“A seemingly random network can evolve with astounding speed into a hierarchy.”
-Niall Ferguson
The absolute and relative returns of “expensive” US Growth exposures have evolved (i.e. gotten more expensive) with astounding speed as the rest of the world’s (China, Europe, EM) cyclical growth continues to slow from its 2017 cycle peak.
How did this happen? Ferguson does a nice job reviewing fractal causality in the latest book I’m in the middle of reading, The Square and The Tower: “…varieties of networks should not be regarded as static categories. Networks are rarely frozen in time…”
“Large networks are complex systems which have ‘emergent properties’ – the tendency of novel structures, patterns, and properties to manifest themselves into ‘phase transitions’…” (pg 40). Global Macro markets have been in a massive phase transition in 2018, indeed.
Back to the Global Macro Grind…
Got Brazil, Mexico, and Turkey #slowing as the NASDAQ #accelerated to a new all-time closing high yesterday? Nice. Well done. US Tech’s +30% year-over-year EPS growth for Q1 of 2018 (SP500 companies) was a plainly evident #acceleration vs. the prior quarter whereas:
- Brazilian Export growth #slowed to DOWN -3% year-over-year in MAY and …
- Mexican Auto Sales #slowed to DOWN -7% year-over-year in MAY
If that seems like cherry picking “cheap” macro exposures that are getting cheaper, you can see in Brazilian and Mexican PMIs, the rate of change story is still the same:
- Brazil’s MAY Manufacturing PMI: 50.7 ↓ from 52.3; inflecting lower from a trending perspective
- Mexico’s MAY Manufacturing PMI: 51.0 ↓ from 51.6; inflecting lower from a trending perspective
Heck, it’s not just Brazil and Mexico (did I mention Turkey? Stocks in Istanbul are still in crash mode, making fresh YTD lows there this morning), the TRENDING slow-down has been pervasive across Global Manufacturing PMIs.
Per Darius Dale’s Global Macro Risk Monitor (add on subscription, ping if you’d like to receive it daily), “we’ve collected all of the Manufacturing PMI data for every country and economic bloc globally for the month of MAY and 69% slowed sequentially and 75% are now slowing from a trending perspective.
Now that the #GlobalDivergences theme we authored is headline news, that doesn’t mean it ceases to exist. Moreover, comparative base effects for global growth steepen markedly in the middle of this year, so the highest probability outcome investors should anticipate is incremental slowing.”
So is US Tech ripping to all-time highs because:
- Q2 Earnings Season compares (base effects) EASE in Q2 vs. Q1… and/or
- Q2 Global Cyclical comparess (base effects) STEEPEN in Q2 vs. Q1?
There’s good fundamental rate of change reason why late-cycle US consumption, employment, and wage growth is earning a massive return relative to these global cyclical exposures.
It also explains why a US Equity Sector exposure like Industrials (XLI) was DOWN -0.2% to DOWN -0.7% YTD yesterday as Consumer Discretionary (XLY) and the Russell 2000 (IWM) ramped to all-time closing highs (+9.2% and +7.7% YTD, respectively).
The closer you get to isolating US growth vs. international equity, credit, and currency exposures, the better USA Relative & Absolute looks. For example:
- Russell Growth (IWO) is beating the Russell 2000 at +10.2% YTD…
- Wheareas Brazil (EWZ) and Mexico (EWW) are down -10% and -8.8% YTD, respectively
And no, I didn’t have to mention what Chinese and/or European Equities are doing both relative and absolute vs. USA to make my point. What’s also interesting, but not surprising, is what’s happening in Global FX and Rates markets from a volatility perspective.
As you can see in today’s Chart of The Day, Foreign Currency (FX) and Interest Rate Volatility is breaking out to the upside as US Equity volatility breaks to the downside. This is another fractal way to summarize our #GlobalDivergences Q118 Macro Theme.
When do US Dollars and US Growth exposures stop looking this good on both a relative and absolute basis? I can tell you that the answer to that question is not “valuation” driven. It will be rate of change driven.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.74-3.10% (bullish)
SPX 2 (bullish)
RUT 1611-1660 (bullish)
NASDAQ 7 (bullish)
Industrials (XLI) 74.22-76.21 (bearish)
VIX 11.11-16.90 (bullish)
USD 93.25-94.75 (bullish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 63.36-73.27 (bullish)
AMZN 1 (bullish)
NFLX 333-368 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
