“If demography is destiny, population movements are the motor of history.”
-Samuel Huntington
That’s a classic quote from a chapter in The Clash of Civilizations that Samuel Huntington titled “The West And The Rest.” Within the “West”, I can’t believe there’s a consensus on Wall Street right now that “it’s different this time” for Europe’s economy.
As a reminder, plenty of Europeans left Europe for the US for good reasons. One of the major ones was growth! “Between 1821 and 1924, approximately 55 million Europeans migrated overseas, 34 million of them to the United States.” (Huntington, pg 198)
Capitalism, free markets, liberty? Newsflash: we still have that in the US. We also have something else that isn’t as readily apparent in Europe as it is in America – a Millennial Generation!
Back to the Global Macro Grind…
As you know, for much of the next decade the population growth rate for Europe’s main spending cohort (35-54 year olds) is going to wallow at its most negative rate of change in modern history.
The USA’s is not.
There’s a handoff that just started between America’s baby boom generation and millennial generation that pivots the US population growth rate in the aforementioned 35-54yr old bucket to delta positive this year, then absolutely positive in the next 3 years.
Fortunately, most of our subscribers already know that.
What the consensus that was chasing European stock market charts in May-June of 2017 didn’t know is that the 1st half of 2017 was likely the top of the cycle for both European growth and inflation.
Now, as the July-August data out of Europe is reported, they know…
Or do they? Let’s review some very recent economic data points. In sharp contrast to the 76 month-high in the US ISM for the month of August, US GDP #Accelerating to +3.0% on a q/q SAAR basis, Consumer Confidence hitting new highs, etc.:
- Swiss GDP came in at 0.3% in Q217 = lowest rate of change since 2009
- Italian Retail Sales came in at 0.00% y/y (those are zeroes) in July vs. +1.5% in June
- France’s Retail PMI dropped down to test “contraction” zone at 50.4 in August vs. 54.1 in July
Not only aren’t these well publicized data points, but they are cyclical ones. For the last 10 years of my macro work, the most important time to manage equity risk is when the CYCLE slows into the SECULAR.
Especially the South of Europe’s SECULAR (demographic) problem of aging (and lower capacity to consume things like Retail Sales) is once again readily apparent in the reported data (today’s Chart of The Day breaks out Retail Sales by European country).
By comparison, US Retail Sales #accelerated in July to +4.2% year-over-year growth and our US GDP tracker continues to tick higher on both a sequential and year-over-year basis as a result of the aggregate data that has been reported.
Our European GDP trackers are at best side-ways, but mostly heading lower. Lower, on both a relative and absolute basis, is also how European Equities are trading compared to US Growth Stocks too:
A) Spain’s stock market is down another -0.5% this morning; down -5% in the last month and -9% since May
B) The Nasdaq is only -0.9% from its YTD high (established last week at +19.5% YTD)
You see, because countries like Spain, Italy, France, etc. don’t have sustainable real growth, they really only have cyclical hopes of the illusion of growth (commonly called central bank manufactured inflation).
That’s why I think it’s either absurd to expect Draghi to tighten at tomorrow’s ECB meeting or even more absurd to expect that if he does opt to taper that he won’t risk tipping the south of Europe back into recession like former ECB head Jean-Claude Trichet did.
Long-term investors have to realize that Demography has been destiny for long-term European inflation and interest rate expectations. As the 5-year run in Europe’s economic cycle slows, US Growth exposures should continue to outperform.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.06-2.18% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
DAX 111 (bearish)
VIX 10.02-12.95 (bearish)
EUR/USD 1.17-1.20 (neutral)
Oil (WTI) 45.72-49.03 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
