“Don’t be afraid to ignore rules of your industry that have become obsolete or that defy common sense.”
That’s right. Don’t be afraid of a 1.2% US GDP number ahead of the toughest 2-year comparison of #TheCycle for Real PCE Growth (Q3). Celebrate it, while it lasts! Consensus is now very long of both stocks and bonds on a clean cut #GrowthSlowing GDP TREND.
No, GDP is not in the area code of where our industry was on GDP 7 months ago, never mind 12 (where you could have bought stocks up here last time and not bought bonds or equity sectors that look like safe-yielding bonds). But “at least it’s not a recession.”
Q1 GDP would have been a recessionary print if they used the same “Deflator” that they used in Q2. And, yes, while the storytelling on “all-time-highs” would have been more difficult, why not just “Defy Convention” as Benioff likes to say in a good business builder’s book I’m reading right now called Behind The Cloud. Even if you’re in the 80% who doesn’t get paid by this, stay positive, “folks”!
Back to the Global Macro Grind…
So what the heck happened on Friday? Why wasn’t that Q2 GDP report a “beat” as CNBC likes to report on Q2 (non-GAAP) Earnings that are currently running down -4.1% year-over-year?
- They finally told the truth on the GDP Deflator taking it from 0.5% to 2.20% (subtracts -1.70% GDP from Q1 to Q2)
- Inventories (our model doesn’t yet nail those with any precision) subtracted -120 basis points from GDP
- Government Spending, in an election year God forbid, subtracted another -44 basis points
In other words, since our call on 70% of the number (Consumption) was right (it contributed +2.83% to GDP), where we had the short-term “GDP surprise” wrong is a trivial matter. That’s the 1st one we’ve had wrong in the last 6 quarters. And, as usual, we’re reviewing our model to see if there are any evolutions we can make to improve it. I can’t see many big ones though.
Well, it’s not just the US government that was making up the real level of inflation (GDP Deflator) in order to maintain a “positive” Q1 GDP report. It’s the storytellers on “Global Demand has bottomed” that are having big issues now too.
Amidst an awesome run for Tech stocks to end July (Tech Sector ETF XLK = +7.10%):
- Chinese stocks dropped another -1.1% last week to -15.8% YTD
- Japanese stocks lost another -0.4% last week to -12.9% YTD
- Commodities (CRB Index) deflated -1.0% last week to +2.8% YTD
- Oil (WTI) got tagged for another -5.9% loss last week to -1.9% YTD
- Energy Stocks (XLE) dropped -1.4% last week to +8.3% YTD
Yeah, I get it. Exxon is going to borrow to pay their dividend… so under any Oil #Deflation scenario, the stock can never go down again. But that and a bucket of pucks might get you KM in a beer league trade vs. being long Facebook (FB) or Amazon (AMZN) here in Q3.
That’s right. If you can’t tell me a story that “China has bottomed”, “Brexit doesn’t matter”, Oil “is going to $70”, blah blah blah… what you really need to do is saddle up and stay with the FANG (Ex-Netflix). That story isn’t “cheap”, but at least it’s not peddling fiction.
While my story this year has been that GDP #GrowthSlowing means you:
- Buy the Long Bond and/or Sectors that look like safe-yielding bonds (TLT, EDV, ZROZ, MUB, XLU, etc.)
- Buy Gold and precious metals (GLD, PTM, etc.)
- Buy Low-Beta Big Cap Liquidity (Style Factors)
That doesn’t mean that my narrative isn’t currently:
You know that I like the idea of expensive getting more expensive when top-down growth is slowing. I like that idea because market history does. That’s also an idea that Tech investors should enjoy, if their companies show continued accelerations in their top-line.
Consensus is getting expensive and extended too. Here’s the latest non-commercial CFTC Futures & Options positioning data:
- SP500 (Index + E-mini) net LONG position up to +175,288 contracts = +2.38x on a 1-yr z-score
- Russell 2000 net SHORT position down to -7,939 = +2.57 on a 1-yr z-score
- 10YR Treasury net LONG position up to +141,138 = +2.25x on a 1-yr z-score
In other words, since anything +/- 2x happens less than 5% of the time, everyone has now been forced into being net LONG (or way less net short) pretty much everything in terms of equity and fixed income beta.
Ex-China-Japan-Europe-Oil-Netflix, what could possibly go wrong?
Who cares about the details. Let’s just celebrate the 1% this morning… and stay positive. Everyone’s in the 1% now!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.45-1.55%
Oil (WTI) 40.13-43.53
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer