Vive la France! (Well, Not So Much)

Takeaway: It's a big, stinky mess in France and the rest of Europe. It's not going to get better any time soon.

In case you missed it ... France officially joined the laundry list of crashing equity market casualties this morning.


Some brief analysis from Hedgeye CEO Keith McCullough in a note sent to subscribers earlier this morning:


"European stocks had their bear market bounce last wk (EuroStoxx600 +3.2% on the wk), but have given back a large % of those gains already this week and mostly remain in crash mode, with France’s CAC40 re-entering that risk zone at -1.7% this am (-20.5% from the 2015 Global Equity #Bubble high); Spain -2% to -32% from its 2015 cycle high."


Vive la France! (Well, Not So Much) - Stocks crash test dummies cartoon 02.18.2016


 To be clear, we don't believe the worst is over. Not only in France, but across Europe.

CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields

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. 


"... Whereas, both Long-term Sovereign Bonds and their equity market proxies did the following:

  1. US Treasury 10-year Yield dropped another -12 basis points on the week to 1.44% (down -83bps YTD)
  2. UK 10-year Yield crashed another -22 basis points on the week to 0.86% (down -110bps YTD)
  3. Germany’s 10yr Yield dropped back to negative, falling -8bps on the week to -0.13% (down -76bps YTD)
  4. Japan’s 10yr Yield fell another -8 basis points on the week to -0.25% (down -52bps YTD)
  5. Low Beta US Equities ramped another +3.7% on the week to +14.0% YTD
  6. High Yield US Equities added another +3.1% on the week to +7.4% YTD
  7. MSCI REITS Equity Index rose another +4.3% on the week to +11.5% YTD
  8. US listed Utilities (XLU) added another +3.7% on the week to +21.3% YTD

*for 5 and 6, that’s the mean performance of Top Quintile vs. Bottom Quintile SP500 Companies"


CHART OF THE DAY: The March To All-Time Lows In Sovereign Yields - 07.05.16 Chart

REPLAY! This Week On HedgeyeTV

Our deep bench of analysts take to HedgeyeTV every weekday to update subscribers on Hedgeye's high conviction stock ideas and evolving macro trends. Whether it's on The Macro ShowReal-Time Alerts Live or other exclusive live events, HedgeyeTV is always chock full of insight.


Below is a taste of the most recent week in HedgeyeTV. (Like what you see? Click here to subscribe for free to our YouTube channel.)




1. McCullough: Gold Loves Blowup of Central Planning Belief System (7/1/2016) 



In this excerpt from The Macro Show today, Hedgeye CEO Keith McCullough lays out the bullish case for gold and highlights some disconcerting central planning statistics in Europe.


2. McCullough: Shameful Big Bank ‘Buybacks’ (6/30/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough exposes the ridiculousness of big bank stock buybacks and enablers at the Fed.


3. A Brief Primer On Our Bull Case For Long Bonds (6/29/2016)



In this excerpt from The Macro Show earlier today, Hedgeye Senior Macro analyst Darius Dale lays out the bull case for Long Bonds (TLT) and explains why consensus has completely missed it.


4. Global Brexplosion | About Everything with Neil Howe (6/29/2016)



In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses last Thursday's Brexit vote and the broader implications for investors. "By failing to tear down and rebuild such hapless and dysfunctional institutions as the European Union, political leaders have left electorates few options other than total disruption," Howe writes.


Click here to read Howe’s associated About Everything piece.


5. Fantasy Land! A Look at This “Final” GDP Report (6/28/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough rips apart the government’s latest GDP calculation. “You couldn’t make this up if you tried,” said McCullough. “And you wonder why people are getting upset with the establishment and the making up of numbers.”


6. McCullough: Crash Goes The Pound (6/27/2016)



In this brief excerpt from The Macro Show this morning, Hedgeye CEO Keith McCullough weighs in with his unique take on the beleagured U.K. currency.

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About Everything: The Global Economy Gears Down

Even Before Brexit, Global Growth Was Decelerating.


Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses lackluster global growth and the IMF's continually downgraded GDP forecasts. 


