Editor's Note: The Early Look below was written by Hedgeye CEO Keith McCullough one week ago. It discusses how "large components of the US economy already in a recession" and why "the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3." Click here to get the Early Look delivered in your inbox weekday mornings.
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“It meant being reasonable, tolerant, honest, virtuous, and candid.”
As I push into my early 40s, I’d like to think a Gentlemanly Bear can be thought of that way inasmuch as a Gentlemanly Bull can be. After all, sometimes (when GDP growth is slowing) gentlemen prefer being bullish on long-term bonds!
In the latest history book I’ve cracked open, Revolutionary Characters, Gordon Wood used the aforementioned characteristics to describe America’s Founding Fathers. How well do you think they describe your economic, profit, or credit cycle resources?
Or are we all partisan now? Rate of change isn’t partisan. It’s honest math. And I think being candid about it accelerating or decelerating is, as Wood wrote, “an important 18th century characteristic that connoted being unbiased and just as well frank.” (pg 15)
Back to the Global Macro Grind…
Yesterday we received more intermediate-term TREND (not to be confused with monthly or sequential immediate-term TRADE head-fakes) confirmation that the US economy is indeed well past the peak of the cycle:
- Having peaked at +3.8% y/y in JAN 2015, Real Consumer Spending was revised down -30bps to +2.6% growth for JAN 2016
- Having peaked at +13.1% y/y in APR 2015, US Pending Home Sales slowed to 0.7% year-over-year (y/y) in FEB of 2016
Sure, a growth bull might say “but, the consumer and housing are still strong parts of the US economy”… but a gentlemanly rate of change person like me would correct them by reminding them that rates of change continue to slow from their respective cycle peaks.
On economic cycle matters, saying things are “good” or “bad” means absolutely nothing to us; measuring and mapping whether things are getting better or worse is what matters most. We’re very reasonable and tolerant about all 2nd derivative debates.
While Real Consumer Spending isn’t crashing into a #Recession (that was never our call), there are large components of the US economy already in a recession (no you can’t “back out” Energy, Industrials, Cyclicals, Financials, etc.). That’s why:
- US Long-term Treasury Yields have dropped from 2.27% at the start of 2016 to 1.87% this morning
- The Yield Spread (10yr minus 2yr Yield) is right around cycle lows at 100 basis points wide
- High Yield Spreads remain elevated and rising (above the recessionary signal of its historical mean)
Yes, the commercial and industrial (C&I) side of the economy matters inasmuch as the consumption and real estate cycle will if these rates of change in both consumer spending and housing demand continue to slow.
By the time it’s all slowed to cycle lows, you start buying again.
Let me say that differently. If you’ve been positioned properly for the last 3-6 months (instead of last 3-6 weeks), once the entire cycle has slowed to its slowest rate of change, you’ll actually start selling what you already own:
- Long-term Treasuries (TLT) = +7.8% YTD
- Utilities (XLU) = +12.6% YTD
- Gold (GLD) = +15.1% YTD
And then you’ll probably start buying the classic #LateCycle things (lower) that you shouldn’t have owned from last year’s cycle peak (note: all 3 of these US Equity Style Factors have underperformed Energy YTD – so you definitely don’t want to “back out” Energy):
- Consumer Discretionary (XLY) = -0.3% YTD
- Financials (XLF) = -6.1% YTD
- Healthcare (XLV) = -6.7% YTD
I know. I know. The YTD performance isn’t “as bad” as this Gentlemanly Bear sounds. But, as you know, staring at a month-end markup performance snapshot can be very risky. Remember “stocks” ramped +6% from the FEB low to MAR 2008 high too…
Again, not that things being “bad” matter as much as things getting better or worse do. But wow is this Atlanta Fed “GDP Now” model getting ugly. How a GDP “forecast” goes from +2.7% GDP only a month ago to +0.6% today is beyond me, to be quite frank!
We’re sticking with what was the Street’s low Q1 US GDP forecast of 1% (our predictive tracking algorithm and mapping/measurement #process has been accurate, within 25-50 basis points, on GDP for the last 5 quarters – without the 200bps intra-quarter swings!).
And, more importantly, we’re reiterating that the US economic and profit cycle won’t even have a chance of putting in a rate of change (cycle) bottom until Q2 which, candidly, won’t be reported until Q3.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.84-1.97%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer