The Doors of Perception

“There are things known and there are things unknown, and in between are the doors of perception.”
-Aldous Huxley

History, like the markets and economics, is prone to consensus relying on the perception of facts, rather than the reality of facts.  Take July 4^th as an example.  Most of us generally accept that July 4^th is America’s birthday.  The reality of the facts is a little different.

In fact, John Adams wrote in a letter:

“People in every colony of the 13, have now adopted it, as their own Act . . .the Second Day of July 1776, will be the most memorable Epocha, in the History of America.”

So, what is Adams referring to in this letter?  Well, in actuality, the Continental Congress voted on July 2^nd, 1776 to approve an earlier motion, put forth by Richard Henry Lee, which called for the colonies to declare their independence from England.  Lee was a delegate from Virginia that made this motion on June 7^th, 1776.

The actual written document known as “The Declaration of Independence” was formally submitted to Congress on the later afternoon of July 4^th, 1776.  Congress then approved the document with nine votes – nine voted in favor, Pennsylvania and South Carolina voted No, Delaware was undecided, and New York abstained.  The document was subsequently printed with the date July 4^th.

Hence July 4^th was born, though technically and legally, American independence was established on July 2^nd.

Back to the Global Macro Grind…

In reviewing the top headlines this morning, one of the more significant “perception versus reality” debates stock market operators are currently having is related to tariffs.  To wit, the top 3 headlines on Bloomberg.com this morning are as follows:

• “China Warns That the Tariff War Will Hurt the U.S. and the Rest of the World”;
• “Traders Grapple with One Big Question: Are Tariffs Priced In?”; and
• “The China-U.S. Power Struggle Is Just Beginning”

When one of the financial media world’s most prominent companies (second only to hedgeye.com perhaps? :-) ), has those as its, literal, top headlines, it’s likely fair to assume that something is priced in.  As for the intermediate and longer-term impact, we will continue to let the data and our now-casting models lead our perception of future reality.

On the topic of data, my colleague Darius Dale updated our view of the U.S. economy in a note on the afternoon of July 2^nd (America’s real birthday!). He noted the following:

“USA Peaking: Arguably the most differentiated forecast we have from a GIP Modeling perspective is our view that both economic growth and reported inflation are setting up to peak and roll here in 2H18E. This view was incrementally confirmed by the decidedly mixed nature of the latest batch of economic releases – most notably highlighted by the juxtaposition between the MAY PCE data and the JUN ISM Manufacturing PMI and JUN University of Michigan Consumer Sentiment data. The former release saw real Household Consumption growth slow to a 27-month low of 2.7% YoY on unfavorable income/inflation dynamics, while the latter release saw a 1.5pt pop back to just shy of cycle-highs at 60.2. The internals were decidedly soft, with the New Orders, Employment and Prices Paid subindices all ticking lower MoM. The slowdown in the latter series might be the first signs of our forecasted crescendo in U.S. inflation, but it’s too early to tell given the trend higher. There were other noteworthy juxtapositions to spot in the latest batch of U.S. data, including the ↑↓ nature of the MAY Durable Goods and Capex revisions, as well as the ↑↓ nature of the MAY Residential and Nonresidential Construction growth figures. All told, mixed ≠ broad-based acceleration, which is what we saw out of the U.S. economy in every quarter from mid-to-late 2016 through 1Q18.”

If you are an institutional subscriber and would like to receive Darius’ (or as he is more commonly known in the summer, The Prince of Montauk) daily data grind, please ping .

As for the river card this morning, U.S. jobless claims just landed in our inboxes and came in at 231K for the week ending June 30^th, with continuing claims at 1739K.  As has been the case with U.S. employment, it continues to stay sticky at its cyclical peak, so this data is unlikely to impact our models meaningfully.  Though it still provides better insight into the economy than the current fixation of the manic financial media as to whether the Peak Pegasus, a U.S. flagged ship loaded with Soybeans, will reach China before tariffs are imposed.

To the extent you are focused on the perceived tariff wars, it’s probably best to focus on the changes at the margin (although even those are unquantifiable) and the most relevant change on the margin appears to be the U.S. and EU (read: Germany) working to resolve their issues over autos.  Even in the anecdotal world of policy, it’s the changes on the margin that matter.

As we sign off this morning, we’ll leave you with a quote from Jim Morrison:

 “Whoever controls the media, controls the mind.”

Indeed.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.80-2.92% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Energy (XLE) 73.36-76.53 (bullish)
REITS (VNQ) 80.00-81.98 (bullish)
Industrials (XLI) 70.85-72.71 (bearish)
USD 93.70-95.31 (bullish)

Keep your head up and stick on the ice,

Daryl G. Jones
Director of Research