YTD returns for fund managers who are levered long GM, Ford, and Housing stocks (or the recent Pending Home Sales report of -1.4% y/y)
  3. “The lagged impact of lower oil prices” – that one is my favorite. Remember that one? Ed & Nancy (different firms now - they broke up) would write that every other week at the all-time #bubble high for US stocks in July of 2015 – “low gas prices” are going to create rainbows and puppy dogs for as far as the eye can see. Isn’t the new bull case “rising gas prices” btw?

Nancy also likes what all #LateCycle labor economists (like Janet Yellen) like to see, which is “solid employment growth” – which, by the way, you always see at the END of a US economic cycle.

Tomorrow, that’s actually the catalyst for the real bulls on Wall Street (the Long Bond and Utilities Bulls) – yet another rate of change slow-down in US Non-Farm Payrolls (NFP) from its FEB 2015 Labor Cycle PEAK of +2.34% growth.

To give Nancy some credit, she did mention that the “foreign backdrop remains a headwind… pulling down Global PMI to 49.8, the lowest level since early 2013.” The problem with that truth is that her partner Francois Trahan has been calling for PMIs to “bottom” globally since US and Japanese Equities peaked in July!

It’s not “mean” to call out Establishment Economists and hold them to account for their research views. God knows, The People can’t afford the Old Wall missing it again. I’d be more than happy to debate any economist in an open forum, anywhere, any time. If we want to evolve as a profession – if we really “want America to be great again” – we really need to have these debates!

Since the best macro exposures you could have been long for the last 2-3 weeks (during the slow-volume squeeze after hedge funds shorted the YTD lows) are precisely the ones that ruined most portfolio returns for the last 6-8 months, I have no doubt that people who are in the business of being bullish are going to be looking for “the economy to be picking up”…

Reality is they aren’t highlighting the most important things at this stage of The Cycle (the profit cycle and the credit cycle). Instead, they’re cherry picking one-off data points that are actually still slowing in trending (year-over-year) rate of change terms.

With S&P Earnings down -8.2% year-over-year (that’s a non-GAAP number, the real # is down double-digits on a percentage basis), High Yield Spreads > historical mean, and Long-term Bond Yields hovering around all-time lows (1.86% UST 10yr is -41bps YTD), the most forward looking and accurate economist I know (Mr. Market) still sides with my team - not Nancy, Ed, and Francois.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.65-1.87%


VIX 16.99-24.13
EUR/USD 1.08-1.12
Oil (WTI) 28.93-35.66

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Establishment Economists - 03.03.16 chart