“That’s where everything is big.”
-Jack McCullough
Unlike the author, David McCullough, I am related to Jack. He’s my 9 year old son. Hedgeye was effectively born when he was. Alongside my three daughters (Callie, Lucy, and Reese), I’ve been blessed beyond belief with healthy and happy children.
Last night I was helping Jack with his homework and he was writing about the tallest building in the world (Burj Khalifa at 2,717 feet). So I asked him what he knew about the building’s location (Dubai). “Oh, Dad, that’s where everything is big – biggest fish tank in the world, by far.”
Whether that part about the fish tank is true or not isn’t my concern this morning. I am thinking about The Big Stuff, however. Ostensibly, so are you. What in macro markets could move, big, from here?
Back to the Global Macro Grind…
Before I get into the potentially big stuff, I’ll tell you what wasn’t moving at all yesterday. And that was Trump Traffic in New York City. Obviously the guy is beyond big at this point. Ask him, he’s huge! And he shut down most of Midtown for his glorious ride to the UN.
That said, Trump’s Tax Plan is one of the Top 8 Things that we discussed with investors yesterday:
- US GDP Growth (to the upside in Q3 and Q4)
- US Wage Growth (to the upside in the next 3-6 months)
- Long-term US Interest Rates (up then back down in the next 3-6 months)
- SP500 Earnings Growth (up in Q3 then back down in Q4 and Q1)?
- European GDP Growth (slowing in Q3 and Q4)
- Old China GDP Growth (slowing in Q3 and Q4)
- Global Equity Volatility (down, then up… eventually!)
There were plenty of other topics discussed, but the aforementioned eight have the potential to move. The one that I have the least conviction in (in terms of the direction of the move and when) is #4 – and here are some questions I’m asking myself as a result:
A) Since #EarningsAccelerating in 2017 is largely a function of US #GrowthAccelerating for 4 straight quarters, but partly due to “recessionary profit comparisons” from 2016, what happens when the comps aren’t easy?
B) As you can see in the Chart of The Day, Q3 is the last glaringly obvious easy “compare” (comparative period from the prior year that data is reported against), so why isn’t Q3 Earnings Season potentially the beginning of the end of this major equity market tailwind?
Not knowing the answer to these questions isn’t the end of the world. Not knowing to ask yourself these questions is an entirely different level of complacency and ignorance that none of us can afford.
Topics #1-3 are all interconnected and they are particularly relevant today as it’s Fed Day! Today is the day that the academic elite descend from upon high with rear-view looking forecasts. They’re so big! Here’s what I’m asking myself about what they’ll say:
A) On REAL GROWTH, since the Fed wasn’t forecasting a 3% handle on US GDP growth in Q2, have they read @Hedgeye Research on a q/q SAAR forecast of +3.5% for Q3? And, if they know that’s coming, why isn’t their next pivot hawkish on that factor?
B) On REFLATION’s ROLLOVER, since the inflation data (producer and consumer prices) stopped rolling over in AUG (accelerating, sequentially, vs. JUL), shouldn’t their next pivot be from dovish to hawkish on that front too?
Since topic #3 (Wage Inflation) usually happens at this stage of the economic cycle because:
- PROFIT GROWTH leads wage inflation by 2-3 quarters, on average
- Labor supply legitimately begins to tighten as the spread between U3 and U6 (employment rate readings) continues to narrow
And since Janet Yellen is first and foremost a linear-labor-economist, you can bet your Madoff that she’ll go hawkish if we start to see WAGE INFLATION chase PROFITS on a lag. Most Fed Chiefs have done the same thing. That’s why Wage Inflation is a BIG #LateCycle indicator.
But can the Federal Reserve voters pivot back to hawkish and raise rates when:
A) Fed Fund Futures haven’t told them to do that, yet… and
B) Inflation’s 1-2 month “reflation” mean reverts back to Reflation’s Rollover in Q118 (toughest compare), while…
C) Both China and Europe slow, against toughening cyclical GDP compares?
A: Of course they can.
And if they do… we’re going to go right back into the soup of dovish-to-hawkish-to-eventually-dovish (again)… and that should, at a bare minimum, give us a shot at potentially moving topic #7 (Global Equity Volatility) big, off its all-time lows.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.03-2.29% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.40-11.99 (bearish)
USD 91.15-92.50 (bearish)
EUR/USD 1.18-1.20 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