About Everything: The Global Economy Gears Down - dead flower


Shortly before the Brexit vote, the International Monetary Fund (IMF) warned that a British exit could cut U.K. GDP growth by 0.8 to 3.0% in 2017. In the following year, 2018, it projected that Brexit would cut rest-of-EU GDP by 0.2 to 0.5% and rest-of-world GDP by 0.0 to 0.2%.


No news there: Few imagined that Brexit would be a stimulant. What’s less widely known is that the global economy was slowing down well before it entered the Brexit sand trap.


According to the IMF, GDP growth shrank from 5.0% in 2010 to 3.1% last year. The World Bank reports that global GDP growth fell from 3.8% in 2010 to 2.4% last year. The brief re-acceleration in 2014 kindled momentary optimism and then disappeared. Emerging markets and developing economies (EMDEs) have fared the worst, with growth sliding almost every year, while advanced economies have been zig-zagging well below 2% growth for years now. (The IMF and World Bank global growth rates don’t match due to the different ways they weight national GDPs.)


About Everything: The Global Economy Gears Down - chart 2


About Everything: The Global Economy Gears Down - chart 3


Current-year forecasts are marred by negative surprises. The latest IMF projection pegs global growth in 2016 at 3.2%—down from an earlier 2016 projection of 3.4% in January and 3.8% last year. The World Bank’s 2016 projection of 2.4% has likewise shriveled— from 3.2% in January and 3.5% last year.


If this strikes you like a quarterly earnings forecast (where the quarter gets uglier the closer it gets), you’re on to something.


In fact, over the past decade, these highly compensated, D.C.-based bureaucrats have consistently chosen to revise their predictions downward. Back in 2010, when the IMF took its first stab at growth figures for 2015, the estimate (+4.6 percent) came in at nearly double the final figure. 


About Everything: The Global Economy Gears Down - chart 4


About Everything: The Global Economy Gears Down - chart 5


This pattern means that, as disappointing as the 2016 projection looks today, the final number will probably come in even lower.


Not surprisingly, the IMF year-ahead odds of recession have been rising since April of 2015 in nearly every region except Emerging Asia (where it remains zero). Since Latin America is already in a recession, that one is an easy call.


About Everything: The Global Economy Gears Down - chart 6


If you don’t trust national accounting and prefer to look at the activity reported by firms, the picture you get is pretty much the same. Take a look at Markit’s Global PMIs: You see a dip in 2012, a peak in 2014, and decline thereafter. Indeed, Global Manufacturing now teeters on the edge of contraction.


About Everything: The Global Economy Gears Down - chart 7


The high-income economies haven’t exactly surged over the past five years—but they haven’t done too badly, either. Back in 2012 and 2013, both the Eurozone and Japan were moving in and out of recession. Today, at least for now, they’re out. According to the World Bank, GDP growth in these regions did pick up in 2014, rising from 1.3% to 1.8% (about where it was last year). Real import growth and real investment growth have been trending up since 2012.


Labor conditions are also improving in most advanced economies—most notably the United States. According to the most recent BLS Employment Situation Summary, the U.S. unemployment rate took its first big step downward in months, hitting 4.7% in May.


Other indicators are less encouraging. The IMF reports that headline inflation in advanced economies averaged just 0.3% in 2015, the lowest level since the recession. Long-term interest rates have been on a downward slide for years. Ten-year bond yields are now well below 2% in the United States and—post-Brexit—heading below zero in Germany and Japan.


Unfavorable demographics has constrained high-income GDP growth in recent years and will constrain it further in the future. According to the U.N. Population Division’s medium growth variant, the working-age populations of Japan and most European nations have already peaked and will decline at gathering speed in the decades to come.


While the developed world is speeding up slightly, the EMDEs as a whole is slowing down sharply. Unlike in advanced economies, rates of real import growth and real investment growth have been falling in EMDEs since 2010 and are now approaching recession levels.


About Everything: The Global Economy Gears Down - chart 8


Yet the bigger story is the wide divergence of growth trends within the EMDEs.


