“Mesopotamia witnessed the invention of three of the most important social technologies in the history of human civilization: literacy, numeracy, and accounting.”
–Felix Martin
Do you measure and map the global economy, daily? Do you use rate of change in doing so? These are the questions we start with when meeting with new and prospective clients. To our excitement, plenty of the “macro” research they read doesn’t do what we do.
I’m in NYC for Day 2 of meetings with some of the most influential money managers in the world. Going from meeting to meeting yesterday reminded me that there’s still tremendous opportunity born out of simply accounting for and accurately (as opposed to politically) contextualizing what’s happening in the world.
To be fair, this is a full-time job that requires a disciplined, focused, and rigorous Independent Research team that works together every day. So it’s not “simple” to execute on. Client feedback loops (some have great rate of change data processes) are critical too.
Back to the Global Macro Grind…
Post the alleged Trump Trade Truce, is Global Growth (and Trade) automatically back into #acceleration mode? The short answer is no. Our GIP model has roughly 80% of the countries we measure and map with #slowing Composite PMIs on a TRENDING basis.
TREND = 3 months or more @Hedgeye.
Again, the opportunity here is in actually knowing what is going on using economic data. Our #process for accounting for GROWTH and INFLATION data has nothing to do with what Macro Tourists think could be going on.
Yesterday, in terms of US Equity Sector bets, the consensus crowd definitely thought Global Growth was back to acceleration mode:
- Industrials (XLI) led the rally, closing +1.5% on the day and back into the black for 2018 YTD at up a whopping +1.1%
- Energy (XLE) continued higher, closing +1.0% on the day to a league leading +9.2% YTD and remains our top sector pick
These are not the same bets. A) is a bet on global demand/growth whereas B) is an explicit bet on #InflationAccelerating. Mathematically (instead of qualitatively) speaking, B) subtracts from A) i.e. real growth.
Unless we see some kind of a magical re-acceleration in Chinese, European, and Emerging market demand (again, we measure and map these data points daily, so we’ll know), Global Growth is about to slow faster than it already has in the coming months and quarters.
Taking a step back, when accounting for cyclical data, it’s critical to know where you are on the sine curve. As you can see in today’s Chart of the Day, going back to the prior Global GDP Cycle peak:
- Real Global GDP growth peaked at +3.7% growth back in Q3 of 2014
- Real Global GDP growth bottomed at +2.1% growth in Q4 of 2015
- Real Global GDP growth re-accelerated to +3.8% growth in Q3 of 2017
In Q4 of 2017, Chinese and European growth started to slow vs. the epic Chinese stimulus of 2016. That unprecedented fiscal and monetary Chinese stimulus is not happening in 2018.
Instead in 2018 real Emerging Market (EM) growth is slowing. Additionally, even though it’s a very subtle slowing from its Q1 of 2018 cycle peak of +2.9% year-over-year real US GDP growth, the USA is slowing on a real basis as inflation accelerates sequentially as well.
“But growth is still good.”
-Old Wall
Yeah, we know. But, from a process perspective, whether something is deemed to be “good” or “bad” is an opinion. Whereas whether things are getting better or worse (in rate of change terms) is a fact.
As opposed to the Global Growth Cycle in 1H of 2018, next to US and EM inflation accelerating, what got better?
A: Post Tax Reform, Late Cycle US Earning Growth:
- 93% of the SP500 companies have reported Q118 aggregate year-over-year EPS growth of +23.5%
- 85% of US Tech companies have reported Q118 aggregate year-over-year EPS growth of +29.2%
- 92% of the Russell 2000 companies have reported Q118 aggregate year-over-year EPS growth of +41.9%
When something #accelerates both sequentially and year-over-year, that is indeed an accounting fact. And simple, objective, and apolitical statements to your investors (or your spouse, or whoever you report your returns to!) right now would be:
- Both US domestic inflation and earnings growth continues to accelerate
- Both Chinese and European growth continue to decelerate from their 2017 cycle peaks
- Emerging Market Export growth is slowing from its 2017 cycle peak
If you missed any of the asset allocation and/or sub-sector exposure pivots born out of these economic facts, that’s ok. Post Madoff, no one is nailing everything all of the time. That said, not having a data-driven process to eventually signal these pivots is not ok.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now as follows:
UST 10yr Yield 2.97-3.14% (bullish)
SPX 2 (neutral)
RUT 1 (bullish)
NASDAQ 7178-7434 (bullish)
Energy (XLE) 75.05-79.69 (bullish)
REITS (RMZ) 1041-1085 (bearish)
Industrials (XLI) 73.30-76.69 (bearish)
VIX 12.23-16.34 (bullish)
USD 92.15-93.95 (bullish)
Oil (WTI) 69.28-72.61 (bullish)
Nat Gas 2.72--2.90 (bullish)
Gold 1 (bearish)
Copper 3.03-3.13 (bearish)
Corn 3.94-4.10 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
