“The new normal of 2% growth that the left is saying you can’t do anything about is so dangerous.”
-Jeb Bush
What’s really dangerous are politicians, on both the left and the right, having absolutely no clue about economic cycles. What’s dangerously normal about this cycle is that GDP isn’t going to hang out around 2% forever. It’s already gone to 1%. After that is 0%.
Unlike one of my competitors (Hyman) who said (yesterday) “I think the economy has years to run and a recession is years away,” I’m here to remind you that Industrials/Cyclicals are already in a #DoubleDipRecession and a broader slowdown towards 0% is months away.
You’ll have to fact check this, but I think I’m one of the few who has proactively called the last 3 US recessions, whereas most of my Old Wall competition hasn’t called one. The establishment of consensus economics is dangerous. That’s not a new normal either.
Back to the Global Macro Grind…
Am I concerned about this? You’re damn right I am. How many times can the “blue chip” economists who have been advising both Republican and Democrat Presidents not only miss the topping process of cycles, but their inevitable rate of change slow-downs?
How much “systemic” risk could have been avoided in this country and its “free markets” if all of these prescient “economists” spoke truthfully about what is going on in the economy and why? The economy isn’t left or right. It’s cyclical. Period.
Again, instead of rolling with what Obama did in his 2016 State of The Union Address, suggesting that “anyone who is talking about the economy slowing is peddling fiction”, or that Bush could double 2% to 4%, before hitting 0%... just study the sine curve.
That’s right, as you can see in today’s Chart of The Day, here’s our stylized model for GDP:
- Cyclicals peak 1st (that’s why we call them cyclicals)
- Late Cycle (employment and consumption) peak and roll last
As the US economy laps the toughest 2 year comparisons for US Consumption (PCE Growth) in the last 9 years, the probability is at its highest point that late cycle consumption growth starts to slow at a faster rate.
All the while, if there’s no “recovery” or “bottom” in what started slowing first (cyclicals), the US economy gets whacked by both the cyclicals and late cycle sectors, at the same time.
Don’t take my word for it (or one of Ed’s “surveys”), all of the growth, costs, margins, capex, etc. data is reported, eventually. That renders all of the storytelling about what the cycle should be, null and void. #TheCycle is what it is.
Alcoa (AA) is a cyclical. Post the negative pre-announcements from Honeywell (HON), PPG Industries (PPG), and Dover Corp (DOV), Alcoa kicked off Earnings Season for Q3 yesterday. The stock was down over -10%.
So I won’t cherry pick that conference call’s details. Instead I thought it would be good to show you the truth according to a company that has more products and customers than most public companies you can follow. The name of the company is Fastenal (FAST).
Here’s what Fastenal’s CFO, Holden Lewis, had to say on the FAST call:
"Qualitatively, it's not clear to us that the tone changed much in the third quarter. We saw that the sales of fasteners and heavy manufacturing construction end markets were relatively weak as we have seen before. The same could be said of our largest customers, our top 100 was flat to maybe down slightly during the period. But again, these are the same dynamics that have persisted throughout 2016."
Then, during the Q&A, the 1st question was directed at Fastenal’s CEO, Daniel Florness, about whether or not he was “seeing any signs that the industrial economy was bottoming”… and Florness replied:
“I can’t say that we are… I can’t say that we’re seeing any kind of inflection.”
Compare and contrast that comment, from a CEO who has plenty of credibility (and 2600 stores), and the hopes and dreams of politicians and their respective central-market-planning-economists-who-don’t-believe-in-cycles (Furman)… and you get the point.
I’ve said this before and I’ll say it again - if we continue to be right on the rate of change in the US economy, we’re going to continue to be right on not only long Utilities (XLU) vs. Financials (XLF), but long Gold and Long-term Bonds (TLT) vs. US Equity Beta (SPY).
As opposed to investing with a prescribed and/or desired political outcome for US GDP and/or how it “feels”, get with the modern macro era and build a predictive tracking algorithm that accurately predicts both the accelerations and decelerations of #TheCycle.
As a reminder, our Q3 '16, Q4 '16, and Q1 '17 US GDP forecasts for q/q SAAR GDP are currently 1.9%, 0.4%, and -0.8%, respectively. Bush had the 1.9-2.0% number right. But he had where the economic cycle goes from here dead wrong. Now is when it gets dangerous.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.50-1.79%
SPX 2129-2159
VIX 12.32-17.01
USD 95.50-97.85
EUR/USD 1.10-1.12
Oil (WTI) 45.97-51.71
Gold 1
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
