• [WEBCAST] Raoul Pal & Neil Howe: A Sobering U.S. Economic Reality Check

    Prepare your portfolio for “big picture” paradigm shifts with Real Vision co-founder Raoul Pal and Demography analyst Neil Howe. Watch the replay from this webcast.

“The idea is to keep opening up new conversational possibilities rather than shut them down.”

-Tim Harford

Today, Donald Trump will be inaugurated as the 45th President of The Unites States of America. You may feel great about that. You may absolutely hate that. My job is to try my best to feel absolutely nothing about that.

That’s easier than you might think as I generally do not support politicians from either the Democrat or Republican party. I’m more of a free market macro, math, and hockey guy.

But what if you aren’t? Should we not “like” each other because we disagree? Should we not open new conversational possibilities? In today’s “social” media era of raging partisanship, it’s not easy to get along, is it?

As Tim Harford explains in his new book (I highly recommend it), Messy:

“The pattern repeats endlessly. We gain new choices about whom to listen to, whom to trust, and whom to befriend – and we use those choices to tighten the circle around us to people who are more and more like us.” (pg 56)

On this day of 2017, I humbly suggest that you don’t do that. If you want to generate alpha, that is.

Math Trumps Partisans - E Pluribus tweet em

Back to the Global Macro Grind

To consistently generate risk adjusted returns that beat both the “market” and your competition, rather than winning political arguments, I think you have to get the rate of change in both growth and inflation right.

The beauty of our rate-of-change model is that it’s bi-partisan.

This week’s inflation data (CPI) accelerated to +2.1% year-over-year growth. This week’s growth data (Industrial Production) accelerated to +0.5% year-over-year growth.

You should feel neither The Bern nor the need to go to a Tea Party after reading those two sentences.

There is neither a Republican nor a Democrat policy plug in the Hedgeye Predictive Tracking Algorithm that we’ve built to measure and map US GDP either. It’s just math. And here’s the latest update:

  1. Our Q4 2016 GDP estimate is now tracking at +2.17% year-over-year growth
  2. That’s up from the cycle low of +1.3% year-over-year growth in Q2 of 2016
  3. That equates to a +2.91% quarter-over-quarter annualized growth rate

There is neither a picture of Michelle nor Melania in the rate of change reporting of Earnings Season:

  1. As of last night, 10% (50 of the 500 S&P Companies) had reported their Q4 numbers
  2. Aggregate SALES growth has accelerated to +4.1% year-over-year growth
  3. Aggregates EPS growth has accelerated to +8.8% year-over-year growth

Those sales and earnings growth accelerations stand in stark contrast to this day last year, when you can go back and read our process driven take on US #GrowthSlowing. In Q4 of 2015 (reported in JAN-FEB 2016) earnings growth was negative.

Do accelerations make you glad? Do decelerations make you sad? Or do you feel nothing and adjust your portfolio’s positioning in conjunction with those trending rates of change?

One big thing that is uniquely tied to what we call Quad2 in our Growth, Inflation, Policy (GIP Model), is a rising US Dollar. If you hold the US Dollar Index at its last price, it’s:

  1. +2.2% higher than its quarterly Q4 2015 average price
  2. +4.5% higher than its quarterly Q1 2016 average price
  3. +7.6% higher than its quarterly Q2 2016 average price

Now you might call +7.6% year-over-year, “too strong”… or you might call it “cool”, if you’ve been long of it. But these qualitative descriptions of mathematical realities mean absolutely nothing to me.

Sure, it was nice to hear the nominee for the next US Treasury Secretary, Steve Mnuchin, remind Congress yesterday that he was a big believer in “long periods of US Dollar strength” being a great thing for America.

But I don’t need him to give me conviction in a historical fact. I don’t need him to be a Republican nor a Democrat either. All I need to do is, God willing, is measure and map rates of change in macro and markets, every day.

Our immediate-term Global Macro Risk Ranges and intermediate-term TREND Research Views (in brackets) are now:

UST 10yr Yield 2.33-2.53% (bullish)

SPX 2 (bullish)
RUT 1 (bullish)

NASDAQ 5 (bullish)

XOP 40.00-42.06 (bullish)

RMZ 1137-1173 (neutral)

Nikkei 182 (bullish)

DAX 118 (bullish)

VIX 10.65-13.33 (bearish)
USD 100.00-103.10 (bullish)
EUR/USD 1.04-1.07 (bearish)
YEN 112.60-117.80 (bearish)
Oil (WTI) 50.58-54.23 (bullish)

Nat Gas 3.09-3.57 (bullish)

Gold 1161-1219 (bearish)
Copper 2.49-2.69 (bullish)

GOOGL 815-840 (bullish)

MU 21.35-23.01 (bullish)

BAC 21.60-22.99 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Math Trumps Partisans - 01.20.17 EL Chart