Commodity-exporting EMDEs. Economies that mainly export stuff (oil, gas, minerals, agricultural products) are doing very poorly as a whole. The World Bank projects that commodity-exporting emerging markets will grow by a miniscule 0.4% this year, down from 3.2% in 2013. That’s by far the fastest deceleration of any group.


About Everything: The Global Economy Gears Down - chart 9


Obviously, these economies are getting hammered by falling commodity prices. Energy prices plummeted by more than two-thirds from mid-2014 to early 2016, and raw materials did little better. Sure, they’ve rebounded some this year, but commodities are still trading at bargain-bin prices, much to the dismay of export-dependent emerging markets like Russia, Saudi Arabia, Nigeria, South Africa, Venezuela, Chile, and Brazil.


Part of the problem is China’s “rebalancing” policy—moving the economy away from massive capital outlays and toward consumer spending. This may be good news for China’s emerging middle class, but it’s bad news for the export-dependent and often low-income countries that used to furnish the raw materials for all of China’s buildings, trains, harbors, and dams.


China. The largest of the non-export dependent EMDEs, China is still growing rapidly—just less rapidly than before. The World Bank predicts that the country’s GDP growth rate will shrink from 7.7% in 2013 to 6.3% in 2018.


On top of China’s marked shift in trade philosophy, it’s also facing a “currency crisis” that has many savers looking for an exit ramp. China’s efforts to downsize its industrial capacity, plus efforts to defend its currency, have had a tidal impact on the direction of global capital flows. Emerging market capital inflows have recently turned negative for the first time since 2008.


About Everything: The Global Economy Gears Down - chart 10


Other non-export dependent EMDEs. Most other non-exporters, however, are doing better than they were a few years ago. According to the World Bank, the GDP for this group (excluding China) has grown by nearly a full percentage point since 2013.


India’s economy is expanding well over 7% annually, where it’s expected to remain in the near future. Southeast Asia’s largest economies, the ASEAN-5 (Malaysia, Philippines, Indonesia, Thailand, and Vietnam), together are growing more than 4% per year.


Typically, these economies benefit from lower raw material and energy prices. And few of them are hurt by China’s declining import demand: ASEAN, for example, has turned into a net importer of Chinese goods.


  • Even before Brexit, global growth was gearing down. Each year since 2010—aside from a blip in 2014—the world economy’s growth rate has slowed. The IMF and the World Bank, if the past is any guide, will continue to lower their estimates for the coming years as time passes.
  • The global slowdown varies widely by region. China and the export-dependent EMDEs are falling fastest. Advanced economies are stable, even rising slightly, while non-export EMDEs (ex China) are speeding up

This Week In Hedgeye Cartoons

Our cartoonist Bob Rich captures the tenor on Wall Street every weekday in Hedgeye's widely-acclaimed Cartoon of the Day. Below are his five latest cartoons. We hope you enjoy his humor and wit as filtered through Hedgeye's market insights. (Click here to receive our daily cartoon for free.)




1. Happy Independence Day (7/1/2016)

This Week In Hedgeye Cartoons - 4th of July cartoon 07.01.2016


Happy Independence Day.


2. Running Of The Bears (6/30/2016)

This Week In Hedgeye Cartoons - Spain cartoon 06.30.2016


Spain's IBEX is down 32% from its 2015 peak.


3. Guru Wisdom (6/29/2016)

This Week In Hedgeye Cartoons - central bankers cartoon 06.29.2016


This one speaks for itself.


4. Eject! (6/28/2016)

This Week In Hedgeye Cartoons - EU cartoon 06.28.2016


Who's next? Grexit? Spexit? Frexit?


5. A Not So Happy Hour For Bulls (6/27/2016)

This Week In Hedgeye Cartoons - Not last Friday cartoon 06.27.2016


Equity markets continued to tumble today as post-Brexit aftershocks continue to be felt.

The Week Ahead

The Economic Data calendar for the week of the 4th of July through the 8th of July is full of critical releases and events. Here is a snapshot of some of the headline numbers that we will be focused on.



The Week Ahead - 07.01.16 Week Ahead

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