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McCullough: Why Our GDP Forecasts Are So Accurate

 

In this special excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough takes subscribers “behind the curtain” on our quantitative forecasting model and how we interpret and debate evolving economic data.


5 CHARTS: Fed Forecasters Flat-Out Wrong

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed forecast crystal ball

 

What do you call an economic forecasting outfit which continually calculates future economic growth and misses time and time again?

 

"Wrong"?

 

"challenged"?

 

...Certainly not "credible."

 

Whichever derivative of "inaccurate" you choose to use, they all apply to the Federal Reserve's economic modeling. Incidentally, it's funny that Fed prognosticators came out so strongly in favor of future rate hikes yesterday when they seemingly have no clue whatsoever about the direction of the U.S. economy.

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - Fed grasping cartoon 01.14.2015

 

Here are a few of the more shocking recent Fed governor comments that we simply couldn't ignore:

 

  1. “A rate hike could be appropriate, if the data is as expected.” –John Williams (San Francisco Fed Head, yesterday)
  2. The economy is offering mixed signals, but favors unemployment data.” –Dennis Lockhart (Atlanta Fed, yesterday) 

 

As Hedgeye CEO Keith McCullough pointed out in today's Early Look:

 

"Recently reported GDP of 0.5% isn’t in the area code of 'as expected.' I don’t think Williams has a lot of credibility as a Wall St. forecaster."

 

Meanwhile, Lockhart's Atlanta Fed updates its much-watched GDPNow estimate throughout the week. The measure seeks to project what recent data points mean for economic growth.

 

However, in the chart below, we show just how wrong that model has been over its lifespan (a.k.a. it has an intra-quarter standard error of 200-250 basis points!). Note: Our own GDP predictive tracking algorhythm has actually been, on average, within 20-30 basis points of getting the US GDP number right for the last 5 quarters (the historical standard error in our model is 35 basis points).

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - atlanta fed post

 

That's why we're deeply skeptical of the most recent GDPNow reading of 1.8% for Q2 2016. (Note: Applying the aforementioned standard error means Q2 GDP could be between -0.7% and 4.3%!)

 

Outside the Atlanta Fed's challenged algorhythm, Hedgeye Senior Macro analyst Darius Dale has peeled back the onion on the Fed's official GDP projections. Unsurprisingly, these unelected bureaucrats are both incorrect and serial over-optimists:

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed overoptimism

 

Similarly, back in October, we highlighted the absurdity of the Fed's forecasting in our 73-page Q4 Macro themes deck. Back then, the Fed was predicting the "longest economic expansion ever."

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - CoD Fed Optimism

 

Now, You might be wondering...

 

Can't the Fed simply turn dovish like last week's "no April rate hike" soothsaying?

 

No. Investors betting on the direction of rates had pushed the next hike into December of 2017.

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - Chart of the Day 4 20 normal

 

So what happens when the Fed admits they are wrong about growth (and Hedgeye's economic predictions prove correct)?

 

Frankly, it will be too late for the Fed to save the day.

 

Here's the selloff that occured during the last two downturns.

 

5 CHARTS: Fed Forecasters Flat-Out Wrong - fed post drawdown

 

As we continually reiterate, the biggest risk to macro markets is believing in the Fed's serially overoptimistic economic projections.


The Daily Macro Market Data Dump: Wednesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges as well as rates and bond spreads. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

Click to enlarge

 

The Daily Macro Market Data Dump: Wednesday - world equity markets 5 4

 

The Daily Macro Market Data Dump: Wednesday - s p sector 5 4

 

The Daily Macro Market Data Dump: Wednesday - volume 5 4

 

The Daily Macro Market Data Dump: Wednesday - hedgeye rates   spreads


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This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

A Precarious Global Growth Setup

Takeaway: U.S. GDP sliding toward zero, Europe struggling with deflation, Japan still flailing as China releases phony (but declining) growth numbers.

 A Precarious Global Growth Setup - stop sign

 

in case you missed it, We'll say it again ... Global growth IS slowing

 

The evidence is obvious to even casual observers by now. U.S. GDP continues its slow slide toward zero, Europe is struggling to beat back deflation, Japan is desperately flailing just to stay afloat, while the Chinese politburo releases phony, albeit still declining, growth numbers.

 

As a result... surprise > global equity markets are getting hammered.

 

Below is equity market analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers this morning:

 

"Buckle in Europe and Japan, that is… most European stock markets signaling immediate-term oversold but Euro not obeying overlord Draghi up at $1.149 this am; European Equities remain in crash mode from last year’s Global Equity Bubble highs; Spain now -26.3%  since this time last year w/ an election (for socialism) pending June 26."

 

 

Heading over to China... 

 

A spate of new reports shines light on the complicated situation evolving in everyone's favorite Communist country.

 

 

In related news, the China Securities Journal noted this morning, "Bad loan ratios rising at majority of Chinese banks in Q1." Meanwhile, Reuters noted the obvious, "Investors to remain wary of China for now."

 

Here's how all of this manifested in Chinese equities today. Spoiler Alert: It's not good.

 

 

it raises serious alarm bells For growth.

 

It also partly explains why Dr. Copper is down yet again this morning despite the recent reflation rally. (Incidentally, we've been warnings subscribers about global #GrowthSlowing for about a year and a half now.)

 

 

The slowdown in China is also handicapping the Australian economy, hence the Reserve Bank of Australia’s decision to cut interest rates to a record low 1.75%.

 

Nice.

 

(Yes, we're highly skeptical the Aussie central bank's efforts will yield fruit.)

 

 

A final rhetorical question... 

 

When global growth slows, what do you own?

 

That's simple... Long Bonds (TLT)

 


A Brief Update On Our Nasdaq Short Call

Takeaway: The Nasdaq is down -3.1% year-to-date and off -8.7% from it's all-time bubble high in July.

A Brief Update On Our Nasdaq Short Call - Bubble bath 9.9.14 large

 

Below is analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:

 

"I’m done apologizing for adding Nasdaq to our bearish US Growth Equity call on March 31; it was a battle, but month-over-month the Composite Index is -3.1% (SP500 is -0.2%, not up, so chart chasers are having some issues on the long side here); Big Cap Tech in a dead heat with Financial (XLF) and Healthcare (XLV) for worst S&P Sector YTD."

 

 

Notice the dead heat for last place in the year-to-date performance scorecard below (i.e. XLF, XLV and XLK):

 

A Brief Update On Our Nasdaq Short Call - sector update 5 4


CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... Given that a recently reported GDP of 0.5% isn’t in the area code of “as expected”, I don’t think Williams has a lot of credibility as a Wall St. forecaster. But Lockhart’s Atlanta Fed actually has a “GDP Now” tracking model (that has recently had an intra-quarter standard error of 200-250 basis points!) that is NOT mixed. It’s flat out bad. So he’s “favoring” non-GDP data."

 

CHART OF THE DAY: Fed Growth Predictions = Pure Poppycock - 05.04.16 chart


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