“Courage is what it takes to stand up and speak; it’s also what it takes to sit down and listen.”
-Winston Churchill
Dollar Up, Rates Up, Stocks Up? Remember Q1 of 2017? Oh yeah, you were listening! We called that Quad 2 @Hedgeye. That’s when both the US growth and inflation were #accelerating, at the same time… and the Fed was forced to go hawkish in kind.
Especially with some of the process-less narratives they paint, I don’t take much time to sit down and listen to most of the Old Wall’s macro strategists and economists anymore. The best market strategist out there, by far, is Mr. Market himself.
When it comes to making macro market “calls”, courage comes in having the objectivity to change one’s mind as the data and/or market signals change. Listening to what the market is doing (as opposed to what you think it should be doing) is only a lesson that a strategist who has actually run money on the buy-side would have had the humility to learn.
Back to the Global Macro Grind…
Do you think I actually care what Quad the US economy is in? Sure, human history would suggest that staying in Quad 1 forever would be the ideal outcome for the largest % of The People. But from a market strategy perspective, I couldn’t care less.
To review what we do vs. what people still making calls on “PMI’s topping” do (USA’s PMI just registered a 76 month high fyi), we measure and map countries from a rate of change perspective, focusing on 2 major macro factors: GROWTH and INFLATION.
When 2nd derivative calculus is your modelling premise… and you have 2 factors, you end up with 4 economic scenarios:
- Quad 1 – real GROWTH is #accelerating as INFLATION is #slowing
- Quad 2 – both GROWTH and INFLATION are #accelerating, at the same time
- Quad 3 – real GROWTH #slowing with INFLATION #accelerating
- Quad 4 – both GROWTH and INFLATION are #slowing, at the same time
Put into establishment economics speak:
- Quad 1 = the mecca for real growth investors
- Quad 2 = late cycle where central banks should be raising rates
- Quad 3 = STAGFLATION perpetuated by central bank currency devaluation
- Quad 4 = DEFLATION
Since most people who believe that economic cycles can be centrally planned away (or “smoothed”), as soon as you see the emergence of Quad 4 DEFLATION, they beg for central bankers to go dovish and devalue the currency.
When you devalue the currency of The People, you erode their purchasing power and real consumption growth slows. You also see rising inequality gaps between those who are long of INFLATION (rich people) vs. those who have to eat it (poorer people).
As you can see in today’s Chart of The Day, the median consumer in the United States of America has neither an income like we do on Wall Street nor do they feel richer when all that they consume is inflating in cost of living terms.
That was mostly what happened under both the Bush and Obama Administrations. Both parties and Presidents supported weak US Dollar Policies. Ben Bernanke didn’t have the courage to act in telling Americans the truth about that either.
During both the Reagan (1) and Clinton (1) sustained real economic growth expansions, you had a #StrongDollar, Rising Real Rates, and Crushed Commodity prices. Many more Americans ate at the table of those real gains.
Today, we have Trump.
But macro markets clearly don’t care about Trump. They’re much more focused on what they always focus on which are the TRENDING rates of change in both GROWTH and INFLATION.
Today, we have the following intermediate-term TREND setup in the US economy:
A) Q1 of 2017 was Quad 2
B) Q2 and Q3 of 2017 was Quad 1
C) September and potentially October of 2017 INFLATION should bounce
D) Q4 of 2017 through the end of Q1 of 2018 should look more obviously like Quad 1
This view is largely due to A) the base effects (inflation comparisons get very difficult in the back end of Q417 and into Q118) and B) the ongoing TRENDING momentum in real US economic growth.
This is also, not surprisingly, Mr. Market’s current outlook:
A) Both the USD and Rates stopped going down as Reflation’s Rollover did in August 2017
B) Oil is attempting to stabilize within a narrowing @Hedgeye Risk Range and is currently bullish TREND
C) The Russell 2000 has joined the Dow, Nasdaq, and SP500 in making a new all-time high in the last week
Yeah, I saw their “narrative.” But how ridiculous is it to call the SP500 and Nasdaq, which are currently -0.4% and -1.25% from their all-time closing highs last week, the sign of this real US growth cycle’s nadir?
For the love of God, even Janet Yellen realizes that the current US economic data is hawkish. That’s why it’s Dollar Up, Rates Up, Russell 2000 Up. Don’t forget that the Russell has a 26% weight in the Financials and bank stocks love #RatesRising.
Is a fresh 5 year high in the 2-year US Treasury Yield this morning of +1.47% a signal that real US growth is slowing?
Of course it isn’t. That and growth stocks at all-time highs is a signal to 2017 US Growth Bears that they should have the courage to hold themselves to account.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.18-2.31% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 31.22-34.32 (neutral)
VIX 9.48-11.09 (bearish)
USD 91.35-93.26 (neutral)
EUR/USD 1.18-1.20 (neutral)
Oil (WTI) 48.40-52.29 (bullish)
Gold 1 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
